Shale Gas Sparks A U.S. Chemicals Renaissance [News Report]

by Avinash Saxena

Shale gas has transformed the U.S. energy market in the last four years, unleashing a huge supply of cheap, relatively clean fuel on the North American market at precisely the time many people thought we’d be importing liquified natural gas from overseas. The new supply has disrupted the renewable-energy market and provided a comforting ceiling to electricity prices. But a less-noticed beneficiary has been the U.S. chemicals industry. The chart below tells the story:

Two years ago Georgia Gulf was near bankruptcy, saved only by a debt-for-equity swap that cut its debt in half. Then came the shale revolution, and with it a flood of natural gas liquids including ethane, which are considered a sometimes annoying byproduct by gas drillers but a vital feedstock to manufacturers like Georgia Gulf. Mr. Market has noticed: Since July of last year, the Dow Jones U.S. Chemicals Index is up 50%.

This chemicals renaissance was the talk of the Yale Alumni in Energy Conference on Friday, an annual gathering of Yale grads that is focused less on windmills and solar panels than on the real, gritty business of supplying energy to the market. It was here three years ago that Howard Newman, a former Warburg energy banker who’s repeatedly made money betting on conventional oil and gas extracted with unconventional technology, told a skeptical audience that shale technology would unleash 900 trillion cubic feet of gas on the North American market, a 100-year supply. The number seemed fanciful at a time when the industry was bemoaning accelerating decline rates on wells it was drilling, treadmill fashion, to supply demand. Newman was right: Two of the world’s three largest gas fields, the Marcellus shale extending across Pennsylvania and New York and the Barnett Shale in Texas, have come on line since 2008.

Shale gas is expected to supply 45% of  the U.S. market by 2025. That’s bad news for producers with expensive reserves, and even low-cost producers were fretting at the conference about a growing bubble as drillers punch holes in the ground simply to avoid losing control of leases that require drilling or they expire. This use-it-or-lose-it behavior has trapped drillers in previous gas booms and once again, Chesapeake Energy seems to be leading the charge, paying $2,500 an acre for dirt in the Utica Shale that others acquired for as little as $150.

“That’s the definition of a bubble,” said one executive, who I will leave nameless as the ground rules of the conference were it would stay on background.

Gas supplies are growing faster than storage capacity, creating the prospect of plummeting prices if there’s an unexpected decrease in demand. But it’s all good news for chemicals producers, who along with fertilizer manufacturers were practically driven off the continent in the ’00s. One high-ranking chemicals executive told me the scenario is surprisingly rosy for this notoriously low-margin business. With a steady supply of raw materials, whether it’s NGL feedstocks or simply gas as a heat source for industrial processes, manufacturers can take this dollar-denominated commodity, transform it to a higher value, and export it to countries whose currencies are rising. It’s a beautiful thing, and stands in sharp contrast to the plight of consumers who soon may be facing imported inflation from countries like China that are struggling to rein in their economies.

A sobering note came from two top commodities bankers who spoke at the conference about inflation and prices. “All currencies are going down, and commodities prices are going up,” said one. Central bankers in the U.S. and Europe have flooded the market with so much money that they will inevitably face a choice between raising rates to dampen inflation, cratering the economy, or watch rising commodity prices do the same thing. Not a pretty picture.

Another banker discussed the relationship of a falling dollar to oil prices. “Oil doesn’t go up because the dollar is weak,” this banker said. “Dollar weakness just masks the impact. If the dollar price goes up in Brazil, the rising real masks the cost and there is no meaningful demand destruction. Other countries like China recycle their foreign trade imbalances and use dollars as fuel subsidies. There are a lot of things in force in the world right now that are hiding the price signals.”



One Comment to “Shale Gas Sparks A U.S. Chemicals Renaissance [News Report]”

  1. I just check the demographics of Miami dade Fl it looks like there less and less foreclosures every month . In 3 Years In febuary we finnally saw it be less than 1000 .

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