Dow Chemical Among Firms Planning Expansion Based on Low Natural Gas Costs

April 21, 2012
By: Dave Rogers

Energy costs, the old bugaboo for the U.S. economy, may turn out to be the saving grace for industry.

The Institute for Energy Research is out with a report noting that natural gas production in the United States is hitting unprecedented highs, storage tanks are filling, and prices are falling to levels not seen in a decade.

Natural gas prices in the United States are at their lowest level in 10 years, due to abundant production arising from shale gas production on private and state lands.

Because of the lower costs, industries like Procter & Gamble are now planning on returning more operations from China back to the U.S., said P&G Chairman Bob McDonald on Jim Cramer's Mad Money program on CNBC.

Dow Chemical Company and Methanex Corporation are also expanding U.S. production due to low natural gas prices, the IER report says. Dow plans to spend $4 billion to increase production of chemicals such as ethylene and propylene in Texas and Louisiana and Methanex plans to move a Chilean methanol plant to Louisiana.

Recently, Chrysler and GM announced the addition to their truck lines of dual-fuel vehicles which can run on either gasoline or compressed natural gas.

American consumers are benefiting from the glut while gas producers are looking toward oil to keep profits from plunging for their stockholders.

The report states: "This leap in natural gas production is caused by American ingenuity applying hydraulic fracturing and horizontal drilling technology to natural gas previously locked in shale formations. Hydraulic fracturing uses water, sand and trace amounts of chemicals to break open shale rock and release natural gas and oil deposits that could not be produced economically with conventional drilling methods.

"Private industry in the U.S. has, literally, drilled our way to lower natural gas prices, and these lower prices have ignited a new flurry of new proposals for the use of abundant, affordable natural gas supplies."

Natural gas consumption rose 2.5 percent in 2011 due to increased industrial and electric power usage. Natural gas increased its share in the electric generation sector to 25 percent in 2011 from 21 percent in 2008, cutting into the coal generation market, whose share declined from 48 percent in 2008 to 42 percent in 2011. Natural gas consumption in the industrial sector also increased in 2011, by 9.5 percent since 2009.

Lower natural gas prices are bringing industry back into the United States for at least two reasons. First, lower natural gas prices reduce energy costs for large industrial users and increase their competitiveness with the rest of the world. Second, chemical companies use natural gas as a feedstock to make petrochemicals, compounds including plastics and fertilizer.

Huntsman Corporation, the world's largest maker of textile dyes, plans to expand chemical production in the United States and may relocate capacity from other countries to take advantage of the low domestic natural gas prices, according to the IER report, which continues:

"While many companies plan to use more natural gas in the future, consumption is lagging natural gas production. The production increases along with a mild winter has left the United States with more natural gas than it can consume, filling up storage facilities.

Natural gas supplies are 61 percent higher than the five-year average.

As the price of natural gas has plummeted, consumers have benefited from lower electricity rates and the lower cost of manufacturing, creating thousands of jobs.

"All of the natural gas production and high inventories mean that people are now exploring less for natural gas than just a few years ago, according to energy services company Baker Hughes. The number of drilling rigs exploring for natural gas has fallen by 30 percent since October to 658.

Despite this drop off in drilling rigs, natural gas production is still increasing due mainly to the five-year natural gas drilling boom. Drilling is down in the Haynesville Shale in Northwestern Louisiana and East Texas and the Fayetteville Shale in Central Arkansas. The rigs and associated jobs, however, have been reassigned to oil fields, where prices are high, recently averaging more than $100 per barrel. The oil rig count in the United States is at a 25-year high. Since drilling for oil generally produces natural gas as a byproduct, natural gas in storage is still likely to increase.

One option being considered to deal with high natural gas inventories and low prices is to export more natural gas. Under current law, the federal government must approve gas sales to countries with which the United States has free trade agreements, such as Canada, Mexico and South Korea. For other countries, the government must grant approval unless it finds that "such action is not consistent with the public interest."

Recently, the Energy Department approved the export of 2.2 billion cubic feet a day of liquefied natural gas from a facility in Louisiana that was originally intended to take in imports and is considering applications from seven other companies, according to the IER report. If all the applications are approved, exports of natural gas from the United States could reach almost a fifth of current consumption.

The benefits of expanded natural gas exports would include a reduction in the U.S. trade deficit, more American jobs, and increased revenues from taxes and fees on production. A reduction in the trade deficit would mean that the United States would have less need to borrow from its Asian trading partners. The added production resulting from exporting natural gas would create jobs. Taxes and other fees on gas production help state and local governments get needed revenues to balance their budgets.

Some in Congress are working on legislation called the New Alternative Transportation to Give Americans Solutions Act of 2011, or Nat Gas Act, which would provide tax breaks and financial incentives for the natural gas industry, and for companies and municipalities that convert trucks and buses to natural gas. The bill provides infrastructure credits for installing fueling stations and tax credits good for up to $7,500 for passenger trucks and $64,000 for commercial trucks that run on natural gas fuels. This proposed legislation would provide about $5 billion in new handouts to the natural gas industry, but would not expand natural gas exploration.

One of the most prominent companies that stand to benefit from this proposed legislation is Clean Energy Fuels, a company founded by T. Boone Pickens. Some estimate that Clean Energy Fuels could receive tens of millions of dollars from the legislation's passage.

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