Petrochemical Industry Regains Its Mojo

When the domestic petrochemical industry was created in the
1950s, the U.S. became the first large-scale producer of olefins (ethylene, propylene) from natural gas liquids (ethane, propane) extracted from natural gas. Availability of natural gas at 25 cents per  million Btu on the Gulf Coast (!) and the development of suitable technology by  companies such as Exxon, Shell, Dow and Union Carbide made the U.S. a  dominant manufacturer of ethylene- and propylene-based petrochemicals. These not only fulfilled the burgeoning post-war domestic demand for plastics, synthetic rubber, solvents, and other consumer-oriented goods, but also allowed the U.S. to become a large exporter of these materials..

Credit: ChevronPhillips Chemical

By the 1990-2000 time frame, several things had  changed. The technology for making these products had become widely available to Middle East and other low cost foreign producers, whose natural gas was  available at effectively historical inexpensive Gulf Coast prices. Meanwhile, gas prices on the Gulf Coast had been rising to as much as 7-10 dollars per million Btu, as demand had surged rapidly, with utilities, industry, commercial and residential customers changing to this cleaner fuel. U.S. producers had, as a result, switched much of their petrochemical production to crude oil (rather than natural gas-) based feedstocks (e.g. naphtha), similar to producers in many other parts of the world. With feedstock costs at parity with most other producers , the U.S. had lost its traditonal competitive advantage.

However, the situation has again changed. Large new domestic supplies of natural gas, partly the result of using horizontal drilling and  “fracking” techniques for liberating vast quantities of gas from shale  formations, have pushed down the domestic price of gas. U.S. natural gas prices are now very  attractive relative to now high cost crude oil on a heating value basis, so petrochemical producers have largely switched back to using natural gas- based feedstocks. Meanwhile, most of  the world’s petrochemical plants (e.g. Europe, Japan) continue to use crude  oil-based feedstocks, even with crude oil prices remaining high, because that is  their only option.  All of this has made U.S. producers very competitive again, as shown on a global “cost curve” developed by Chemical Market Associates, Inc. (CMAI), a respected Houston-based consulting firm and published on its website.

The graph represents an estimate of ethylene manufacturing costs in a number of producing regions for the years 2003 and 2009. (Key: MDE Middle East; NAM North America; SAM South America; SEA Southeast Asia; NEA China, Taiwan and Japan; WEP Western Europe.) While in 2003 North American producers were close to the high end of the cost curve, by 2009, using largely natural gas, they had regained their traditional competitive advantage over all of their global competitors except for those in Western Canada and the Middle East.

The relatively attractive cost position of domestic producers has now also provided substantial  opportunities for the export of products like polyethylene, polypropylene,  ethylene glycol, etc. While the overall U.S. balance of trade with other countries has been highly negative for a long time, its chemical balance of trade is greatly helped by exports of petrochemicals. Up to recently, with U.S. petrochemical producers struggling to meet the threat of foreign imports from low cost producers, it was hard to imagine that any more crackers would be built in this country. Now, there are plans to build a new shale gas-based cracker to make ethylene and propylene in the Middle West, the first new cracker built here for a number of years. Here is a perfect example of how the U.S. is regaining its manufacturing mojo.