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With Shale Gas Fueling Growth, Dow Puts Pedal to the Metal

Dow Chemical Co., the biggest U.S. chemical manufacturer, expects to see its earnings jump 16% in 2011 from a year ago, in part because of the ability to use inexpensive shale gas in its operations, CEO Andrew Liveris said on Tuesday.

By selling assets, making key acquisitions and using abundant and cheap U.S. natural gas, the Midland, MI-based chemicals manufacturer now is better able to cope with any potential financial crisis, he told investors during a day-long company conference. Dow doesn't expect a repeat of the 2008 recession, but if one were to occur, the CEO said company earnings before interest, taxes, depreciation and amortization (EBITDA) would be $2 billion more.

Plentiful U.S. shale gas has given the chemical sector a cheap feedstock that may be second only to the Middle East in terms of pricing, said Liveris. Abundant resources also have the potential to make the country a large-scale gas exporter, he said. Repeating the oft-used phrase that shale gas has become a "game changer" for the industry, Dow also expects shale gas to fuel chemical industry growth "for decades to come."

Several "key drivers" are the foundation for Dow's near-term earnings growth, he said. A "compelling feedstock advantage" is near the top of the list.

"Dow's global, flexible, and cost-advantaged feedstocks are a central component of its competitive advantage and growth strategy," he said. "Dow currently has 70% of its ethylene production in cost-advantaged regions. Recently announced U.S. Gulf Coast investments in ethylene and propylene integration, coupled with growing benefits from shale gas dynamics, are expected to deliver at least $2 billion in EBITDA by 2017."

The petrochemical industry consumes energy as a raw material and uses energy for fuel and power. Shale gas resources -- and ethane produced from gas liquids -- have given domestic petrochemical producers a competitive advantage over many global competitors that rely on naphtha, a more expensive, oil-based feedstock. The American Chemistry Council in June said natural gas liquids in shale gas offer the United States a "tremendous opportunity" to strengthen manufacturing, boost economic output and create jobs (see Shale Daily, June 13).

A recent report by Fitch Ratings said the shale gas boom had fueled "significant cost advantages" for North America's commodity chemicals producers because the costs of gas and oil-based feedstocks remain far apart (see Shale Daily, Oct. 3). Liveris said competition for ethylene supplies is ferocious.

A unit of Range Resources Corp. signed a memorandum of understanding in April to deliver Marcellus Shale ethane to Dow's existing chemical operations in Louisiana (see Shale Daily, April 25). Chevron Phillips Chemical Co. LP is evaluating plans to site a "world-class" ethane cracker and ethylene derivatives facility -- fed by shale gas reserves -- in the Gulf Coast region (see Shale Daily, March 29). Westlake Chemical Corp. is planning to expand its ethylene capacity (see Shale Daily, April 7). And Royal Dutch Shell plc plans to build an ethylene cracker in the Marcellus Shale (see Shale Daily, June 7).

Dow also has plans to open an ethylene plant on the Gulf Coast by 2017 and it wants to expand chemicals production at other sites.

"We are at the epicenter of this trend," said Liveris. The Gulf Coast plants, as well as a plant under construction in Saudi Arabia, will be growth "anchors" for the company. Dow is "better able to respond quickly to headwinds and also to take advantage of opportunities wherever they occur..."

However, the CEO admitted that the "pace of economic recovery will continue to be jagged." The company is "much more recession-resistant than before" but even in the event of an economic decline, Dow would continue to fund its planned expansions. "The world has slowed in its economic recovery, but we at Dow have the agility and flexibility as well as a diverse portfolio to rapidly respond to changing conditions, and we are operating from a position of financial strength."

The company's EBITDA is expected to climb to $10 billion in the next one to two years from $8.6 billion in the 12 months ending June 30, the Dow chief told investors and analysts. The earnings gains, he said, will come despite the fact that the economies of the United States and Western Europe may not grow for one to two quarters. Dow last November set an earnings target of $10 billion in the "near term."

"The U.S. and Europe together are growing slowly and potentially going to zero growth. I think there is a decent chance of that," Liveris said. However, he said passing the Obama administration's jobs bill would help maintain some domestic growth momentum. "We'll get to our targets no matter what the world throws at us."

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