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The U.S. Economy's Chemical Advantage The U.S. Economy's Chemical Advantage

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The U.S. Economy's Chemical Advantage

The domestic chemicals industry is undergoing a dramatic rebirth as a result of new, robust supplies of natural gas and its byproducts.

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Call it America's chemical advantage.

The anticipated long-term abundance of natural gas resulting from shale-rock energy exploration has been a boon to the U.S. economy and industries across the board, creating millions of new jobs and lowering the cost of fuel and electricity.

 

None, however, are benefitting as much as the U.S. chemicals industry, which is undergoing a dramatic rebirth. Jobs and factories lost overseas in recent decades are being brought back to the U.S., or "reshored," as a result of new, robust supplies of natural gas and its byproducts—in particular, natural gas liquids such as ethane.

Ethane is the primary raw material used to manufacture basic chemicals and plastics. America's cheap supply gives domestic manufacturers a powerful advantage over offshore competitors, which tend to rely on the more expensive, oil-based alternative naphtha.

"You never thought you would see the opportunity for dramatic growth in the petrochemicals business in this country, and there is that very real opportunity," said John Watson, chairman and CEO of Chevron.

 

Until the late 1990s, the U.S. had been a major petrochemical producer. But rising oil and natural gas prices sent the cost of feedstocks—about 75 percent of total production costs—through the roof. This forced U.S. chemical plants to close and manufacturers that relied on them to move offshore.

Chemicals production has now become one of America's largest exporting industries, accounting for about $198 billion, or 13 percent, of all U.S. merchandise exports in 2012.

U.S. natural gas liquids production is projected to double between now and 2020, according to IHS, creating a "profound and sustained competitive advantage that is expected to last for decades."

Chemical manufacturers are rolling out massive capital investments to take advantage of this shift in global competitiveness. As of early September, chemical companies had announced 126 projects representing $84 billion in capital investments—54 percent of which are direct foreign investment in the U.S., according to the American Chemistry Council.

"Natural gas supply growth is leading to unprecedented investment and capacity expansion in the U.S., in stark contrast with other areas," said ACC President and CEO Cal Dooley. "We are truly the bright spot around the world."

Production of chemicals and plastics in North America is now expected to more than double by 2020, while production in Western Europe is expected to fall by about one-third, according to IHS.

Gary Adams, chief chemicals adviser for IHS, called it "a revolution in manufacturing."

The cost advantage available to chemicals manufacturers in the U.S. is so significant that the Canadian-based chemicals company Methanex is spending $1.1 billion to move two plants from Chile to Geismar, La. Other idled facilities in the U.S. and Canada either have been or will be restarted.

"Methanex's decision to build… in Louisiana is part of the renaissance that our energy and chemical industries are experiencing every day," said Louisiana Gov. Bobby Jindal.

In December 2012, the South Africa-based chemicals company Sasol Ltd. announced it would make one of the largest foreign direct investments in manufacturing in the history of the U.S.—and certainly the largest single manufacturing investment in Louisiana history: an integrated production complex in Westlake, La., at a cost of $16 billion to $21 billion.

Some of the largest domestic U.S. petrochemical companies have embarked on a plant-building spree to capitalize on cheap, plentiful shale gas.

Chevron Phillips Chemical, Dow Chemical and Shell Oil have projects on the board that will cost at least $5 billion, $4 billion and $2.5 billion, respectively.

The same rush is underway in the fertilizer production industry, which lost 40 percent of its domestic manufacturing capacity from 1999 to 2006. Plants in Louisiana, Texas and Oklahoma that managed to avoid demolition are now being restarted as new ones are being built.

Meanwhile, Egypt's Orascom Construction Industries will spend an estimated $1.4 billion to build the first large-scale, natural gas-based fertilizer plant in the U.S. in 25 years—a project Iowa Gov. Terry Branstad called "the largest investment ever made in our state."

"The opportunities are not opportunities of a lifetime, it's of multiple lifetimes," said Adams, of IHS. "These companies are investing as quickly as they can."