By Christopher M. Matthews
When new parents in Rio de Janeiro buy baby food in plastic
containers, they are bringing home a little piece of the U.S. shale
revolution.
That boom in drilling has expanded the output of oil and gas in
the U.S. more than 57% in the past decade, lowering prices for the
primary ingredients Dow Chemical Co. uses to make tiny plastic
pellets. Some of the pellets are exported to Brazil, where they are
reshaped into the plastic pouches filled with puréed fruits and
vegetables.
Tons more will be shipping soon as Dow completes $8 billion in
new and expanded U.S. petrochemical facilities mostly along the
Gulf of Mexico over the next year, part of the industry's largest
transformation in a generation.
The scale of the sector's investment is staggering: $185 billion
in new U.S. petrochemical projects are in construction or planning,
according to the American Chemistry Council. Last year,
expenditures on chemical plants alone accounted for half of all
capital investment in U.S. manufacturing, up from less than 20% in
2009, according to the Census Bureau.
Integrated oil firms including Exxon Mobil Corp. and Royal Dutch
Shell PLC are racing to take advantage of the cheap byproducts of
the oil and gas being unlocked by shale drilling. The companies are
expanding petrochemical units that produce the materials eventually
used to fashion car fenders, smartphones, shampoo bottles and other
plastic stuff being bought more and more by the world's burgeoning
middle classes.
"It's a tectonic shift in the hemispherical balance of who makes
what to essentially feed the manufacturing sector," said Dow Chief
Executive Andrew Liveris, referring to the growth of production in
the U.S. His company now plans to double down on its U.S. expansion
with a $4 billion investment in a handful of projects over the next
five years.
Companies are eagerly launching new U.S. petrochemical projects
-- 310 in all according to the Chemistry Council -- because at a
time of uncertainty over when demand for transportation fuels may
peak, due to electric cars and ride sharing, the world's appetite
for plastics is expected to rise for decades to come.
That demand typically grows at least 1.5 to 2 times as fast as
global gross domestic product, according to industry analysts. That
theoretically makes petrochemicals one of the safer fossil fuel
investments, though skeptics question whether the margins on
U.S.-made plastics can last.
The new investment will establish the U.S. as a major exporter
of plastic and reduce its trade deficit, economists say. The
American Chemistry Council predicts it will add $294 billion to
U.S. economic output and 462,000 direct and indirect jobs by 2025,
though analysts say direct employment at plants will be limited due
to automation.
For energy companies, the build-out creates a new market for
byproducts they previously had little use for. Drillers have been
flush for years with the raw materials but have left them in the
gas stream to be burned off, because no one wanted them. A spike in
demand in coming years could make drilling more profitable.
Petrochemical companies are betting the price of the feedstocks
-- their most costly expense -- will remain low for years due to
shale drilling. As a result, net U.S. petrochemical exports, which
include plastic as well as products such as fertilizer, adhesives
and solvents, will grow to $110 billion a year by 2027 from $17
billion last year, according to IHS Markit. That would come close
to the value of Saudi Arabia's current annual oil exports.
"There's no other industry that comes close to that level of
growth," said IHS economist Thomas Runiewicz.
Many of the companies investing in the U.S. are foreign,
including Saudi Arabia's state-owned chemical company and some of
the largest petrochemical companies in Brazil, Japan and
Thailand.
In April, Exxon said it selected a site near Corpus Christi,
Texas, for a $9.3 billion petrochemical complex it is building
jointly with Saudi Basic Industries Corp. The proposed facility,
the largest of its kind in the world, is expected to be done by
2021 and produce 1.8 million metric tons a year of ethylene, the
main component of plastic.
"We don't see this as a bet," said Neil Chapman, president of
the chemicals unit at Exxon, which is investing a total of $20
billion in such projects along the Gulf of Mexico. "You've got to
pinch yourself sometimes and say 'this is the envy of the world.'
"
Dow's plant in Freeport, Texas, when fully operational by the
end of the year, will produce 1.5 million metric tons of ethylene
annually. The company plans to export at least 20% of the plastic
it makes in the U.S. and is particularly eyeing Latin America as a
ripe market.
Dow expects plastic baby food containers will be a booming
business in Brazil, where an increasingly career-oriented female
population is favoring prepared baby foods in innovative packaging
to save time, according to a 2015 World Health Organization study.
That is expected to fuel projected annual growth of about 10% in
sales of the industry's flexible and rigid plastic packaging in
Brazil, the report said.
"We are taking advantage of population growth, the rising middle
class and the on-the-go lifestyle," said Paloma Alonso, Dow's vice
president of plastics in South America. "The Gulf investment is
really essential for us."
The U.S. investments aren't without risk. American petrochemical
facilities mostly run on ethane, a byproduct tied to natural gas
prices, while counterparts in Asia and Europe primarily use
naphtha, a crude oil derivative.
Ethane prices fell when U.S. natural gas prices fell in 2009,
while naphtha prices increased as oil prices soared to more than
$100 a barrel in 2011. Since then oil has fallen below $50 a
barrel, making companies that use naphtha more competitive. Natural
gas prices remain historically low, but the wave of new ethane
demand could drive up prices.
Paul Bjacek, a chemicals expert at Accenture, said diminishing
margins might push smaller companies or private-equity investors
out of the second wave of investment, but larger operators will
move ahead.
"The margins are still good, they're just not as good as they
were, which was amazing," he said.
Human beings have been using pliable materials found in nature,
such as rubber, for centuries. But when Leo Baekeland, a
Belgian-born American chemist, invented the first fully synthetic
plastic derived from coal in 1907, it set off the modern consumer
era, flooding the market with cheap durable goods almost entirely
derived from fossil fuels.
Chemists can take the carbon atoms found in fossil fuels and
rearrange them to create chains of atoms longer than those found in
nature, which in turn can be used to make everything from nylon
stockings to PVC piping.
Oil and gas byproducts, including ethane, butane and propane,
are sent to huge furnaces called "steam crackers," which use
superheated steam fed at high pressure to break apart molecules.
Ethane is cracked into a smaller molecule, ethylene. The majority
of ethylene in turn is used to make a plastic called polyethylene,
and formed into pellets.
Millions of these U.S.-made pellets will be loaded into 25
kilogram sacks and sent via cargo ships to factories around the
world, where they will be melted and shaped into plastic
products.
By the end of the decade, energy consultancy PCI Wood Mackenzie
estimates the U.S. chemical industry will have increased its
capacity to make ethylene by 50%.
The world consumed more than 147 million metric tons in 2016 of
ethylene and will need more than 186 million tons by 2023 to meet
global demand, according to the consultancy. It said U.S. exports
of polyethylene, the plastic pellets, are expected to reach $10.5
billion by 2020.
China is also rushing to build new plastics factories to meet
domestic demand, which is already more than double U.S. demand and
is expected to grow 6% annually.
The boom in U.S. petrochemicals is a big turnaround from just a
decade ago. Following a period of large investment in U.S. projects
in the 1990s, U.S. ethylene manufacturers made huge cuts in the
2000s.
Instead, chemical companies invested in large projects in the
Middle East and Asia, attracted by cheaper raw materials and closer
proximity to manufacturers, who had also fled the U.S. because of
higher costs. The tough times were exacerbated by falling demand
for plastic as the financial downturn took hold in 2009.
More than a dozen facilities on the U.S. Gulf were shut down in
2008 and 2009. Dow alone closed a half dozen plants on the Gulf and
laid off 5,000 employees world-wide. Chevron Phillips Chemical, a
joint venture between Chevron Corp. and Phillips 66, temporarily
closed two factories and ran others at lower capacity.
LyondellBasell shut down its complex in Chocolate Bayou, Texas, and
declared bankruptcy in the U.S.
"The industry was really looking inward and saying 'it's not
dead but it's not going to grow anymore,' " said Steve Zinger, a
petrochemical consultant at PCI Wood Mackenzie.
Then came the fracking revolution. By 2010, as U.S. drillers
used horizontal drilling and hydraulic-fracturing technologies to
release vast oil and gas deposits trapped in rocks, they also
unlocked raw materials for petrochemicals. U.S. production of
natural gas byproducts has grown from two million barrels a day in
2008 to more than 3.7 million in 2016, according to energy
consultant RBN Energy LLC.
The petrochemical industry was slow to react due to uncertainty
about the long-term viability of U.S. shale drilling. Initially,
companies invested only in adding capacity to existing U.S.
facilities. By 2012, they started building.
Later this year, a new Chevron Phillips facility capable of
producing 1.5 million metric tons of ethylene a year is coming
online in Baytown, Texas. It covers a plot the size of 44 football
fields and is made up of 350 miles of pipe, 40,000 tons of steel
and 140,000 tons of concrete. It has taken four years to
finish.
During the height of its construction, more than 4,500
construction workers and engineers were on site. Once operational,
it will only take around 200 employees to run.
"I had told the board the U.S. was not a growth play, but by
2010 I saw things were changing," said Ron Corn, Chevron Phillips'
senior vice president of projects. "Of course, once you put in the
capital, you have to wait five years."
For Chevron Phillips, the biggest challenge isn't profitably
making plastic pellets. It is getting them to market in a crowded
Gulf Coast.
Because there is so much traffic in the Port of Houston, and a
dearth of shipping containers there, the company has created a
fleet of 2,750 railcars to divert many of the pellets north to Fort
Worth. From there, they will be sent by train to ports in Long
Beach, Calif., and Charleston, S.C., where they will be shipped to
Asia and South America. Some exports will also leave from Houston
and Freeport, Texas.
"Everyone has the same great idea at the same time in this
industry," Mr. Corn said. "The way you win is on logistics."
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
(END) Dow Jones Newswires
June 25, 2017 13:44 ET (17:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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