PLG President Taylor Robinson presents "Shale Gas Implications For US Manufacturing Renaissance" at Reinvesting in American Manufacturing conference in Houston, TX.

1. Logistics
Engineering
Supply Chain
Shale Gas Implications
for US Manufacturing
Renaissance
Prepared for
Taylor Robinson, President
December 5, 2013
Houston, TX
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2. About PLG Consulting
»
Boutique consulting firm specializing in logistics, engineering,
and supply chain
Established in 2001
Over 80 clients and 200 engagements
»
Headquarters in Chicago USA, with team members
throughout the US and with “on the ground” experience in:
North America / Europe / South America / Asia / Middle East
»
Key services
Strategy and optimization
Assessments and benchmarking
Supply Chain design and implementation
Transportation assets and infrastructure
Logistics operations
Investment strategy and due diligence
»
Key industry verticals
Energy
Bulk commodities incl. chemicals & plastics
Manufactured goods
Private equity and Corporate Development
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3. Shale Gas Is More Important to US
Industry Competitiveness Than Oil
Oil vs. Gas Price on BTU
Basis
» Natural gas is 4X cheaper than oil on a BTU-basis
» US electricity prices are the lowest in the industrial world
US industries are now the power cost leaders
Gas drives an increasing share of the US electricity generation capacity
» US gas downstream products will have world class
competitiveness - are the “building blocks of
manufacturing”
Chemicals
Resins
Compounds
» Natural gas is a cleaner burning fuel compared to other
hydrocarbons
WTI Crude ($/MMBTU)
$30
Natural Gas ($/MMBTU)
$25
$20
$15
$10
$5
$0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: EIA
Average Cost of Electricity (2012)
A
¢/kWh
Innovation will convert more transportation fuels and other energy
requirements to natural gas
35
30
25
20
15
10
5
0
31¢ 30¢
18¢
13¢
9¢
7¢
4¢
3¢
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4. US Shale Gas History
Gas rig count has decreased significantly,
but gas production has increased – Why?
»
Shale gas prolific supply growth in 2007 &
2008 caused a dramatic price drop in 2009,
rigs shifted to oil & liquids
»
Drilling productivity continues to lower costs
and increase production with less rigs
»
And the Liquids (Crude, NGL) wells produce
dry natural gas as a by-product
Rig Count by Class vs. Gas Production
Source: Bentek, September 2013
Representative Productivity Gains – Fayetteville Shale Play
Source: Southwestern Energy investor presentation, September 2013
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5. US Shale Gas Future
»
Abundant US gas supply for the foreseeable future
US Natural Gas Supply/Demand
Low cost reserves in accessible locations near population
US will become a net gas exporter by 2020
US gas demand will grow gradually due to:
•
•
•
•
»
Coal-fired generation plant converting to gas
More industrial use – steel, fertilizer, methanol
Mexican export via pipeline and LNG export overseas
Increasing use as transportation fuel
US gas cost competitiveness is sustainable
Supply will overwhelm demand as prices approach $5
US government will likely limit LNG export to protect US from
world gas market price
Annual Average Henry Hub Spot Natural
Gas Prices
2011 $ per M Btu
»
Source: EIA, Annual Energy Outlook, 2013
Source: BENTEK, September 2013
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6. Marcellus: Future Gas Play of Choice
»
Marcellus is gas play of choice
Massive scale near highest US population density
Rapid increase in production – now 5th largest production
“country” in the world
Low cost wells with high productivity enables dry gas
profitability for efficient drillers at current price
Export potential for LNG & NGL from Marcus Hook and
other export terminals
However, no ethane crackers in the region, so gas NGL’s
need to be piped to Gulf region for further processing
Shale Gas Development Rates
Shale Play IRR
Currently, only
profitable dry
gas play
Source: Bentek, September 2013
Source: Bentek, September 2013
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7. Shale Gas Downstream Products
Inputs
>>
Wellhead >> Direct Output >>
Thermal >>
Fuels >> Raw Materials
>>
Generation
Fertilizer (Ammonia)
Gas
OCTG
Home Heating (Propane)
Methanol
Other Fuels
NGLs
Feedstock (Ethane)
Chemicals and Resins
Feedstock (Propane,
Butane, etc)
Water
Cement
Steel
Process Feedstocks
Proppants
Chemicals
Downstream Products
Chemicals and Resins
Crude
Petroleum Products
Gasoline
Petrochemicals
Diesel, Jet Fuel
Other Refined Products
» Shale crude oil makes the headlines, but shale gas & NGLs will drive US industry
and manufacturing cost competitiveness and growth
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8. NGL Boom In Progress
»
NGL = Natural Gas Liquids or “Wet Gas”
Prevalent in large Crude plays as a by product – Bakken,
Eagle Ford, Permian
Prolific areas in eastern Marcellus and Utica
Adds profitability potential for oil & gas production
companies
»
NGL’s require processing and fractionation
Capacity coming on line quickly in multiple plays
3-9 gallons/MCF (thousand cubic feet)
–
Ethane
~42-65%
–
Propane
~28%
–
Normal Butane ~8%
–
Iso-Butane
~9%
–
Condensate ~13%
»
NGL supply growth will outpace downstream
product demand in North America
Ethane currently “rejected” in large volumes due to low
prices
As processing capacity increases, export of downstream
products will grow significantly due to cost advantage
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9. Ethane is the “Building Blocks” for
Manufacturing
Feedstock/
Intermediary
Finished
Products
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10. Shale Gas Phased Impact To US Industrial &
Manufacturing Cost Competitiveness
2008
2010
2012
2014
2016
2018
2020
Shale
Gas
Boom
Phase III – “Manufacturing”:
Raw material cost driven
Phase II ‐ Downstream Products:
Resins, Chemicals
Phase I ‐ Gas & Power‐intensive Industries:
Steel, Fertilizer, Methane
» Phase I & II expansion, brownfield and greenfield
plants announced – 2014-2017 investment peak
Over $100B of chemical industry investments have been
announced with more announcements expected
Foreign investment is over 50% of announced
Not all of the announced factories will be built or be delayed due to
regulatory issues
» Ethane crackers are vital to downstream growth
10 expansions and 7 greenfield crackers announced
3-5 world scale crackers likely to be built
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11. Phase I – Gas- and Power-Intensive
Industries Are Advantaged Now
» Steel example -- Direct Reduction Iron (DRI)
Gas strips oxygen from iron core to make high purity/quality pellets
DRI pellets cost ~$270/ton vs. scrap steel cost ~$390/ton
Nucor/Encana $750 M plant in St. James Parish, LA is starting early 2014
with capacity of 2.5 M tons/year (will be largest DRI plant in the world)
Voestalpine 2 M tons/year HBI and DRI plant is due online in early 2016
» Fertilizer example – Numerous new plant announcements
Gas is feedstock for ammonia/nitrogen
5 plants will likely be built out of the 20 factory announcements
First world scale plant in nearly 25 years in Wever, IA – Iowa Fertilizer (OCI)
– projected to start in late 2015
CF Industries’ two fertilizer expansions that have been announced in IA and
LA are likely to be built – 2016 start
Average Cost of Electricity (2012)
Three iron‐ore storage domes stand near Nucor's direct‐reduced iron plant in
Convent, La.www.wsj.com ‐ Feb 1, 2013
» Methanol example – Imports will be displaced
Beaumont OCI plant restoration in 2012 – producing methanol & ammonia
LyondellBassell’s restart of mothballed Texas plant operational late 2013
Methanex is relocating two plants from Chile to LA – first plant expected
operational by end of 2014 and second early 2016
OCI new plant announced in Beaumont – Q4 2016 start
Valero evaluating bolt-on approach for methanol plant at refinery in LA,
project could startup in 2017
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12. Phase II - Low Cost Gas Feedstock Provides
Significant Cost Advantages for Chemicals & Resins
» US has a large structural cost advantage due to gasbased ethane for downstream products
Europe and Asia are tied to crude-based naptha as a feedstock for
their downstream processing
US has shifted to ~90% ethane feedstock for ethylene
» However, US ethane cracker and processing capacity
is tight and ethylene prices are inflated
Current ethane cracker margins 50-60 cents/lb
Additional cracker capacity expected in 2016/2017
Margins/prices will moderate as more capacity comes online
New US resin facilities also on the drawing board
Excess resin capacity will promote globally competitive prices and
large export increases
Source: Townsend Solutions
k tons
North America Ethylene Expansions
k tons
50,000
45,000
40,000
35,000
30,000
2012 2013 2014 2015 2016 2017 2018 2019 2020
Actual Capacity
Additional Capacity
Sources: Townsend Solutions
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13. Phase III - Raw Material Cost Advantage Is Key Cost
Driver to Reshoring Growth
» Raw materials normally accounts for 60-70% of
manufacturing cost of goods sold (COGS)
Most product cost competition is won or lost here
Shale gas giving the US an advantage for steel, plastics, chemicals
» Total labor cost is usually ~20% of COGS for US
manufacturers
China labor cost in $ will continue to rise due to inflation and
currency appreciation
US labor rate expected to remain stable
» Transportation & Logistics costs are in “Other”
Asia/China has 5~10% cost disadvantage due to extra ~ 1 month
shipping lead time (major cash flow disadvantage)
Transportation costs continue to rise
» Energy cost is usually less than 5% for final
manufacturer
However, energy costs are buried in raw material costs and
transportation and can be more substantial in energy-intensive
products
US has a tremendous advantage vs. industrialized world
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14. Implications and Wrap Up
»
Reshoring manufacturing volume will be limited until raw
material costs are advantaged with some exceptions:
Durable goods
Quality differentiation
Innovation / proximity to market advantages
Mexico near-sourcing
»
Shale gas-driven raw material advantages will take 5 years+ to
flow through supply chain
Ethane crackers are current bottleneck to downstream cost competitiveness
Bottleneck will be relieved in 2016/2017 timeframe
Imports will be displaced – exports will grow dramatically in some industries
»
Shale gas competitiveness is sustainable with huge, accessible
supply reserves with continuous production cost improvement
»
Shale oil is “icing on the cake” for the US
Shale oil and gas supply chain will drive job growth
Energy independence coming!
Improvement in trade deficit
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15. Thank You!
For follow up questions and information, please contact:
Taylor Robinson, President
+1 (508) 982-1319
trobinson@plgconsulting.com
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