Shale boom gives Texas competitive advantage over Asia

Bloomberg/Businessweek:

North America’s shale boom is prompting the biggest expansion of natural gas-fed petrochemical plants in 15 years, helping Exxon Mobil Corp. (XOM) beat Mitsubishi Chemical Holdings Corp. with raw materials that are half the price of the oil product used in Asia.

Hydraulic fracturing of shale rock formations, known as fracking, is giving U.S. chemical makers an edge in making ethylene, a building block in everything from plastics to antifreeze. Record gas production has driven down the cost of ethane, a component that’s converted to ethylene, by 60 percent this year and prompted Japan to shut units running on oil-based naphtha that’s up 2 percent.

Exxon Mobil and Westlake Chemical Corp. are among companies building ethane-fed plants to benefit from shale output that cut gas prices by about 75 percent since 2008. Mitsubishi plans to shut an ethylene unit, partly blaming the “emergence of shale gas” in North America, while Mitsui Chemicals Inc. also anticipates cutbacks. Closures may spread to South Korea and Taiwan, according to Credit Suisse Group AG.

“They believe they are losing cost competitiveness,” said Masami Sawato, a chemicals analyst at Credit Suisse in Tokyo. “That’s why companies like Mitsubishi Chemicals are planning to shut down part of their operations.”

Gas liquids, mostly ethane, supply about 85 percent of feedstock for U.S. ethylene makers. Almost all plants in Northeast Asia use naphtha.

The boom in oil and gas production helped America meet 83 percent of its energy needs in the first six months of 2012, Energy Department data show. If the trend continues, it will be the highest level of self-sufficiency since 1991. Marketed gas production will reach a record 68.85 billion cubic this year, according to department estimates.

Ethane at Mont Belvieu, Texas, the supply hub for Gulf Coast chemical makers, has fallen more than 60 percent this year to 32.3 cents a gallon, according to data from Liquidity Partners. The cost of naphtha in Japan has gained to $932.75 a ton, according to data compiled by Bloomberg.

LyondellBasell Industries NV (LYB) and Westlake Chemical produced the commodity in the U.S. this year for an average of about 18 cents a pound using ethane, according to analysis by Goldman Sachs Group Inc. That was 20 cents less than naphtha-based producers. Ethylene sold for about 49 cents a pound.

A Japanese plastics factory that uses naphtha is near or below break-even, according to Bloomberg Industries. A similar plant in the U.S., run on ethane, is making about $812 a ton.

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The price differentials are hard to follow in the story because they jump from gallons to tons to pounds, but when you get to the bottom line, the Asia plants are operating at barely break even prices while the plants in Texas are making $812 a ton.   Exxon and other chemical companies are investing heavily in new infrastructure to take advantage of this price differential.  For Exxon it is the best way to get a return on their own investment in shale gas.