Three Key Strategies for Capitalizing on New Energy Opportunities

Three Key Strategies for Capitalizing on New Energy Opportunities

The “shale revolution” is prompting many chemical manufactures to make changes to their current operations. Three strategies offering the most benefits are: Move closer to feedstock, Import shale gas or use alternative feedstock, and Secure first mover advantage to push sustainable technology innovations into the marketplace.

For years, we’ve been flooded with reports detailing how new drilling and fracking technology will unleash a supply of natural energy that will change the world. Suggested benefits of shale gas include energy independence, a resurgence in manufacturing, lower energy costs and new jobs. Indeed, studies indicate that the United States possesses enough natural gas to supply the nation for upwards of a hundred years. And while estimates vary on the actual amount of natural gas hidden beneath the earth, the initial results have stimulated a surge of investment in U.S.-based chemical manufacturing. 

Along with an increase in supply, global economic changes are causing shift in energy demand. According to the Organization for Economic Cooperation and Development (OECD), the size of the global middle class is predicted to increase from 1.8 billion in 2009 to 3.2 billion by 2020 and 4.9 billion by 2030. This larger middle class will consume its fair share of resources including modern electronics, energy and fossil fuels. The intersection between greater supply and greater demand is creating some exciting new opportunities for chemical manufacturers.

According to the EIA 2014 Annual Energy Outlook report, U.S. shale gas production is projected to grow from 9.7 tcf in 2012 to 19.8 tcf in 2040. Driven by horizontal drilling and hydraulic fracturing, the “shale revolution” is prompting many chemical manufactures to make changes to their current operations. Three strategies offering the most benefits are: move closer to feedstock, import shale gas or use alternative feedstock, and secure first mover advantage to push sustainable technology innovations into the marketplace.

Move Production Close to Supply

According to industry experts, approximately 60-70% of the costs of chemical production is in the feedstock or raw materials. Companies seeking a long-term competitive advantage can lower these costs by reducing the distance between the source and their manufacturing facility. It is this strategy that has chemical companies flocking to build plants in the United States. From 2011 to August 2014, there were close to 200 announcements of new chemical plants or upgrades to existing ones in the United States, with investments totaling $124 billion (MIT Technology Review.)

Leading chemical companies such as ExxonMobil (IW 1000/3), Chevron (IW 1000/10), Saudi Basic Industries (IW 1000/86) and Dow Chemical (IW 1000/76) have plans to invest billions of dollars in future plants. Interestingly, nearly half of all the new investment is coming from foreign companies. For example, South Africa’s Sasol (IW 1000/230) is planning to invest $21 billion into nine Louisiana plants that turn gas into plastics and Taiwan’s Formosa Plastics (IW 1000/606) plans two new factories in Texas to make ethylene and propylene (Bloomberg BusinessWeek.)

Import Less Expensive Shale Gas

Another strategy for benefitting from natural gas availability is to import it to be used in facilities closer to the demand. In the current shale gas situation, this could mean importing feedstock for non-U.S. based companies, particularly those in EMEA, to serve regional or local demand. The obvious downside to this strategy is that transportation costs incurred to some extent compensate for the low feedstock costs.  However, the fact that companies like INEOS continue to import natural gas proves there is still an overall net gain in operating their assets and serving their markets based on shale gas feedstock.

Leverage Technology for Product and Process Innovation

Sometimes it is not possible to relocate or import shale gas. In those situations, companies need to turn inward to implement or develop innovative technologies that improve current feedstock or use existing resources in new ways.  As the saying goes, “necessity is the mother of invention” and for companies without access to less expensive shale gas, innovation is critical to survival. For example, Brazilian-based Braskem (IW 1000/263), one of the world’s largest producers of thermoplastic resins, has developed an ethylene value chain based on readily available bio-ethanol feedstock. Also companies in China as well as Sasol in South Africa seek for competitiveness by leveraging advancements in methanol-to-olefin technology.

If predictions for shale gas exploration within the United States come to fruition, which is still to be determined, it will have far-reaching global impact. Already we are seeing chemical manufacturers adjust their processes and products to take advantage of the lower cost feedstock through relocating operations to the United States or increasing shale gas imports. But it is the innovation that will come from the shift in the existing trade balance that is perhaps most exciting. Chemicals companies able to assess the changing landscape and respond with innovative technologies, processes and products will emerge as the undisputed global leaders. 

Dr. Stefan Guertzgen is the Chemicals Global Director for Industry Solution Marketing at SAP. Prior to this assignment he spent 11 years in the chemical Industry at Chemtura in various positions including R&D, global business development, sales and business process management, and sales & operations planning. Join him in conversation @SGgaw29c or on @SAPIndustries 

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