In This Issue
Summer Issue of The Bridge on Shale Gas: Promises and Challenges
June 15, 2014 Volume 44 Issue 2

Shale Gas Production Effects on Investment and Competitiveness in the US Chemical Industry

Monday, June 23, 2014

Author: T. Kevin Swift

This paper reports current and projected effects of dramatic increases in US shale gas production on new investment in—and hence the competitiveness of—the US chemical industry. Similar to the manufacturing industries, the chemical industry uses hydrocarbons, including natural gas, to provide much of the basic process energy for heating and steam. However, it also uses natural gas as a primary feedstock for many of its largest processes, and is therefore particularly sensitive to natural gas costs.

Energy and Feedstock Costs in the Chemical Industry

Processes in the chemical industry tend to be very energy intensive. Figure 1 shows the fraction of total costs that arise from energy, fuel, and feedstocks for various segments of the US chemical industry: two major inorganic chemicals, chlorine/caustic soda and sodium carbonate, are listed at the top, followed by petrochemicals, then plastics and resins, and two fertilizers at the bottom. Blue indicates the cost associated with fuel, power, and feedstocks; red shows other costs (e.g., other raw materials, labor, maintenance).

Figure 1

Note that even for inorganic chemicals, which do not use hydrocarbons as feedstocks, the energy cost is an appreciable fraction (26–41 percent) of total production costs; chlorine/caustic soda plants, for example, are very large consumers of electricity (for electrolysis). For most of the petrochemicals and resins, which do use hydrocarbons as a feedstock, the percentage of total costs assignable to fuel, power, and feedstocks is well over 50 percent. Finally, energy and feedstock costs are the major cost components associated with the production of fertilizers such as anhydrous ammonia, which is made directly from natural gas.

In recent years energy prices in the United States have been falling both in absolute terms and relative to other countries. From 2005 to 2012 the price of natural gas in the United States fell by more than 50 percent, although the general trend of petroleum prices was upward. These changes are having significant positive effects on US competitiveness, as illustrated in the example of ethylene production.

Ethylene Production Costs

Naphtha, a hydrocarbon feedstock derived from oil refining, is used in Western Europe to produce ethylene and related products. Its cost is highly correlated with the cost of petroleum, which has increased. In the United States, on the other hand, ethane is a primary feedstock used for similar purposes. Largely derived from natural gas liquids, its cost is correlated with that of natural gas, which has decreased. Thus in Western Europe the costs of feedstock for ethylene production have risen while in the United States they have declined (Swift and Moore 2013). These changes have greatly enhanced the competitiveness of the US industry compared to that of Western Europe.

Global Ethylene Supply

Because ethylene is a major chemical intermediate for a host of downstream products around the globe, its cost can serve as a bellwether for the chemical industry.

Figure 2

Changes in the cost of producing ethylene are vividly illustrated in Figure 2, which shows the global ethylene supply curves for 2005 (blue) and 2012 (red). In 2005 the cost of producing ethylene in the United States was higher than in all other major markets. But by 2012 the production costs in Western Europe and Asia had gone up significantly, while US costs were markedly less than those in Western Europe, China, and Northeast Asia (Japan and Korea) and only slightly higher than those in Saudi Arabia. However, by the end of this decade producers in Saudi Arabia will have to switch from natural gas feedstocks to more costly naphtha derived from petroleum (Swift and Moore 2013); unless Saudi Arabia subsidizes the cost of naphtha, that change will offset its current cost advantage. As a result, the United States will likely be in an even stronger relative position.

Announced Capital Projects

The American Chemistry Council (ACC) currently estimates that, thanks to the new shale gas development, by 2020 there will be over $100 billion (2012 dollars) in incremental new investment in the US chemical industry, over half of it from overseas (i.e., foreign direct investment). It is possible that over $110 billion (in 2012 dollars) will ultimately be invested.1

In association with these investments, about 150 chemical industry capital projects in the United States have recently been announced—about 50 percent in bulk petrochemicals, 25 percent in plastics and resins, and the remainder in fertilizer and inorganic chemicals. Approximately three quarters of these developments are planned for the Gulf Coast region and the rest in the Ohio Valley and other Midwest locations. The number and mix of projects will, of course, change with time, but the basic trend is clear: the number of announced capital projects in the US chemical industry almost doubled between January and June 2013.

In addition, the Ohio Valley and the rest of the Midwest will see significant increases in downstream industries, such as plastics and resins manufacturing. For example, in Hudson, Ohio, Little Tikes is expanding its production of plastic toys, and a number of other manufacturers (e.g., molders, fabricators) of finished plastic products are likewise expanding. The ACC has counted over 20 such initiatives since mid-2012, making Ohio the third largest state with these investments.

When completed, these capital projects are anticipated to add over $70 billion annually to total US chemical production. Furthermore, they will dramatically enhance job growth in the chemical and ancillary industries, US competitiveness, and hence exports of chemical products.

Job Growth

Direct job growth in the chemical industry by the end of the decade is estimated at 46,000 jobs, which by itself is good but will not make a major impact on overall US employment. However, the chemical industry is a major purchaser of goods and services from associated industries that are much more labor intensive, and this activity is expected to add approximately 262,000 jobs. Moreover, indirect economic activity in other segments of the economy associated with shale gas investment is projected to add another 224,000 jobs, bringing the total job growth attributable to enhanced shale activity to over 500,000 jobs by 2020 (Swift and Moore 2013).

US Competitiveness and Exports

The improved global competitiveness of the US chemical industry is leading to increased exports of chemical products. For example, the export of US-produced resins and plastics has virtually doubled in the past decade from about 10 to 20 percent of total output, and the American Chemistry Council expects that this share will grow to over 30 percent by 2020.

Figure 3

As a corollary of these trends, the US chemical industry may capture market share from Western Europe (Swift and Moore 2013; Swift et al. 2013). In fact, ACC analysis indicates that the trade surplus in chemicals will eventually outweigh the trade deficit for pharmaceuticals (Figure 3).

Concluding Thoughts

Shale gas production—the number one development in the US chemical industry since the 1930s—has been a game changer for the US natural gas markets, with manifold effects:

  • It has improved the competitiveness of US manufacturing, especially chemicals.
  • It is fostering a wave of new greenfield investment, over 50 percent of which is from foreign companies—the United States is now recognized as a very good place for chemical production.
  • The new investment is generating new business, jobs, and tax revenues.
  • With global integration and renewed competitiveness, US exports will capture greater global market share. The chemical industry is projected to become a major net positive contributor to the US balance of payments by 2020.

In summary, there is a very promising future for the US chemical industry.

References

Swift T, Moore M. 2013. Shale Gas, Competitiveness, and New US Chemical Industry Investment: An Analysis Based on Announced Projects. Washington: American Chemistry Council.

Swift T, Moore M, Sanchez E. 2013. Year-End 2013 Chemical Industry Situation and Outlook. Washington: American Chemistry Council.

FOOTNOTES

 1 The peak year for investment spending was predicted to be 2016, but this will likely slip.

About the Author:T. Kevin Swift is chief economist and managing director of the American Chemistry Council.