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.
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.