Market outlook: Is US shale gas a window of opportunity or endless bonanza for petrochemicals?

12 October 2012 09:41  [Source: ICB]

A large amount of natural gas is being developed in the US as the result of new discoveries, and drilling and well-completion technologies. This is creating a renaissance in petrochemicals and elevating the competitiveness of US manufacturing.

However, a look at how much shale gas there is and the cost of bringing it to market shows this to be a window of opportunity, rather than something that lasts indefinitely. Some petrochemical investments look very good, while others could be risky, and some might be a "bridge too far".

The sections that follow discuss natural gas resource estimates; Probe Economics' forecasts of oil and gas prices based on the economy and estimates of those resources; and how those forecasts affect the long-term prospects for petrochemical investments such as those in propane dehydrogenation (PDH), butane dehydrogenation (BDH) and ethane cracking.


Any estimate of the size of the US shale gas resource and its cost of extraction will be embroiled in controversy and politics. There is much at stake, with some market participants wanting to boost investments in shale resources and others wanting to move on from hydrocarbons to conservation and "sustainable" technologies - whatever the latter means.

Estimates of how much additional gas the US can produce vary widely, from under 1,000 trillion cubic feet (tcf, 28 trillion cubic metres) to more than 3,000tcf. The US currently consumes about 24tcf of gas per year.

At the high end we have the US Energy Information Administration; various gas industry promoters; and energy expert Leonardo Maugeri, who recently wrote a study for Harvard's Kennedy School

ROI table

US real crude price

On the low side, we have the conservative US Geological Survey; well-known sceptic and petroleum geologist Arthur Berman; and the Association for the Study of Peak Oil (ASPO), which is wedded to the idea that we are running out of hydrocarbons.

The most reasonable and credible estimates seem to come from to be Richard Nehring, president of US petroleum consultancy Nehring Associates, chairman of the Committee on Resource Evaluation of the American Association of Petroleum Geologists (AAPG) and a past member of various task groups and committees dealing with hydrocarbon resources.

Given the US gas consumption rate and its likely growth, Nehring estimates that it would take between 2,500tcf and 3,000tcf of gas to supply the US for the next 100 years.

Comparing this to the about 1,150tcf of gas that has been produced so far, he thinks it "highly unlikely" that remaining US gas resources are sufficient to last that 100 years. Maybe there is another 50 years' worth.

The amount that is extractable depends on the price. More will be extracted at a higher price, so what we really need is a long-term gas supply curve that shows the quantity of gas that would be available at different prices.

At very low prices of, say, $2/MMBtu, some gas would be available from advantaged reservoirs, with low costs of extraction, favourable logistics and/or high concentrations of gas liquids such as ethane and propane.

The sale of those liquids can offer generous credits and allow the dry gas to be sold at a lower price. But there is a limited supply of such gas and a limited ability to sell the ethane. The latter cannot readily be shipped overseas and is used mostly to make ethylene.

There appears to be plenty of gas available at $4-8/MMBtu in today's dollars - enough to last two to four decades, according to Nehring. Then, as the more attractive locations are exhausted, costs will rise to perhaps $12-18/MMBtu. After considering all these factors, Probe Economics concludes that the long-term dry gas supply curve looks something like in the graph, above, with costs low at the start, rising slowly for a few decades, and then peaking rapidly at the end.


Probe developed three energy and economic forecast scenarios based on shale gas developments and other factors affecting energy and the economy. They are shown in the graph far left and described as follows:

Path A has slow, steady economic growth, to which Probe assigns a probability of 50%. Path B, with a probability of 15%, has somewhat higher growth that is interrupted by a Middle-East-based oil price shock. Growth resumes, but with higher oil prices and more inflation. Path C, with a probability of 35%, has a double-dip recession followed by slow growth and lower oil prices.

US dry gas

There is an unusually wide spread between oil and gas prices right now, but that is unsustainable. Energy users will switch from oil to gas wherever they can. Accordingly, the oil-gas price spread partially converges in all three of Probe's scenarios. It is likely that total convergence will take many decades, which is good for petrochemicals.


The narrowing spread between oil and gas prices means trouble for petrochemical investments - particularly those based on cheap shale gas, high levels of ethane cracking and a shortage of propylene and butadiene (BD).

The trouble is greater for "marginal", cost-setting technologies than it is for "advantaged", inframarginal technologies.

On-purpose technologies, such as those to produce propylene and BD by dehydrogenation, will be marginal once they have been built out. They will produce the last ton of material demanded by the market, and their cost will set the market price.

Incidentally, these technologies had similar roles in the past, when insufficient material was available as a by-product of ethylene production or petroleum refining, or a buyer wanted to affect the price.

North Sea Petrochemical, a joint venture between European polypropylene (PP) producer Himont and Norway's Statoil built a PDH unit in Antwerp, Belgium, in 1992 - not so much to operate the plant as to impose a ceiling on the price of propylene and thereby keep the by-product producers "honest."

Tyre producers Firestone, Goodyear and chemical company DuPont owned, or had interests in, BDH units in the US for similar reasons, although there was also an outright shortage of by-product BD.

PDH and BDH look good right now, and will continue to do so until they achieve marginal status. Once there, they could easily be forced to shut down, periodically or permanently, by a fall in oil prices or a rise in gas prices, either of which could cause a return to naphtha cracking and boost the supply of low-cost by-products propylene and BD.

This would be acceptable to a large buyer such as Brazil-based Braskem, or large integrated producers such as US-based Dow Chemical and Netherlands-based LyondellBasell, but it would not be acceptable to small, unintegrated producers such as US-based firms TPC Group and PetroLogistics that have plans to build dehydro plants. That may be why these companies are reportedly seeking investments or long-term, take-or-pay commitments from potential customers. And it may be why TPC is proposing to be acquired by global investment firm First Reserve Corporation and private equity firm SK Capital Partners.

Inframarginal, or advantaged technologies such as ethane cracking have less of a problem, but still, a problem. Prices are set by a higher-cost technology - naphtha cracking - so that ethane crackers are making big profits.

If oil and gas prices converge, ethane crackers will still be making profits - just smaller ones. However, there is the point where ethane cracking could become marginal or even unprofitable.

As the graph on the previous page shows, with path C's low oil prices, ethane ceases to have an advantage after 2028. Ethane cracking hangs on longer in path A and looks very good with the high oil prices in path B, albeit with only a 15% probability. Basically, the longer it takes oil and gas prices to converge, the longer ethane cracking will look good.


Fred PetersonProbe believes the US shale gas revolution will result in supply that lasts for 50 years. Natural gas prices will be in the $4-8/MMBtu range for two to four decades before hitting $12-18/MMBtu in today's dollars. The convergence of oil and gas prices will reduce the profitability of ethane cracking, eventually making the technology marginal or unprofitable. And dehydrogenation technologies to produce propylene and BD will quickly become marginal, making them risky investments for small, unintegrated players. There appears to be enough gas to transform the petrochemical industry, if that is how the gas will be used. But there simply is not enough natural gas in the North America to overhaul electric power generation or ground transportation as we know it.

  • Fred Peterson is president of Probe Economics, a consulting firm in Hanover, New Hampshire, US. He has held government, academic and industry positions, and has a PhD in economics.

Author: Fred Peterson

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