Industrials Say, “I’m a Believer,” But Will They Still Love the U.S. Tomorrow?

The promise of vast quantities of shale gas at low and stable prices is sparking a U.S. industrial revival no one could have envisioned only a few years ago. Most of the big-dollar industrial expansion projects planned for later this decade are chemical facilities and gas-to-liquids (GTL) plants; many of the rest are steel mills and other energy-intensive industrial facilities. If all—or even most—of these projects become a reality over the next five to 10 years, gas producers in the big shale plays would benefit from sharply higher demand and  the likelihood of higher prices as well. But how many industrial projects will actually be built? Will the forecasted industrial boom turn out to be more of a boomlet?  That could happen if several factors converge, like the approval of a few more LNG export terminals, environmental regulations that result in big growth in gas fired generation, and higher natural gas exports to Mexico.  Any combination of these factors could result in significant upward pressure on domestic gas prices. In this two-part series we explore the potential for a shale-driven industrial revival.

In Part 1 we look at the drivers behind what many think will be an unprecedented shale-driven industrial revival in the U.S., and discuss some key chemical, GTL and other industrial projects now on the drawing boards. There are many reasons why the U.S. over the past 40 years has become a less and less dominant force in chemicals, steel and manufacturing in general. Key factors in the decline of our chemical industry, of course, include what until recently was falling domestic production of gas; the desire of hydrocarbon giants in the Middle East and elsewhere to add value to their natural resources by producing chemicals themselves; and tightening environmental regulations that often tipped the economic scales in favor of moving chemicals production overseas. For steel makers and other manufacturers, moving production from the U.S. to China or India or other fast-developing nations sometimes seemed to be a no-brainer from a dollars-and-cents standpoint. Plus, the new ease and low cost of moving goods vast distances won out over the old need to be physically close to your market.

Now a new set of factors—cheap, plentiful U.S. shale gas chief among them—has come into play, and U.S. and foreign companies in a wide range of industries are planning projects each valued in the billions or hundreds of millions of dollars. Forecasters predict that the industrial sector will regain and retain its long-held role as the leading consumer of natural gas, a role that the electric power sector has challenged the past two or three years as utilities shifted away from coal (see Figure 1).

Source: EIA Annual Energy Outlook 2013 (Click to Enlarge)

Thanks to the nation’s almost limitless shale reserves and the now-widespread use of directional drilling and hydraulic fracturing (see Tales of the Tight Sand Laterals) U.S. gas prices are roughly one-third what they were at their peak five years ago, and they are projected to remain within the $4-to-$5/MMbtu range well into the 2020s (see Figure 2). That’s music to the ears of energy and chemical giants like Sasol and Dow Chemical, who see the potential for large-scale shale-driven industrial projects, especially in the Gulf Coast and Midcontinent regions because—to paraphrase bank-robber Willie Sutton—that’s where the hydrocarbons and the infrastructure are.