With the shale gas revolution having created a surplus of cheap natural gas in North America, and with the prospect of plentiful supplies of gas in the region for many years to come, how can people best take advantage of this new energy bonanza? And how might Alaska benefit from the growth of gas-related industries, especially petrochemicals?
On Feb. 22 Daniel Carlson, Shell general manager for new business development for the Americas, talked to the Alaska World Affairs Council about some business drivers emerging from the shale gas revolution, as businesses seek the best ways to monetize gas that has become a plentiful resource.
“The story is really all about shale and the fact that that this is sort of turning the world on its head,” Carlson said.
Gas options
Shell thinks, for example, that the time has come to use natural gas as a material fuel for transportation, Carlson said. And there is also the possibility to use gas as a feedstock for the manufacture of liquid fuels and lubricants — Shell has recently started up a gas-to-liquids facility in Qatar, a kind of refinery using natural gas rather than crude oil. Natural gas has a market as a fuel for power generation. And natural gas liquids, “wet” components such as ethane and propane, form feedstocks for the petrochemical industry.
The petrochemical industry involves adding value to chemical feedstocks all the way down the industry value chain, ultimately making products for the automotive industry, the construction industry, consumer goods and so on. But the base chemical building blocks, in the part of the industry where Shell operates, are simple and versatile, Carlson said.
Business opportunities
As the cost of natural gas in North America has plunged well below the equivalent cost of crude oil, and as gas production costs have dropped, major business opportunities for the gas industry have emerged in the supply of competitively priced raw materials for petrochemicals, Carlson said.
“In the petrochemicals world it’s absolutely turning the industry on its head,” he said. “This is the mother lode of business opportunity. … It’s a huge opportunity space.”
With developing countries seeking access to the materials and products enjoyed by the developed world, Shell sees demand for petrochemical products increasing in the future, he said. The production of ethylene, the bellwether material of the petrochemical industry, has been growing faster than either oil production or the U.S. gross domestic product, Carlson said.
A large proportion of petrochemical products originate from oil and gas, with manufacturers having to choose between oil and gas for their feedstocks. And, with an abundance of cheap gas in the United States, there is the potential for the petrochemical industry to bring jobs back to the country, he said.
Pricing is critical
But to make the petrochemical industry work it is essential to have an abundant source of viably priced feedstock because the cost of the raw materials and the energy needed for processing constitutes more than 90 percent of the cost of the petrochemical products, he said.
“If you start out with the wrong costs for your ingredients there’s no way you’re going to compete globally,” he said. “That’s really the key to the whole game.”
It is also essential to figure out who are the customers and determine how to ship products to the marketplace effectively. Transportation can be quite challenging.
Investment climate
Success also depends on a stable, predictable and competitive investment climate, coupled with the type of long-term strategic thinking required for the major investment in the infrastructure for a global business.
“You’re going to talk about very big investments. You’re going to talk about big consequences if you get these things wrong,” he said. “So you want to know how you manage your risks in an investment like this.”
As examples of regions that have seen success in the petrochemicals industry, the Gulf Coast, the Middle East and China stand out. The Gulf Coast enjoys access to feedstock through an integrated pipeline system; enjoys great market access for products; and has benefited from huge investments — more than 95 percent of U.S. ethylene is produced in Texas and Louisiana, Carlson said. The Middle East, on the other hand, used to have a surplus of stranded gas and had to develop a business model for the shipment of gas products to growing markets in Asia, Carlson said.
“They’ve got the lowest cost position in the world for their chemical business,” Carlson said.
China, with a thriving petrochemical industry close to customers, is a demand center for natural gas products.
“They have come late to the game but are now building up their capacity quite quickly,” he said.
Think long term
For regions such as Alaska that might see a future place in the petrochemicals industry it is essential to think long term, perhaps on a 25- to 30-year time horizon, to accommodate the very large scale of facility development that is typically required, Carlson said.
“This is not something that is going to happen very quickly,” he said.
Shell has four olefin plants in the Gulf region that remain in fine condition, even although they are now more than 30 years old, he said.
And the petrochemical industry is global, with different worldwide regions competing for business and with investors looking at the total cost of doing business in one region relative to another.
Community involvement
Also, given the scale of facility construction normally required and the inevitable community impacts, local community support is critically important, Carlson said.
The question of whether the local community has an established strategy for industry development can also prove very valuable. For example, the Singapore Development Board has a complete vision for what it wants to see in the Singapore chemical industry and is buying land and establishing a strategy for locating different types of facility. In the United States there are organizations that provide industry support — the Greater Houston Partnership, for example.
“It’s really important to be organized and be focused,” Carlson said.
An organization constructing large-scale facilities also needs the credible ability to execute the type of multi-billion dollar project required, he said.
Regional opportunities
With significant economic benefit to a community where a major facility is sited, new natural gas developments in the United States are bringing new opportunities for regions other than the Gulf Coast. Shell is considering developing a major petrochemical complex in Appalachia, to benefit from gas production from the Marcellus shale. Facility construction in Pennsylvania could result in more than 10,000 direct jobs over three to four years, with the industry providing 400 to 500 direct jobs and several thousand related jobs after new facilities go into operation, Carlson said.
In terms of Alaska, Carlson said that the state could benefit from looking at new petrochemical opportunities, but he cautioned about the time potentially required for a new industry to form.
“It has to be the beginning of a long dialogue … amongst the community, amongst the government. Is this the right kind of thing? Is there a reason to pursue this?” he said. “Until you start to increase the production of the gas and have it available at the right economics, this is all kind of an academic conversation. … I don’t think you’ve missed an opportunity yet. I think this is a conversation that can extend out into the future.”
