Dow Bets on Low Natural Gas Prices

Becoming the latest company to take advantage of the shale boom's flat-lining natural gas prices, Dow Chemical's Andrew N. Liveris, Chairman and CEO, recently announced the company plans to build a new ethylene production plant in Freeport, Texas. Synchronistic markets backed him up, with natural gas prices reaching 10-year lows because of storage capacity concerns. But, then again, in the global energy market, no good deed goes untested.

Dow's tectonic strategy shift

"For the first time in over a decade, US natural gas prices are affordable, attracting new investments and putting us on the threshold of an American manufacturing resurgence," said Liveris, who, last year, began to seed US and Australian universities with money to boost chemical engineering research and enrollment.

The current trend of cheap, plentiful gas has been a gift to Dow, which already uses the energy equivalent of 850,000 barrels of oil per day as a chemicals and plastics feedstock. That figure will jump when the new Texas plant starts to convert ethane, which is used in plastics like water bottles and vinyl.

This is a relatively sudden and tectonic shift after years of overseas expansion in cheap-energy countries like Saudi Arabia (where last year Dow announced the Sadara chemical complex joint venture with Saudi Aramco).

New exports new jobs

Liveris knows that Dow's isn't the only industry responding to low prices and remains very aware of the long-term risk to his investment if the advantage of cheap gas disappears. Recently he voiced his major concern: US companies that want to export domestic LNG. "We're all for exporting natural gas," he said. "We just want to see it exported in solid form instead of liquid." (CNN video interview)

As part of his strategy to diversify out of commodity chemicals, Liveris wants to export products made from natural gas, like Dow's new solar shingle, a solar panel integrated into regular roofing shingles. Watch a news report here:

This new product has already been installed on 3,000 homes in Colorado and is currently being rolled out in Texas. Liveris says exports like the solar shingle would generate eight times more value for the U.S. economy than just exporting the LNG alone.

According to Forbes, Liveris warned: "If we allow the world gas price to come to this country by exporting gas then it will destroy the benefits of plentiful cheap gas." For example, LNG delivered to Japan nets $15 per thousand cubic feet, versus a current U.S. price of $2.25. But asking for that much government protectionism would create a country-wide political paroxysm. I won't use the term "firestorm," because in a story about natural gas and political hot air, it's an unnecessary accelerant.

LNG rising

Like a bad horror movie, Liveris's most primal competitive fear just returned. There will soon be global competition for US natural gas, becasuse Houston's Cheniere Energy has just received approval from the Federal Energy Regulatory Commission (FERC) for the first large-scale natural gas export facility in the US, clearing the way for construction of the Sabine Pass LNG export terminal in Cameron Parish, La. Once completed, the new facility will allow U.S. producers to send natural gas overseas to chase huge price imbalances.

While several other LNG export projects have also been proposed, the Financial Times noted, Cheniere has already found four customers: BG Group of the UK, Gas Natural Fenosa of Spain, Kogas of Korea and Gail of India, and plans to export a total of 16m tons of LNG per year.

Sabine Pass, originally built as an LNG import terminal, a sign of how quickly the natural gas future changed, will help to turn around the struggling company, which, as recently as December, had been placed on Standard & Poor's Creditwatch due to credit risk. Company shares, $4 in September, are now more than four times higher following FERC's approval.

Crowding Dow Chemical

Suddenly, horror movie cliches are multiplying like zombies surrounding and attacking an isolated farm house. Phillips 66, the refining arm of oil major ConocoPhillips that will become a stand-alone company after April 30, will shift its long-term capital spending to its Chevron Phillips Chemical production because of the weak outlook for fuel demand.

Phillips 66 will roughly double its 2012 capital expenditure budget for its chemical business to $500 million, while its spending on its refining business will grow from just under $1 billion, Greg Garland, a ConocoPhillips executive vice president who will head Phillips 66, said.

Shifting out of shale gas

And don't forget the nightmare shape-shifters ("Freddy, I know you're there!"). Many domestic drillers are idling rigs or switching them over to oil shale plays to take advantage of the record price disparity between gas and oil.

In late January, taking a drastic step to stem the natural gas glut, Oklahoma City-based Chesapeake Energy, the nation's second-largest producer, said it would slash gas drilling by nearly half. At the time, this was greeted with exuberance by traders and investors who had been waiting for a sign that producers were ready to make dramatic changes.

Other companies are following Chesapeake's example. The natural gas rig count dropped for the 13th time in 14 weeks to 624 (a drop of 23 rigs from the previous week). The number of gas-directed rigs is at their lowest level since April 19, 2002 and is down more than 33% from its 2011 peak of 936, reached during mid-October. The current natural gas rig count remains 61% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 885 active natural gas rigs.

When do you think resulting chemical jobs will appear?

Images: Andrew Liveris, businessroundtable; LNG facility, Cheniere Energy; Refinery, wikicommons; charts, EIA.


Robert S's picture

I really like his point about exporting natural gas - but as products. Will definitely get much more value out of that. I think for now, there is enough gas to go around for exporting, like you mentioned a lot of idle rigs. But curious to see how many pull the trigger on real infrastructure, Dow pulled it pretty quick. Good to be the first, we'll see if anyone wants to be the second or third.

harrington.kent's picture

Dow may have jumped the gun. Honeywell has announced a one-step process to convert household natural gas into a plastics raw material. Now that's timing. It's still several years away from commercialization, but it should get people thinking. UOP’s process would save about 40 percent from the cost of ethane-based ethylene production at current prices. The technology could lower the cost of products ranging from soda bottles to paint; and give Honeywell a steady profit stream from licensing the technique in the $150 billion plastics raw-material industry.

Robert S's picture

I'm glad you brought that up. I can't really speak to the new technology. But it will compete against some of our current technologies. Dow selected UOP's Oleflex for propylene which I would say is a good decision, may be a little biased. China has bought into this in a big way (I don't have the exact number handy) - approximately 10 of these units have been sold to go online in the next few years and approximately 8 are in China. Some of the risk factors are off the table in China (labor and regulatory costs) but the raw material advantage is definitely in the Americas now. I think that the raw material costs will send some of these chemical jobs back to the US for now - such as the export terminals and the Dow venture. There is plenty of room for both and some combination may be a long run benefit. Exporting can be done in the short term and as manufacturing comes on line there will be a greater benefit to the higher margin products. I don't think they jumped the gun, I think the first few into the market will see big returns. But as time does go on, there will be a big question of investing in the now or waiting a little more for something new. But that is going to require predicting future prices, which won't be easy. Prices usually find a level where some people will take the plunge.

harrington.kent's picture

The info on China is really worth a look for me. It makes their push for shale gas even more understandable. It seems like so many countries are in the same bind - energy importing is a real scary position to be in. And expensive. Large countries all walk a fine line between cooperative interdependence and confrontation. Thanks for the insight. By the way, where are you posted these days? And when are you going to post another of your inimitable travel blogs? Just started to follow the controversy in India over the opening of a new nuclear plant. That country is in a total energy straight-jacket. An article about India's falling industrial productivity tied it to limited energy resources. (don't even talk about their funky grid) Many factories have to shut down several hours or even days each week. Others use backup generators - but the diesel fuel is expensive. How does UOP's new research facility in India fit into the big picture? I think Infrastructure, and getting the power where it can be used, is the Cinderalla story of energy. Now I know why Warren Buffet invested in gas pipelines and railroads about 7 or 8 years ago. Or how GE went infrastructure intensive about the same time. Among other technologies, I'm sure they saw the gas turbine surge coming. The amount of change in the energy/chemicals sector is mind-boggling. And the Americas: look what's happening in Argentina, huge gas reserves and national expropriation! Also, wondering if you've heard anything about the new biorefinery in Hawaii? Best, Kent

Totally agree on the large country policy dance. China is so big it needs everything. There is always a lot of talk about China having the largest wind or solar investment...yeah but they also have the largest coal. They need energy from anywhere they can get it. And India is the opposite, the whole economy is in a straight jacket. They can't get anything done. They need the energy but the government can't pay for it and the people can't afford to fund it because they don't have a way to advance without the power. I was in a upper class neighborhood that experienced regular outages. Maintaining a backup generator to power during blackouts is just considering a way of life in India. Having power generation that decentralized just isn't many things there. Having a nuke plant should do them good (most productive use of their nuke technology to date) but there would still be a lot of additional infrastructure needed just to deliver it. I don't know how our new research facility ties in there. It is housed in a larger Honeywell complex so it is likely large enough that all infrastructure needs are covered, though don't know at what expense. It seemed to go up relatively painlessly. Not sure of the business strategy, like all things it is a step towards regionalization where local resources are used when possible. There is talent there, but it is much more mobile than in the US (they split for more money quickly) so it is hard to hold them for a useful amount of time. Don't know how it will play out long term. And the research complex is in a more centralized urban area, so services are a little better. Many of their factories and industry are located as far from urban centers as possible - making power harder to get. Infrastructure is the way to go - both as an investor and as where government should put its money. Even if the US isn't growing most of our utilities are just out of date and will be needed to grow. The booming parts of GE gets covered by the financial arm's problems. Buffet sees that need and also is a practical guy that gets those businesses more. A nice thing about those transportation plays is that they are less tied to actual price and more about usage. Pipelines get paid to move it, so low prices may be better if they stoke demand. I am kind of surprised how little is being said about Argentina - maybe because they are stealing from Spain. It is a pretty crazy situation, I think it says more about their current government. They could be a BRIC in the direction of China, but seem to be moving closer to India. I have heard a little about the biorefinery in Hawaii. I was hoping to get on the project, but I am not that lucky. Can't say too much about. Using circulating hot sand to pyrolyze biomass (wood chips) and make pyrolysis oil. It is a scale-up proof of concept. Has worked in the lab, this is fine tune the process on a larger scale and produce enough of the "product" to use for testing (since pyrolysis oil will require some further processing for use). I think they will wrap up operations end of the summer and maybe move forward on next steps in 2013. Thanks for asking about my writing - I actually have one post on biofuel progress in for review (I submitted it during the Spring Meeting it might have slipped past Doug) and I am working on another one urban agri/aquaculture. If you want to see more of my travel writing I think you'll have to go to my blog since it hasn't been too engineer-y as of late.

Sorry to keep spamming this thread, but I heard any interesting theory regarding Chesapeake. They are having some serious problems with corporate governance which could cause a serious shake-up at their top. This at a time when they are struggling to find a business model that works with low gas prices. Some are seeing this as a bellweather company and their fear is that if Chesapeake can not make it work then maybe other won't be able to make it work. If this happens to enough companies, then this current state of low energy cost vanishes. I don't think the sky is falling, there are a lot of external factors at work in Chesapeake's case. But an interesting counter-point.

I don't know where to best put this - but how about Delta buying a refinery!?

harrington.kent's picture

The Chesapeake business model never anticipated such a huge drop in natural gas prices, guided more by a by-the-seat-of-your-pants wildcatter mo. I'll bet that even as gas prices were dropping they were still buying land. On top of that, they are one-trick-pony. Exxon Mobile, the largest nat gas driller, is so well diversified they can ride this out. And Chesapeake should have understood their own vulnerability. I'll add that petrochemical companies might be just as vulnerable. The low gas price bubble is moving through the system, causing the rapid buildout of new facilities. Eventually, some people think there will be a shakeout at that end as well. I look forward to your in-depth take as events evolve over time. Or does the big news include that Sunocco was just bought.