A resurgence in the chemicals industry is in progress,
primarily driven by unprecedented growth in U.S. oil and gas
production. The discovery of abundant reserves of natural gas
trapped within shale rock and new and economical methods of
extraction are the primary factors driving such production
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New methods of extraction such as horizontal drilling and
hydraulic fracturing have provided access to shale reserves which
were earlier inaccessible. They have also lowered associated
costs, in turn pushing down prices of many key inputs for
petrochemical production and ethane in particular. Ethane is used
to produce ethylene, the starting point in the production of
plastics like polyethylene.
As a result, petrochemical majors like
The Dow Chemical Company
Exxon Mobil Corporation
) and CPChem - a joint venture of
) - are helping the U.S. chemicals sector grow by setting up
facilities to produce ethylene from ethane. Yet, only about three
years ago the chemicals industry was projected to decline over
the long term.
The likes of Dow Chemical were earlier considering investing in
the Middle East and going into production of specialized
products. However, the shale powered resurgence has changed the
situation quite radically. According to the chief economist of
the American Chemistry Council (ACC), the U.S. is now the ideal
location for chemical manufacturers.
The ACC says that no fewer than 17 projects have been initiated
only to produce ethane from ethylene. The companies setting up
these projects are not limited to the U.S.
Royal Dutch Shell plc
LyondellBasell Industries NV
) of Brazil and Formosa Plastics from Thailand are also looking
to set up facilities for ethylene production.
Goldman Sachs Group Inc.
) believes that shale gas investments and production are being
driven by the high prices of crude oil worldwide. This has led to
the higher investment in the U.S. oil and gas industry. In 2011,
exploration and production expenditure amounted to $138 billion
in the U.S. compared to $35 billion in China, $10 billion in
Russia and $5 billion in Saudi Arabia. Goldman Sachs' global head
of commodity research believes that a tax regime which is
favorable has also led to an increase in investments.
The rise in crude prices has subsequently led to an increase in
the cost of naptha, which is produced from oil. Naptha accounts
for around half of the world's ethylene production and now costs
around $100 a barrel, increasing marginally over last year. On
the other hand, the price of ethane has declined from 80 cents
from over a year ago to below 23 cents. This is a consequence of
the additions to natural gas capacity over the
It is of course generally being accepted that the price of ethane
will increase over time. The chief executive of Dow Chemical,
Andrew Liveris believes prices will stabilize on the higher side
of thirty cents. But investment research group Alembic believes
that even if ethane costs between 40-50 cents per gallon, the
cost of production of ethylene will be between $400-500 a ton in
the U.S. compared to $1,200 a ton in Europe. This has led to
companies like Bayer setting up ethane manufacturing facilities
in the U.S.
Not just the chemicals sector, the rise in shale gas production
has led to positive effects for the entire economy. Prices of
electricity have fallen and energy independence has increased.
Former U.S. secretaries of energy Bill Richardson and Spencer
Abraham believe the U.S. could even emerge as a net exporter of
liquefied natural gas by 2016. The U.S. Department of Energy
thinks LNG exports could in turn spark off $47 billion in new
economic activity for the U.S. by 2020.
Additionally, the use of gas in place of coal to generate power
has led to carbon emissions in the U.S. falling to levels last
witnessed in 1992 in the first quarter of 2012. Clearly,
the shale gas revolution is here to stay.