22 March 2013 15:32 [Source: ICB]
The advent of shale gas, reviving North America's petrochemical industry, has also created a rift between the producers and consumers of the fuel. Energy producers, saddled with some of the world's cheapest natural gas, want the US to allow them to export liquefied natural gas (LNG). Petrochemical producers, wary about losing their cost advantage, want the US to place some restrictions on exports, warning that higher energy prices could threaten an incipient recovery in manufacturing.
ExxonMobil sits on both sides of the argument, as it is both the largest natural gas and chemical producer in the US. However, its message is clear. Restricting LNG exports amounts to government interference in the market, warns Stephen Pryor, president of ExxonMobil Chemical. "That kind of government interference in the market is tantamount to introducing price controls on natural gas."
Restricting exports would effectively allow the government to control supply, Pryor adds. From there, the government would indirectly control price. "Any time we have allowed government to substitute its judgement for that of the market, we get in trouble."
The US government has meddled in natural gas markets in the past, Pryor says. "The intent of that government interference back in the 1970s and 1980s [was] about achieving reasonable prices, achieving good supply. But it never works out that way," he says. Instead, the result created some of the highest natural-gas prices in the world.
"We had a reduction in investments, we had a reduction in supply, we had a dampening in economic opportunity," he says. "For the chemical business, because we are so energy intensive, it was a dark period. It was a period of declining production, declining exports, declining investments and, of course, declining employment. We killed jobs."
In addition, the argument behind supply controls is based on dubious logic, because it treats energy supply and demand as a zero-sum game, Pryor explains. Free markets do not work that way.
"If you allow demand for natural gas to rise because of LNG exports, that's going to encourage increased supply," he says. "Conversely, if government tries to restrict demand and cap prices, that's going to shrink supply."
Such interference produces unintended consequences, Pryor says. "When you get involved in protectionism and price controls or market controls, you end up shrinking the economic pie. When you allow the free market to work and free trade to work, the economic pie expands because it attracts investments and it creates jobs."
ExxonMobil itself is developing a $10bn LNG export project in Texas under a joint venture, Pryor says. Construction alone should create 45,000 jobs. ExxonMobil estimates that the project will create 3,800 permanent jobs and $31 billion in economic activity during its life.
"It's a tremendous, tremendous amount of economic activity, job creation, however you look at it," Pryor says. "So you really have to say to yourself, 'Why should the government discriminate between an LNG investment to liquefy gas versus a chemical investment to solidify gas into plastic pellets? Why should the government discriminate between those two?'"
In fact, ExxonMobil is also expanding chemical production at its complex in Baytown, Texas, the largest integrated refining and petrochemical complex in the country. The rationale for the project, however, does not rest solely on low-cost feedstock, says Pryor. The petrochemical industry is global, competitive and cyclical, so any project would need more than just cheap feedstocks to succeed, he explains.
ExxonMobil's Baytown complex achieves this, in part, by further expanding what is already the largest refining and petrochemical complex in the US, Pryor says. As such, the expansion will benefit from the integration and scale already present at Baytown. "What we are doing now is building on that model, making it even more robust by incorporating additional integration, not just with refining but with our upstream business," he says.
"Shale gas is a big opportunity, but you still have to have projects that are robust and will stand the test of time, both cost wise and in terms of the products it produces."
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