Musings from the Oil Patch
A news item from pastemart.com reported that the U.S. has overtaken the Middle East as the region with the cheapest petrochemicals feedstock, for the first time since the Arabian Gulf's industry was established. The American shale revolution has created a boom in natural gas production that has contributed to the cheap gas feedstock in North America, driving a new generation of petrochemicals expansion in the U.S. “The cash cost per ton of ethylene in the U.S. in Q4-2012 was lower than the cash cost in Saudi Arabia,” said Nexant vice president Graham Hoar, speaking at the MEED Middle East Petrochemicals 2013 conference. “It is a dramatic change in economics in the U.S.”
The conclusion was reinforced by comments from James Gallogly, CEO of LyondellBasell (LYB-NYSE), recently. In talking about the impact of shale drilling in revolutionizing the U.S. chemicals industry, he said, “That's the biggest piece of news the U.S. petrochemical industry has had in the last 30 years. About 75 to 80 percent of the as-delivered cost of the (chemical) product relates to energy in some way. It could be the electricity we use at the plant, it could be the natural gas that fires the boilers or furnaces or the feedstocks we use.” The impact of the growth in shale gas and liquids production and their contribution to reducing the market prices is contributing to a huge American industrial revolution.
Eoin Treacy's view This quote highlights the extent to which the boom in unconventional gas production has had on the energy sector. Only five years ago if someone had suggested that the USA could produce petrochemical products at a lower cost than Saudi Arabia they would probably have been laughed out of the room.
While the cost of natural gas will probably have to rise somewhat to ensure a sustainable economic foundation for producers, the spread between US and European gas prices is sufficiently wide to ensure the USA's competitive advantage over the medium term.
The main beneficiaries of this evolution have so far been chemical, industrial and utility companies. However as demand for natural gas increases in line with lower pricing on a relative basis, the benefits are likely to be more widely dispersed.