The Natural Gas Feedstock Dilemma

A well-documented benefit of the shale gas revolution is the return to a competitive advantage for industries that rely on natural gas as a major feedstock.  The most obvious winners are polyethylene producers, the largest category in plastics, and petrochemical producers.  These industries are highly competitive globally, and the cost advantage for American exports has produced dramatic results.  For instance, Giant Dow Chemical plans to spend nearly $4 billion over the next five years to take advantage of low natural gas prices. Analysts have predicted that for every 10-cent drop in the cost of ethane, the earnings of Dow are boosted nearly $200 million.  Pipeline and processing capacity is expected to remain ahead of demand for the near term, which will facilitate continued suppressed prices.

 

There is a natural tension, however, between domestic natural gas consumers and producers, who are eager to take advantage of price differences created by a fractured global marketplace.  Despite the region’s heavy reliance on Russian distribution, the margins are slim in Europe once the cost of liquefaction and transportation are factored in.  The arbitrage opportunities in Asia remain significant, and are expected to remain so until large scale regional suppliers and distribution systems are online.

 

natural-gas-prices-in-us-europe-japan

http://ourfiniteworld.com/2012/03/23/why-us-natural-gas-prices-are-so-low-are-changes-needed/

 

With multiple domestic liquefaction facilities in the approval process, industrial consumers know the bet on continued current natural gas prices is a gamble given the massive capital expenditures necessary to build new infrastructure.  ExxonMobil has chosen to hedge this bet by ruling out any new capacity, instead saying it would concentrate on incremental growth at existing facilities.

While it is clear that the likely increase in exports will lead to domestic price increases, massive uncertainties remain regarding how fast export capability will be added, global demand over the next decade, and therefore when and at what price global and domestic prices will converge.  Increased prices will likely lead to both increased reserves and increased production, welcome news for the E&P sector, but perhaps at the cost of a long-term sustainable competitive advantage for industrial and manufacturing consumers.

http://press.ihs.com/press-release/country-industry-forecasting/cheaper-natural-gas-feedstocks-shale-plays-revitalizing-n

http://investorplace.com/2012/03/why-chemical-makers-love-cheap-natural-gas/

http://www.icis.com/Articles/2011/06/07/9466781/shell-may-bring-partner-on-pe-component-of-new-us-cracker.html

http://www.investmentu.com/research/natural-gas-price-forecast.html

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One response to “The Natural Gas Feedstock Dilemma

  1. It is possible that the liquefaction and exportation of natural gas is the best “solution” to low natural gas prices. The price of natural gas dropped out because of the discovery and production of several behemoth shale gas plays, including the Marcellus Shale in Pennsylvania, the Woodford Shale of Oklahoma, and the Haynesville Shale of Louisiana. This overproduction led to a price drop not only in the United States but worldwide (evidenced by the 2008 price drop of natural gas in Europe and Japan soon after the price drop in the United States, as seen on the graphic from ourfiniteworld.com). The worldwide price drop, however, was just temporary (unlike the price drop in the United States). Before too long, the price of natural gas in both Europe and Japan has soared upwards while the American price has remained stagnant. If natural gas could be exported across the globe, producers would be able to take advantage of markets that sell natural gas at three or even four times the price in America.

    The question, then, becomes whether it is worth it. I am unfamiliar with the capital investment required to liquefy and export natural gas, but I assume it is not cheap, especially to do it on a large-scale basis. If this price is too prohibitive, the profit margins will be much smaller.

    A better solution to low-gas prices may be for Americans to start implementing more natural gas into their lives. Moving from a primarily coal-powered electrical economy to a natural-gas-powered electrical economy has many benefits. Again natural gas is cheap now (though I suspect coal is as well) and burns cleaner than coal. Of course, this also requires large capital investments (and many government approvals) for natural gas power plants. But given that natural gas is so readily available, it seems logical to begin moving electricity production towards more natural gas.

    Another solution may be to increase infrastructures for natural gas cars. Natural gas burns more cleanly than petroleum and a properly designed diesel engine can be very efficient when using natural gas. The issue, of course, is infrastructure. Natural gas refilling stations are few and far between (something like less than 10 in Houston). Thus consumers are hesitant to purchase natural gas cars. If a larger infrastructure were put into place, there would be many possible upsides, such as less dependence on foreign oil, cleaner-burning cars, and use for this large overproduction of natural gas.

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