2012-10-29 16:35:17Roosevelt

Shale gas transforming US economy

The wonders of US shale gas continue to amaze. We receive fresh evidence by the day that swathes of America's industry have acquired a massive and lasting advantage in energy costs over global rivals, demolishing assumptions about US economic decline.


Shell is planning an ethane plant in a near-derelict steel valley near Pittsburgh. Dow Chemical is shutting operations in Belgium, Holland, Spain, the UK, and Japan, but pouring money into a propylene venture in Texas where natural gas prices are a fraction of world levels and likely to remain so for the life-cycle of Dow's investments.


Some 50 new projects have been unveiled in US petrochemicals. A $US30bn ($A29.4 billionn) blitz is under way in ethylene and fertiliser plants alone.


A study by the American Chemistry Council said shale gas has reversed the fortunes of the chemical, plastics, aluminium, iron and steel, rubber, coated metals, and glass industries. "This was virtually unthinkable five years ago," said the body's president, Cal Dooley.


Advertisement This is happening just as other clusters of manufacturing - machinery, electrical products, furniture - are "re-shoring" to the US to escape surging Chinese wages. PricewaterhouseCoopers calls it the "Homecoming".


The revival of the chemical industry is a spin-off from the greater drama of America's energy rebound, though a big one. As many readers will have seen, the US energy department says the country will produce 11.4m barrels a day (b/d) of oil and liquid hydrocarbons next year, almost as much as Saudi Arabia.


The Holy Grail


America looks poised to become the world's top producer in 2014. It will near the Holy Grail of "energy independence" before the end of the decade. This is largely due to hydraulic fracturing - blasting rock with water jets - to extract shale gas and oil, though solar power and onshore wind are playing their parts.


Europe is going in the opposite direction, drifting towards energy suicide. So is Japan as it shuts down its nuclear industry after the Fukushima disaster. China is more hard-headed, as it needs to be. The country is adding 20m cars a year. Chinese oil imports are rising by 0.5m b/d annually.


As of last week, US natural gas prices were one third of European levels. Germany's chemicals group BASF said it had become impossible to match the US on production costs.


Asia is facing an even greater handicap as Japan soaks up supply of liquefied natural gas (LNG) to offset the closure of its nuclear plants. Prices on the Pacific rim are near $15 (per million British Thermal Units), compared with $3 in the US.


The US cost of ethane - the raw material for plastics and much else - has collapsed by 70pc since 2008. It is why Exxon and Westlake Chemical are building new ethane plants in America, while loss-making Mitsubishi is closing its unit in Japan. Credit Suisse said ethane production is barely viable in Japan, Korea or Taiwan.


The gas differential with Europe and Asia will narrow over time but there is no genuine global market for gas. Prices are local, dictated by pipelines. In Europe's case they are dictated by Vladimir Putin's Gazprom. Germany imports 36 per cent of its gas from Russia. Poland imports 48 per cent, the Baltics 100 per cent.


While LNG helps, it requires shipping at minus 116 degrees in molybdenum alloy hulls, and an elaborate infrastructure at the docking port.


A new twist


Shale has made the US self-sufficient in gas almost overnight. The new twist of course is shale oil. It has jumped to 2m b/d from almost nothing eight years ago. America produced 81 per cent of its total energy needs in the first six months of this year, the highest since 1991.


Citigroup thinks US output of crude and equivalents may top 15.6m b/d by 2020, adding 3.6 million jobs through multiplier effects. North America will reach 27m b/d - with Canada's oil sands and Mexico's deepwater fields - becoming a "new Middle East".