U.S. Takes The Lead - The shale gas revolution has the potential to transform not only global energy distribution, but also the petrochemicals landscape. The U.S. has been the most successful country at exploiting its reserves and is five to 10 years ahead of other regions. Consequently, it is expected to take a more dominant role in the global energy mix.

As other regions aim to replicate this success, they face a number of challenges. Geological assessments are needed to determine the potential of available resources, and a skilled workforce is required to apply and improve current extraction technologies. From a regulatory perspective, there are land ownership laws to contend with, and how they relate to subsurface resources. Pricing controls, taxation and environmental laws also need to be considered.  Many of these issues remain unresolved, even in the more developed U.S. shale gas market.

New Petrochemical Landscape

Petrochemical production is shifting to the U.S., where, for the first time, production costs have dipped below those in the Middle East. Other regions remain significantly more expensive.  As a result of shale gas production, there has been a shift to natural gas (NG) from naphtha, because of the wide price difference between the two feedstocks. Ethylene production has been a major beneficiary, with many companies reviving defunct crackers and others relocating operations from the Middle East.

These effects are not limited to ethylene production. Approximately 90% of propylene is made as a byproduct of cracking naphtha to make ethylene and gasoline. However, because of the higher price of naphtha, more crackers are using NG as a feedstock and reviving propane dehydrogenation (PDH) to make propylene. Naphtha-based crackers in Europe and Asia may have to focus on higher value product lines such as butadiene and aromatics.

The juxtaposition of low NG prices and high crude oil prices has encouraged supplier companies to adopt gas-to-liquids (GTL) technology to escape low NG prices in the U.S., and access the high value oil prices. Innovations in this area include setting up small-scale GTL plants to serve a number of shale gas producers, thereby sharing risks and cutting costs.

 Caveat

While the future seems bright, there have been many sobering developments. Shale gas resource valuations are consistently revised downward. The twin issues of low recovery efficiencies and high rates of decline have not been satisfactorily addressed. In addition, the cost of shale gas production is much higher than conventional oil and gas, particularly outside the U.S., suggesting that the regional NG price disparity will continue. Consequently, a number of companies have dramatically written down their shale assets. There is clearly much to be done to prove the long-term viability of this resource.

Geopolitical Realignment

Shale gas proliferation will undoubtedly influence global geopolitics, particularly with regard to the relationships among the U.S., China, Russia and the Middle East.

Europe

Shale gas developments in Europe have thus far been stifled by restrictive legislative policies, and environmental and human health concerns. The situation is exacerbated by ambitious regional targets for the adoption of renewable resources, and a powerful anti-shale gas lobbying body, which strongly influences public opinion. 

Strong competition from Asia, the Middle East and North America is due to availability of cheap feedstocks, adequate funding for investments and low cost production factors. In addition, Europe is still reeling from a protracted recession and the dominant feedstock is naphtha, which is inextricably linked to high crude oil prices. Producers are therefore susceptible to a decrease in global commodity prices of ethylene and propylene and have to consider focusing on higher value product lines. European chemical companies have a key advantage, which will be vital to addressing these challenges. They have amassed a significant amount of intellectual property through technological innovation. This is particularly the case with regard to product lines and solutions, which address increasingly important factors such as health and wellness, sustainability, functionality and performance.  They can leverage this against cash-rich, technology-poor regions.

Additionally, Europe maintains a difficult relationship with Russia, which has been known to leverage its dominant position as an NG supplier. Shale gas production in the U.S. will result in Middle Eastern and African NG exports being rerouted to Europe, thereby diversifying the region's supply.

Latin America

NG and naphtha prices in Latin America are approximately 20% higher than in North America. Consequently, primary chemical production costs are high and increasingly uncompetitive. The bio-based chemical industry has been affected for similar reasons. As a result, various international chemicals companies in the region are reassessing their investments, with raw material costs a major factor.

Argentina is estimated to hold more than 60% of the region's technically recoverable shale gas resources and boasts a government willing to exploit this fully. However, the government has imposed low domestic prices, which undermine investment uptake. Essentially, a rise in NG prices is needed to reflect the high production costs. In addition, the investment climate in the region has soured because of nationalization of some international energy and petrochemical subsidiaries.

Asia

To sustain continued growth, China needs viable solutions for its energy and feedstock needs, and is aggressively pursuing a number of options. Currently, extraction of Chinese shale gas is nascent and more expensive than in the U.S. Even accounting for a proliferation of NG supplies, prices in Asia will remain higher than in other regions.

National oil companies such as Sinopec have invested heavily in North American shale gas assets as a way of acquiring the necessary technology to develop domestic resources. In addition, the government has encouraged a revival of coal-to-liquids (CTL) technologies to capitalize on vast domestic reserves. This allows China to reduce imports and address emissions targets since CTL is cleaner than simply burning coal.

Middle East

As NG supplies diversify, the dominance of the Middle East will weaken and the region's chemical producers will have to expand down the value chain to produce high value chemicals and counter losses in the upstream primary chemicals sector. In addition, state-backed cash-rich companies are in a strong position to invest in developments elsewhere.

Conclusion

Global shale gas proliferation will signal a significant shift in the energy and chemical feedstock markets. Countries looking to exploit their shale gas resources, as well as current oil and gas suppliers, are investing heavily in joint ventures and acquisitions to secure knowledge and hedge against losses in their conventional markets. European companies have an opportunity to leverage their strong technological knowhow against cash-rich, technology-poor regions in order to survive this turbulent market.