For years, North American makers of plastics and petrochemicals had been looking for a way to remain competitive on the global market. As it turns out, the answer was right beneath their feet.
That answer has come in the form of abundant supplies of natural gas from massive shale gas deposits that are being discovered and developed throughout the United States. The new natural gas can provide ethane feedstock that can be converted into ethylene, a key plastic feedstock used to make commodity resins polyethylene and PVC and several specialty materials as well.
Use of low-priced natural gas as a feedstock has allowed the North American market to use less ethylene based on higher-priced naphtha feedstock, which comes from price-volatile crude oil. The impact of this natural gas resurgence was a big topic at a pair of industry conferences held March 23-24 in Houston. One of the events hosted by Houston consulting firm Chemical Market Associates Inc. featured Alan Armstrong, CEO of Williams Cos. Inc.
Tulsa, Okla.-based Williams ranks as one of the 10 largest natural gas suppliers in the United States.
Shale gas is positioned to create a renaissance in the U.S. petrochemicals industry, Armstrong said. We're positioned to meet the demand for plastics in the U.S.
This is a tremendous opportunity, he added. But there are some challenges ahead as we unlock these vast resources.
Those challenges include the need for political courage to push for exploration and development while facing environmental and regulatory challenges, including some that have raised concerns about drilling's impact on water supplies. Keeping up with the need for expanding pipeline infrastructure also will require work and investment.
But the size of the opportunity and the economic strength it could provide for the U.S. apparently is worth the effort. Armstrong pointed out that more than 16,000 miles of new interstate gas pipeline were installed in the U.S. between 2000 and 2010.
The Barnett shale basin in Texas, with 12,000 natural gas wells as of 2009, is huge, Armstrong said. But the Marcellus shale basin covering a large portion of Pennsylvania and parts of Ohio, New York and West Virginia is expected to be many times larger.
The size of the Marcellus basin is estimated at 95,000 square miles, or 19 times the size of the Barnett basin.
We're talking about a supply [in the U.S.] of 100-plus years and growing, said Armstrong, whose firm controls $25 billion in energy assets. Five years ago, [former Federal Reserve Chairman] Alan Greenspan and a lot of others thought natural gas supplies were dwindling, but now production is flourishing.
Williams is taking part in that production by developing multiple natural gas sites throughout North America. The firm also owns a majority stake in an ethylene cracker in Geismar, La. Saudi Basic Industries Corp. of Riyadh, Saudi Arabia, is minority owner there.
North American petrochemical firms now are looking to boost their own capacities for making ethylene and most likely of PE as well. A few years ago, it would have been hard to find anyone in the industry who believed North America ever again would see new capacity for those products.
PE maker Chevron Phillips Chemical Co. LP moved in that direction March 28 when it announced a feasibility study for a new ethane cracker and ethylene derivatives unit at one of its sites on the U.S. Gulf Coast. There's even been talks that PVC makers could add North American capacity even with the domestic construction market in the doldrums solely for the purpose of selling into export markets in the Middle East or South America.
Williams made an ethane/ethylene deal of its own March 28, although this one involved natural gas from oil sands, not shale gas. The firm signed a long-term agreement to supply ethane and ethylene to plastics and chemicals maker Nova Chemicals Corp., based in Pittsburgh. That material will be sourced from the Canadian province of Alberta and will involve Williams investing more than $300 million on facilities there.
Every time a well is drilled, we learn how to do it better, Armstrong said. We have a clear vision to North American ethane.
The massive natural gas movement also is drawing investment from abroad. Armstrong said that investors from China, the United Kingdom, Japan and other countries already have invested more than $20 billion into U.S. shale gas. He said investors are being drawn to a low-cost resource in a politically stable area.
But even as new natural gas promises to be a boon for PE and PVC, it's having a less-than-positive impact on polypropylene. That's because natural gas-based ethane produces less propylene monomer feedstock per unit than crude oil-based naphtha does. As a result, supplies of propylene have tightened, leading to increased price volatility best exemplified by a 17-cent price spike that hit the propylene and PP markets in January.
Market watchers don't expect that situation to change as long as North American natural gas remains price-advantaged vs. crude oil. The materials are said to be at parity when there's a 6-to-1 price ratio of oil-to-natural gas. Anything above that ratio gives the price advantage to natural gas. On March 30 with oil futures above $104 and natural gas futures just above $4 that ratio was more than 25-to-1, giving natural gas a major advantage.
Natural gas prices averaged $8 per unit in the 2004-08 period, but now are expected to be around the $5 mark until 2020 and aren't expected to hit the $7 mark until 2035, according to Armstrong. At current cost levels, natural gas supplied from the Marcellus shale can break-even when natural gas is priced at $3.25, he said.
At the CMAI event, CMAI President Gary Adams said the shale gas boom will be highly advantaged vs. crude oil for the PE and ethylene chain and will be moderately advantaged for vinyls and styrenics. But the same process would offer no advantage in the propylene market and would be a potential disaster in the market for plastic feedstock butadiene.
Lower feedstock and electricity prices are a potential, but not a certainty, he said. Competing market forces will prevail.
These new natural gas economics already have had an impact on U.S./ Canadian PVC, as low prices allowed producers in the region to almost double their export sales last year. That rescued PVC makers from what could have been a double-digit sales loss caused by the region's struggling construction market.
For PE, export sales were down slightly in 2010, mainly due to production outages that left less material available for that market, but PE exports could gain in 2011, market watchers have said.
At DeWitt & Co.'s World Petrochemical Conference, March 23-24, DeWitt President Earl Armstrong said that the new natural gas market is shaping the future of the North American petrochemicals sector.
The U.S. is going to max ethane and is expected to stay there, he said. The incentive [on ethylene and PE] can be 10-15 cents per pound.
North America will be able to compete for polyethylene export business because of shale gas and less capacity than expected from the Middle East.
For his part, Alan Armstrong at Williams is remaining optimistic.
Capital will fund the [pipeline] infrastructure, but we're concerned about regulatory issues, he said. This is a once-in-a-career opportunity.