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Natural gas from shale driving an American industrial revival

Workers adjust pipes on a rig drilling for natural gas in the Marcellus shale formation in Pennsylvania. Royal Dutch Shell has plans for a $2 billion petrochemical plant northwest of Pittsburgh that will rely on natural gas from the shale.
Workers adjust pipes on a rig drilling for natural gas in the Marcellus shale formation in Pennsylvania. Royal Dutch Shell has plans for a $2 billion petrochemical plant northwest of Pittsburgh that will rely on natural gas from the shale.
Published Nov. 24, 2012

The shale gas revolution is firing up an old-fashioned American industrial revival, breathing life into businesses such as petrochemicals and glass, steel and toys.

Consider the rising fortunes of Ascension Parish, La.

Methanex Corp., which closed its last U.S. chemical plant in 1999, is spending more than half a billion dollars to dismantle a methanol plant in Chile and move it to the parish.

Nearby, a petrochemical company, Williams, is spending $400 million to expand an ethylene plant. And CF Industries just unveiled a $2.1 billion expansion of its nitrogen fertilizer manufacturing complex, aiming to displace imports that now make up half of U.S. nitrogen fertilizer sales.

These companies all rely heavily on natural gas. And across the country, companies like them are crediting the sudden abundance of cheap natural gas for revving up their U.S. operations. Thanks to new applications of drilling technology to unlock natural gas trapped in shale rock, the nation's output has surged and energy experts almost unanimously forecast that prices will remain low or moderate for a generation. The International Energy Agency says that by 2015, the United States will overtake Russia as the world's biggest gas producer.

"The supply of natural gas and the price are the driving factors, and we're swimming in natural gas down here," said Mike Eades, president of the Ascension Economic Development Corp.

Ascension Parish falls inside the Haynesville geological region — one of the nation's big shale gas prospects.

"It has become clear to me that the responsible development of our nation's extensive recoverable oil and natural gas resources has the potential to be the once-in-a-lifetime economic engine that coal was nearly 200 years ago," U.S. Steel chairman John Surma said in a speech this year.

Industrial companies are betting that the surge in the domestic production of natural gas is much more than a blip. Cheap and plentiful supplies of natural gas are flooding the U.S. market — and prices in the United States are as low as a quarter of what they are in Europe or Asia.

"That will translate into significantly lower costs for electricity generation, for fuel used to power industrial plants and for feedstock used across many industrial processes," said Justin Rose of the Boston Consulting Group.

Manufacturers have plans to invest as much as $80 billion in U.S. chemical, fertilizer, steel, aluminum, tire and plastics plants, according to Dow Chemical. And the main reason, said George J. Biltz, Dow Chemical's vice president for energy and climate change, "comes back to the massive competitive advantage the United States has with natural gas today."

A changing conversation

The shale boom has also altered the way we think and talk about energy.

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For decades, most of the conversation about U.S. oil and natural gas has revolved around the idea of scarcity, declining output and rising prices. Natural gas supplies traditionally have been seen as limited and gas prices have been volatile — burning utilities that bet too heavily on gas-fired power plants in the 1990s.

But past assumptions have been challenged by new technologies — and new uses of old technology. Years of pioneering work on drilling techniques by an independent oilman, George Mitchell, paid off. Despite concerns about water pollution risks linked to hydraulic fracturing of shale, drilling and production have soared.

The United States is rife with these shale plays, some rich in natural gas and others rich in oil. The United States is producing more oil than in any year since 1994, and production is rising.

Natural gas production has jumped to record levels. In 2000, shale gas was 2 percent of the U.S. natural gas supply; by 2012, it was 37 percent.

Natural gas supplies suddenly look bountiful enough to last a century at current consumption rates, the National Petroleum Council said in a report last year.

Some advocates of natural gas have called it a "bridge" to a clean-energy future because its greenhouse gas emissions are half those of coal.

Others call it a detour, since it is still a fossil fuel and it is undercutting nuclear, wind and solar energy, as well as coal.

For environmentalists, the abundance of shale gas poses a political and environmental dilemma. As new gas supplies fuel more and more industrial plants, new constituencies will have stakes in gas production, making it politically harder to impose new regulations. The Environmental Protection Agency is weighing whether to issue additional federal guidelines on various disruptive aspects of shale gas drilling, including the disposal of toxic water used to fracture formations and air pollution from drilling operations. The EPA might also issue rules requiring drilling techniques that would make contamination of water aquifers less likely.

One thing is clear: Tumbling natural gas prices have changed every calculation and assumption about the energy business.

The petrochemical industry's reaction

Perhaps no one benefits more from low natural gas prices than the petrochemical industry, which relies on it as a feedstock and as a source of power. Natural gas, in turn, produces the building blocks for other products, including paints, solvents, plastics, packaging, inks, dyes and lubricants.

And no industry better demonstrates just how much has changed. Chemical industry employment slid 17 percent from January 2002 through January 2011, according to the Bureau of Labor Statistics.

In October 2005, after Hurricane Katrina pounded Louisiana, the price of natural gas had spiked to $14 per 1,000 cubic feet. Supplies were scarce even before the storm, and Dow Chemical had temporarily shut down one of its biggest petrochemical plants.

Natural gas accounted for half of Dow's costs, chief executive Andrew Liveris said at the time.

"We simply cannot compete with the rest of the world at these prices," Liveris told the U.S. Senate. But today, Dow is drawing up plans to construct a plant in Freeport, Texas, and is restarting a plant in St. Charles, La. And year-end nationwide chemical industry employment has edged up for the first time in a decade, the Bureau of Labor Statistics says.

Methanex chief executive Bruce Aitken said natural gas prices made moving operations to Louisiana attractive.

He said moving the methanol plant from Chile to Louisiana will pay off in less than four years if gas prices stay around $4 per 1,000 cubic feet. He said the company was considering moving a second plant from Chile to Geismar, La.

CF Industries was also lured by the price and proximity of natural gas in Ascension Parish. Gas makes up about 70 percent of manufacturing costs at its ammonia and urea units. The company said the site is served by five pipelines at prices set at the nearby Henry Hub, which is the nationwide benchmark for spot gas prices.

Foreign companies eye U.S. natural gas

In September, a large Egyptian construction company announced that it would build a nitrogen fertilizer production plant in southeast Iowa to supply customers in the U.S. Corn Belt. Cairo-based Orascom Construction Industries, one of the world's largest fertilizer makers, said the $1.4 billion plant would be "the first world-scale, natural gas-based fertilizer plant built in the United States in nearly 25 years" and would reduce U.S. dependence on imported fertilizers.

After years of losing manufacturing jobs, most American communities are vying to lure industries.

Orascom chose Wever, Iowa, over Illinois because part of its investment will be funded by a tax-exempt bond. The Iowa Economic Development Authority approved an incentive package that is expected to provide tax relief "in the order of $100 million," the company said.

Royal Dutch Shell has unveiled plans for a $2 billion petrochemical plant northwest of Pittsburgh, where it can use natural gas supplies from the state's enormous Marcellus shale formation. It chose Pennsylvania despite being wooed by Ohio and West Virginia.

The broader effect

The economic growth from natural gas extends to companies providing drilling supplies.

On Oct. 1, Honeywell announced that it paid $525 million for a 70 percent stake in Thomas Russell, a privately held provider of technology and equipment for natural gas processing and treatment.

Another example: U.S. Steel. The company is churning out new pipe for natural gas drilling rigs, wells and pipelines. And as a big consumer of power, it is paying less for fuel.

Surma, U.S. Steel's chief executive, said in a speech recently that the company used 100 billion cubic feet of natural gas in 2011, "so just a few dollars' difference in the price … allows us to realize important and significant cost savings." For every $1 change in the price of 1,000 cubic feet, the company saves $100 million.

Surma said the company is also improving its North American blast furnaces to increase injection of natural gas to reduce its consumption of coke, a fuel derived from coal. The reduction could cut blast-furnace fuel costs by $15 per ton of hot metal produced — and U.S. Steel can produce more than 20 million tons of steel a year.

Once some of these basic industries come home, companies further down the value chain could return, too.

"If you make plastics in the United States, there are a bunch of things produced in China that might tip back to being produced in the U.S.," said Harold L. Sirkin, a senior partner at the Boston Consulting Group.

"You could think about toys," he said. "We talked to a few companies thinking, 'Does this mean I can reshore some toy production to the U.S.?' The energy cost in plastic toys is reasonably high. And the labor content is relatively low because we're talking about automated injection molding facilities.

"All of a sudden, the equations start changing about where you produce things. Even in industries where the cost structure includes only 1 or 2 percent electricity, that could make the difference."


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