The plentiful natural gas unleashed by new fracking technology has spawned a surprising resurgence of U.S.-based chemical manufacturing. An abundance of shale gas has made the U.S. the lowest-cost chemical producer outside the Middle East, attracting billions of dollars in investments and transforming the United States from an energy importer to an energy exporter. As a result, the global landscape is changing, not only in how countries are interacting with each other, but also in supply chains, manufacturing operations and processes.
It is important to note, that while many positive changes are predicted to occur from shale gas manufacturing, there are plenty of forces working against it. Environmental concerns over drilling, political issues and legislation including land rights, continue to be vigorously debated. Additionally, the economics of horizontal drilling require shale gas manufacturers to sell at a certain price point. When oil prices drop, it is extremely difficult to sustain gas exploration while operating at a loss. Although it is believed the potential upside of shale gas availability will eventually overcome the objections, it is not as straightforward an issue as many would believe.
Impact on Global Supply Chains
To take advantage of lower feedstock costs and increased supply, chemical manufacturers are racing to establish more U.S.-based facilities. This is resulting in an investment boom and creating an opportunity for new U.S. exports including selling shale gas to Europe and importing feedstock to Europe, Africa, Asia Pacific and Japan to be used in downstream products. As a result, the industry is beginning to see major changes to the global petrochemical supply chain such as:
- The flow of basic petrochemical products from the Middle East into the Asia Pacific and Japan (APJ) as well as the Europe, and Africa likely will decline over the next few years.
- China´s basic petrochemical industry, along with petrochemical producers from Russia or other emerging countries out of the CIS, might offset the decline from the Middle East.
- Additional capacity will be built in the U.S., whereas non-profitable capacity will be shut down in EMEA.
- New demand centers will be established in emerging countries.
- There will be an increase in joint-ventures, mergers and acquisitions as companies strive to move closer to the source, closer to demand or implement cutting edge technologies.
- As demand and supply centers are shifting locations, the industry will experience an increase in cross border or cross continent shipments, which will result in the need to manage numerous global, regional and local regulatory requirements around global trade and transportation.
- Changing dynamics and increased uncertainties on the demand and supply side are calling for reduced sales and operations planning cycles, more predictive modeling and advanced supply chain risk management.
- Optimizing multi-level inventory systems will become imperative to ensure responsive order fulfillment at minimum costs. This includes implementing integrated technology platforms to track of items such as levels of raw material, intermediate or finished products.
- Local or regional warehouses will increase their efforts to offer value-added services such as local formulations or blending.
While these are just a few of the changes predicted to occur in the near future, it is clear that the entire, existing supply networks will need to be redesigned. In doing so, manufacturers should keep in mind that using collaboration tools and data analysis for real-time decision making and predictive modeling will be critical to success.
Impact on Global Manufacturing
The type of products and services offered by manufactures in various regions will be impacted as well. For example, it is anticipated that new crackers will be built in the U.S. for "light feedstock" and that gaps in the feedstock will foster growth of alternative, innovative technologies such as bio-refineries or propane dehydrogenation. Countries which do not enjoy the advantageous feedstock situation will also begin to focus on new technologies, particularly those that leverage coal.
Another expected change in global manufacturing is that some countries like EMEA will either retrofit their crackers for light feedstock or shut down non-profitable capacities, based on closed integration with naphtha based feedstock. In fact research by KPMG International, suggests that “changes in global capacity will render 14 of 43 crackers in Europe uneconomic by 2015. The closure of these plants would correspond to the loss of 26% of total cracker capacity in Europe.” Hopefully, a shift in production toward more value added downstream products, built on proprietary technology or intellectual property, will offset the impact of these forecasted closures. Finally, MENA countries will most likely remain the lowest cost producer, despite a new shale-age market equilibrium albeit with much less margin differentials to U.S.
Impact on Innovation
In general it can be expected that shale gas will drive down global pricing. Manufacturers who cannot directly capitalize on low feedstock costs will be pushed toward achieving operational excellence through not only innovative process technology but also real-time IT platforms to maximize production performance and asset utilization. In fact, the industry has already started seeing enhancements around existing coal-to-liquid, gas-to-liquid and bio-to-liquid technology. Local bio-refineries are emerging to complement feedstock needs with their own production trees, while also supplying sustainable products and production. It is predicted that additional process innovations will emerge as more countries start exploring natural gas opportunities like shale gas deposits or methane hydrate extraction. MENA has already begun finding innovative ways to bypass refining altogether by converting oil directly into chemicals.
Shale gas exploration, when performed in an environmentally safe way, is expected to have a great global impact on chemical manufacturing. The new supply of natural gas will make chemical products more competitive and sustainable (e.g. lightweight materials in automotive, building and construction, aerospace, etc.) A new world is upon us and visionary leaders have the opportunity to improve people’s lives through safe and sustainable chemical innovation. However, an unpredictable variable in the equation determining the overall scope and impact on global supply chains, manufacturing and innovations coming from shale gas will be the short to long term price differential between shale gas and crude oil.
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