Industryweek 2618 Iw0511energy1

Shale Gas: The New Black Gold

May 12, 2011
Experts say the shale gas boom presents a historic opportunity for U.S. manufacturers and the nation's energy security.

Shale gas is a "once-in-a-lifetime opportunity" for U.S. manufacturing, says Bayer Corp. CEO Gregory Babe. The chief executive of Bayer AG's North American division told IW that shale gas could play a critical role in bringing U.S. manufacturing back to its former glory. For chemicals manufacturers such as Bayer, the new abundance of natural gas has created energy pricing predictability. The chemicals industry is a large consumer of natural gas, both as a raw material and energy supply.

"Predictability in energy prices has always been one of the things we've clamored for," Babe says. "Predictability allows us to plan appropriately, allows us to make decisions about where to site a plant -- either in the United States or outside of the United States."

Bayer and other manufacturers across North America are riding a natural gas wave that's been referred to by some industry experts as the "shale gale." Advances in new, and sometimes controversial, technologies have allowed oil and gas developers to extract natural gas from shale formations across North America more easily.

Workers move a section of well casing into place at a Chesapeake Energy natural gas well site near Burlington, Pa. The region is rich in natural gas locked underneath shale gas formations that experts say could be a boon to manufacturing.
Photo:AP/Ralph Wilson

The largest shale gas repository in North America is the Marcellus formation that's primarily located in New York, Pennsylvania, West Virginia and Ohio. Others include Haynesville in the Southeast, Eagle Ford in Texas, and Horn River and Montney in Canada. The shale boom should contribute to an expected record for natural gas production in United States this year, says Donald Norman, economist and council director for the Manufacturers Alliance/MAPI.

IHS Cambridge Energy Research Associates estimates that unconventional gas plays in North America contain more than 51 trillion cubic meters of recoverable gas. That's more gas than has been produced in North America since 1930, according to the IHS Energy Vision Update 2011 report on natural gas trends.

Shale gas exploration picked up after Hurricane Katrina in 2005 when natural gas prices spiked to as high as $15 per million BTUs, says Kevin Swift, chief economist and senior director at the American Chemistry Council. Today, prices hover around $4 per million BTUs.

Swift, whose association represents members of the $674 billion U.S. chemicals industry, says the Katrina aftershocks created demand for more natural gas supplies. That, coupled with improvements in production technologies called hydraulic fracturing and horizontal drilling, were key drivers of the current natural gas boom in the United States.

Swift and many other representatives of energy-intensive industries see long-term benefits from shale gas exploration. More natural gas supplies have helped chemicals producers lower their raw materials costs, enabling them to double their exports as a share of total production over the past four years, Swift says.

What it Means for Manufacturers

Of course, manufacturers that directly benefit from the expansion of shale gas exploration include the oil and gas companies themselves. "Oil companies in every country are coming here to learn," says Fadel Gheit, a managing director and senior analyst with investment firm Oppenheimer & Co. "We have made huge advancements in this field and have gas that could last us more than a hundred years, and we're just scratching the surface."

Exxon Mobil Corp. has stressed the importance of natural gas in its portfolio. The company says rising demand for natural gas will make it the fastest-growing major energy source. Exxon has responded with several natural gas investments, including the 2009 purchase of Fort Worth, Texas-based XTO Energy for $34.9 billion.

Greg Babe:
"If natural gas remains at a predictably low cost for decades to come, then, yes, it could mean we could invest further in the United States."

Beyond the oil and gas industry is a vast supply chain that is beginning to reap the benefits of the expanding market. For instance, in March tubular steel producer TMK ISCO, a division of Russia's OAO TMK, said it would add a second pipe threading line at its facility in Brookfield, Ohio, to meet growing demand in the Marcellus shale field. Lower natural gas prices could offer opportunities for newer technologies in the steel industry. A process called direct reduced iron, or DRI, uses large amounts of natural gas to eliminate impurities in iron ore. The iron-rich iron ore can be used as a more affordable substitute for scrap metal used in electric-furnace steel production.

The progression of DRI will depend on positive natural gas trends, said Nucor Corp. CEO Dan DiMicco in an American Iron and Steel Institute state of the industry address May 2.

The drop in natural gas prices has been one of the few major input cost benefits for U.S. Steel Corp., said company President and CEO John Surma during the AISI conference.

Natural gas from the Marcellus field provides U.S. Steel with a locally based energy supply for its mills in Western Pennsylvania, Surma noted in past House testimony. Increased access to local supplies could provide a competitive advantage for U.S. manufacturers because by nature natural gas is much more difficult to deliver than oil, says MAPI's Norman. "It's not like oil where if all of a sudden there's a lot more oil out there in the world, the world price of oil goes down and everyone benefits," Norman says. "It doesn't quite work the same way with natural gas because of the regional nature of the market."

Likewise, increasing proximity to feedstocks has created new opportunities for chemicals producers. Dow Chemical Co. announced a plan on April 21 to build a new ethylene production plant in the Gulf Coast to take advantage of shale gas supplies in the Eagle Ford and Marcellus shale regions. Bayer Corp. has an industrial park in Institute, W.Va., with about 460 acres, that is located in the center of the Marcellus gas field.

Bayer is in discussions with chemicals companies that may be interested in building an ethane cracker at the industrial park, Babe says. "That's not really in our particular business line, but it would be leveraging our infrastructure that we have today to enable that and to hopefully accelerate growth of manufacturing in this particular geographic region, which would be supportive of feedstocks that we use in our process," Babe says. An ethane cracker plant converts ethane, a natural gas derivative, into ethylene, which is typically used to make plastics.

Rocky Road Ahead?

Like any advancing technology, the promise of shale gas doesn't come without its share of controversy or challenges. The primary one concerns hydraulic fracturing, or "fracking," a method used to extract gas from shale rock. As described in the IHS report, fracking involves injecting high-pressure fluids into a well to create fractures in the reservoir rock. The fractures allow the natural gas trapped in the rock to eventually flow toward the surface. The fluid typically comprises water and sand or another solid to keep the fractures open. Chemicals used in the process make up less than 1% of fracking fluid, IHS reports.

Combining hydraulic fracturing with another technology called horizontal drilling was considered a major breakthrough in shale gas exploration around 2002-2003, according to IHS. Environmentalists are concerned that fracking fluids could contaminate groundwater. In September, the U.S. Environmental Protection Agency began requesting information from nine leading national and regional hydraulic fracturing service providers for a study to identify any potential impacts fracking could have on drinking water and groundwater.

In a March 30 speech on energy security, President Barack Obama said he is committed to using and developing natural gas in the United States. But he cautioned that his administration is focused on launching an initiative that will seek input from experts on the use of fracking chemicals.

A report released April 16 by House Democrats concluded that oil and gas companies are "injecting millions of gallons of products that contain potentially hazardous chemicals, including known carcinogens" during the hydraulic fracturing process, said Rep. Henry Waxman (D-Calif.), the top Democrat on the Energy and Commerce committee.

But a coalition of independent oil and gas producers called Energy in Depth contends the report is flawed and misleading. The group notes the committee report does not indicate that the chemicals have actually entered the water supplies underground. The report also ignores various processes and technologies used by producers to identify and eliminate potential pathways of exposure underground, according to Energy in Depth.

In addition to potential legislative issues, infrastructure continues to be a challenge for the natural gas industry. The Marcellus formation is located in a mountainous region away from most petrochemical hubs, Swift says.

Feasibility studies are underway to assess whether pipelines can be constructed to move ethane from the Northeast to market, Swift says. There's also increasing talk of petrochemical companies building ethane crackers in the Marcellus region.

For manufacturers such as Bayer, future decisions regarding shale gas development in the United States could determine where they locate new plants.

"If natural gas remains at a predictably low cost for decades to come, then, yes, it could mean we could invest further in the United States in plants that would be feeding demand here," Babe says.

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