Shale Revolution Boost U.S. Chemical Industry

Published July 14, 2015

Just a decade ago, the domestic chemical industry was in decline as natural gas prices were high and estimated reserves low. Of the more than 40 chemical manufacturing plants being built worldwide in the mid-2000’s of more than $1 billion capitalization, none were under construction in the U.S. 

Due primarily to the shale gas revolution, the fortunes of the domestic chemical industry have changed radically. The abundance of cheap natural gas and associated liquids resulting from the widespread use of fracking has made the U.S. the place to build new chemical manufacturing facilities.

Growing Chemical Industry

The American Chemistry Council (ACC) reports, the $800-billion U.S. chemicals industry will experience 3.2 percent growth in 2015 and is expected to expand by more than 3 percent in 2016. With the Federal Reserve estimating just 1 to 2.3 percent GDP growth for the U.S. economy as a whole through 2018, the ACC forecasts the domestic chemical industry’s growth to exceed the U.S. economy as a whole for years to come, topping 5% range in the 2017-to-2019 period. This growth is expected to accompany record trade surpluses for the industry by 2020. 

Fracking released abundant and cheap natural gas and natural gas liquids (NGL), including ethane, key feedstocks and fuel for the chemical industry. In the mid-2000’s new chemical plant construction in the U.S. was at a standstill, with new construction moving overseas to location with lower labor costs and less oppressive regulatory regimes. Natural gas prices weren’t an issue because they were comparable worldwide.

As fracking combined with horizontal drilling opened up huge natural gas reserves in the Barnett Shale in Texas and the Marcellus Shale in Pennsylvania and nearby states, among other shale formations, gas prices fell sharply in the U.S. compared to the rest of the world. Demand for new natural gas import terminals, shifted to request to build natural gas export terminals.

Consumers have benefitted immensely from the decline in natural gas prices over the past decade. In 2015 alone, those homeowners using natural gas for heating and cooking could expect to see a 5 percent decline in their heating/cooking bill for the year. In late 2014, Charles Acquard, executive director at the National Association of State Utility Consumer Advocates said, “It’s looking awful good for consumers the next couple years, that’s for sure. Propane users will save anywhere from 20% to 34%,” to the Wall Street Journal (12/22/14).

Billions in New Investment

What’s been good news for consumers has been great news for the chemical industry. 

According to Wall Street Daily (7/1/15), the ACC reports 238 U.S. chemicals companies have announced investment projects worth a total of $145 billion, in 2015, up from $90 billion in announced projects as of mid-2014.

Capital spending in the industry soared 64% from 2010 to 2014, to $33.4 billion. The ACC expects spending to jump another 37% to $45.8 billion by 2018.

Sixty-one percent of the announced investment is in the U.S. of from foreign companys. This represents a huge reversal in the flow of chemical plant investment in less than a decade.

U.S. companies, including Du Pont (DD), Dow Chemical (DOW), Eastman Chemical (EMN), Westlake Chemical (WLK), Celanese (CE), and LyondellBasell Industries (LYB) and major oil companies such as ExxonMobil (XOM), are also expanding chemical production in the U.S.

Dow Chemical, for example, is spending $6 billion on expanding its Gulf Coast facilities, including a new “cracker” plant to produce ethylene — a basic building block for other industrial chemicals. 

Wall Street Daily reports LyondellBasell CEO Bob Patel told the Financial Times he expects the oil-to-gas price ratio to remain favorable for U.S. companies. And he continues to see the United States as the most favorable location for ethylene production.

Low natural gas prices brought about by increased fracking has resulted in a retrenchment in the industry, with less efficient producers shutting down. Efficient producers using ever improving technologies are picking up the slack and despite fewer natural gas wells, production remains high by historic standards. As a result, the chemical industry sees continued low prices and a bright future.

H. Sterling Burnett, Ph.D. ([email protected]) is managing editor of Environment & Climate News.