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U.S. Chemicals Industry Getting Shale Makeover

The shale natural gas market in North America is helping to revamp the U.S. chemicals industry and may benefit a variety of other manufacturing sectors through lower costs for raw materials and energy, according to a report issued last week by PwC US.

The report, "Shale Gas: Reshaping the U.S. Chemicals Industry," follows one by PwC in late 2011 that said onshore gas supplies had sparked a manufacturing renaissance (see NGI, Dec. 19, 2011). Now almost one year later researchers said low priced natural gas liquids (NGL) are helping the domestic chemicals industry to produce derivative products at less cost. Those products in turn ultimately become raw materials for multiple manufacturing sectors.

"As the U.S. chemical industry expands NGL conversion into a higher volume of downstream products, the positive impacts could flow through the value chain into other manufacturing sectors, particularly given that chemicals are used in an estimated 90% of all manufactured products," said PwC U.S. chemicals leader Anthony J. Scamuffa. "Not only could the abundance of NGLs help drive reduced pricing for derivative products, it could also potentially drive domestic re-shoring activity and possibly bring about a favorable shift in the U.S. balance of trade as ethylene capacity comes on line."

Major producers and upstream commodity industry participants "are evaluating their business models and actively moving forward to take advantage of emerging shale gas opportunities," PwC said. "Some are considering whether to restart mothballed assets, invest in greenfield projects, form strategic alliances, and expand and upgrade existing assets. Many of these companies are also executing large capital projects, identifying engineering and construction resources, and establishing strategic sourcing agreements with NGL providers."

Several chemicals companies this year have announced plans to take are advantage of the low-cost gas supply, including Westlake Chemical Corp. (see NGI, Oct. 8a). CHS Inc., the nation's largest farmer-owned cooperative, in September announced plans to build a $1.1-1.4 billion nitrogen fertilizer manufacturing plant in North Dakota that would take advantage of natural gas feedstock to provide U.S. and Canadian farmers with crop nutrients (see NGI, Sept. 17).

Also last month, Orascom Construction Industries, Egypt's largest company, agreed to make the largest single investment ever in the state of Iowa ($1.4 billion) to build a nitrogen fertilizer plant to tap domestic natural gas supplies (see NGI, Sept. 10). Abundant regional supplies of natural gas also drew Methanex Corp., the largest methanol supplier in the world, to Louisiana to construct a new plant (see NGI, July 30).

The benefits of low-cost gas supplies aren't just building business in the United States. Alberta's off-gas business is becoming an ever-larger source for new feedstock supply as the province's oilsands and petrochemicals industries grow (see NGI, Oct. 8b).

Specialty chemical entities also are beginning to feel the effects of natural gas and NGL prices on their business models, PwC said. As the commercial distribution of ethane and ethane-based raw materials increases, "it could trigger new innovations and investment in new technologies. Research and development initiatives leveraging ethylene-based chemistries that replace petroleum-based products may predominate. Companies might also look for longer-term sourcing relationships and partnerships with raw material suppliers to help with developing new products."

The U.S. chemicals industry already has invested an estimated $15 billion in ethylene production, increasing capacity by one-third, according to PwC.

"As these investments take hold yielding more supply, the U.S. could become a major, global, low-cost provider of energy and feedstocks," said PwC's Garrett Gee, who directs the firm's chemical advisory services. "We are already seeing increased investment activity among multinational companies in building the infrastructure to export liquefied natural gas (LNG) products."

Cost structures for manufacturers may change dramatically as petroleum-based raw materials are replaced with products based on ethylene, and as the supply and demand picture is revised for some products. "This pattern may be repeated for other petroleum-based raw materials, many of which are used in building, construction, adhesives, paint, coatings, plastics, packaging and carpeting," PwC said.

"If the changes brought about by shale gas take hold in the chemicals industry, they will also create a need for specialty steels, reactors, pumps, valves, fittings, control systems, storage tanks and other equipment, as well as the services of engineering and construction firms. Another possible outcome is that chemical products will increasingly become a substitute for more expensive materials, such as metals, glass, wood, leather and textiles," said PwC.

"There is no doubt that the significant increase in NGL production could drive change across the U.S. chemicals industry, but the full potential of the market will depend on a number of factors," said Scamuffa. "The implications of the shale gas boom for the chemicals sector also vary by company, so management teams need to consider their individual situation and business options, including the risks and opportunities presented by the abundance of shale gas."

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