The US shale gas exploration and production boom continues
to fuel significant cost advantages for North American
commodity chemicals producers as relative costs of natural gas
and oil-based feedstocks remain far apart, according to a new
report from credit-watch firm Fitch Ratings.
Fitch said it sees the increased availability of cheap
natural gas liquids (NGL) feedstocks as a critical factor
supporting the competitive position of North American commodity
chemicals firms by pushing them down the cost curve versus
global competitors. Innovation in drilling technology, including widespread use
of horizontal drilling and hydraulic fracturing has sharply
boosted liquids supply from unconventional shales in North
America, in turn pressuring prices of North American NGLs.
Meanwhile, upstream exploration and production (E&P)
companies such as Marathon Oil, Occidental Petroleum and Conoco
Phillips have directed more capital expenditures to onshore
liquids-rich shale plays in the US and Canada, paving the way
for further supply growth.
For downstream producers of petrochemicals and plastics, access
to lower-cost NGL feedstocks has boosted export
competitiveness in products such as ethylene, polyethylene
(PE), and other derivative products.
European producers, in contrast, which rely on heavier crude
oil-based feedstocks such as naptha and vacuum
gas oil (VGO), continue to see a feedstock cost
Since 2008, light feedstock (ethane) prices as a
percentage of Brent crude oil have declined from approximately
43% to 27% at current market prices.
In response to these favorable input cost shifts, companies
such as Dow Chemical, Chevron, Westlake Chemical and Nova
Chemicals have announced major expansions of North American
nameplate petrochemical production capacity,
including various ethylene cracker projects.
In addition to expansions along the Gulf Coast,
Shell Chemical has announced plans to build a facility in West
Virginia, near the Marcellus shale in the Appalachians.
The surge in shale liquids availability has been a
game-changing event for downstream chemical producers dependent
on inexpensive light feedstocks, said Mark
Sadeghian, senior director in Fitchs corporate finance
Unconventional gas resources now account for approximately
25% of North American natural gas supplies, and that share is
likely to grow significantly in coming years, Fitch said.
The surge in shale gas availability has contributed to a
halving of natural gas prices in the US compared with three
years ago, when unconventional gas exploration began to
Despite growing signs of a global slowdown and reduced
growth rates in Asian export markets, North American chemical
producers may still benefit materially from the shale gas
revolution, with the differential between gas and oil-based feedstocks likely to remain at
historically wide levels over the near to medium term.