By JIM LANDERS
Staff Writer
jlanders@dallasnews.com
Published 05 September 2011 08:56 PM
Related items American manufacturers that use lots of oil and natural gas are gaining market share around the world as they take advantage of lower prices at home. Exports of basic chemicals and plastics were up 28 percent last year, giving the nation a $16.4 billion trade surplus in those goods.
Though it may not seem like it to motorists, oil and natural gas are far cheaper in many parts of the United States than they are worldwide. North of Dallas, refiners can buy West Texas Intermediate and other regional crudes for less than $90 a barrel. On the Gulf, Atlantic and Pacific coasts, refiners are paying world prices of around $115 a barrel.
Nationwide, natural gas prices (less than $4 per million British thermal units, or Btus) are not even half of what industrial buyers pay in Europe and Asia.
The pricing advantage shows up in exports from the energy-intensive industries of Texas. Since 2007, U.S. trade statistics show Texas refiners have more than doubled their exports of oil products — from $13 billion to $29.4 billion in 2010. Exports of the leading petrochemicals — plastics and other materials made from oil and natural gas — have surged from $7.8 billion to $11.9 billion.
Analysts say this comparative advantage results largely from the success of drilling technologies that fracture tight shale formations to release trapped reservoirs of oil and gas.
That’s most evident with natural gas, where shale gas released by hydraulic fracturing has boosted U.S. reserves 32 percent, according to the American Chemical Council.
Oil drillers have used the same technology to boost production. U.S. crude reserves rose 9 percent in 2009, according to the U.S. Energy Information Administration. (Results for 2010 won’t be announced until November.)
Much of that increase was in the Permian Basin area of West Texas. There is an ongoing oil boom in North Dakota as well.
This has led to a supply surplus in the Central and Western regions where the refineries operate, with insufficient pipeline capacity to spread the oil to other parts of the country. U.S. oil production is still far short of demand, and imports account for about half of total U.S. oil consumption. But refiners such as HollyFrontier Corp. of Dallas and CVR Energy of Sugar Land are reporting record earnings because of low-cost crude.
Kevin Swift, chief economist of the American Chemical Council, recalls hearing one petrochemical analyst call shale gas the “most significant event for the industry in 75 years.” After thinking about it, he agreed.
“It’s a game changer,” Swift said.
New gas supplies have lowered prices so much that Swift estimates the petrochemical industry will invest $16.2 billion in plant construction over the next several years. More than half of that, $8.5 billion, will be in Texas.
“That would create roughly 8,800 jobs in the Texas chemical industry itself, and with the ripple effects from Texas suppliers, heat exchanger manufacturers and the like, the total would be more like 81,000 jobs … within the next five to six years,” he said.
Petrochemical boom
Dow Chemical and Shell Chemical have announced plans to increase their production capacity of petrochemicals in the Gulf Coast area.
Petrochemical manufacturers convert natural gas into liquid ethane and ethylene, which is used to make rubber, polyester, pantyhose, plastic bottles, food containers and many other products.
Petrochemical makers in other parts of the world rely on naphtha, an oil product, as their primary raw material and to a lesser extent on natural gas. Either way, these raw materials are tied to world oil prices. Abundant gas supplies in the U.S. have broken that price linkage with oil — so much so that by energy content, U.S. natural gas is selling for a third of the world price of oil.
While that’s good news for consumers, natural gas producers aren’t as pleased. Some hope to convert their gas into liquids that can be exported to markets around the world.
“You’ve got a North American market that’s screaming for a connection to that higher-priced market overseas,” said Ken Medlock, an energy economics fellow at the James A. Baker III Institute for Public Policy at Rice University.
Searching for markets
Producers such as Dallas’ T. Boone Pickens are seeking new U.S. gas markets like trucking. Pickens has promoted natural gas as an oil substitute and contends that it could significantly reduce U.S. oil imports. He’s attracted lots of congressional support for billions of dollars in incentives for natural gas use.
The chemical industry opposes the measure. Dow Chemical vice president George Biltz warned the Senate Energy Committee this summer that Pickens’ bill could create another natural gas supply squeeze that would erode the chemical industry’s competitive advantage.
The advantage for oil refiners is more complex. Most of the U.S. refining industry relies on a mixture of crude oil types that are globally priced. But about 12 percent of U.S. refinery capacity is in the Central and Western regions, where a surge of oil production from Texas, Oklahoma and North Dakota is filling storage tanks. Canadian oil from the extensive oil sands of Alberta is also stacking up in the same area.
HollyFrontier runs five refineries spread from New Mexico to Wyoming. Last month, the company reported second-quarter earnings were up 191 percent, to $126.1 million, and said the increase was largely because of the price difference between crude oil available in the Midwest and in other parts of the country.
CVR said last month that its petroleum business earnings for the second quarter jumped from $4.6 million in 2010 to $183.5 million. The company’s refining margin for each barrel of oil jumped from $6.70 to $25.49.
Medlock and other analysts said the difference between the price of West Texas Intermediate and other global crude oils such as Britain’s Brent largely reflects a shortfall in pipeline capacity centered in Cushing, Okla.
Several companies are pursuing pipelines from Cushing to the Gulf Coast that would untie that bottleneck over the next two or three years. Meanwhile, oil producers are trying to line up freight trains carrying 100 or more tank cars of crude oil to coastal refining centers.
Jeff Morris, vice chairman of Dallas-based refiner Alon USA, said the crude oil price difference is greater than the cost of that sort of transportation.
Morris said Alon USA’s refinery in Big Spring, Texas, “is doing very, very well” because of the price disparity, while the company’s refineries in California and Louisiana don’t have the same advantage.
Prices aren’t expected to favor U.S. refiners over the long haul. Medlock said oil futures markets are expecting West Texas Intermediate and Brent crude to come back into alignment over the next two years as the Cushing bottleneck eases.
Several factors could affect the relative cheapness of U.S. natural gas. Some state governments and consumers are questioning the practice of hydrofracking over water contamination and air pollution fears.
The federal government is also looking into the industry’s drilling practices.
Dow and other chemical companies worry that government fuel-switching incentives for the transportation and the electric power industries could once again leave supplies tight and raise prices.
Other parts of the world, meanwhile, are racing to catch up with the U.S. lead in drilling technology. China, Poland, Germany and several other countries are exploring tight shale formations for gas.
Swift doesn’t think those efforts will change petroleum economics soon.
“We have a huge, commanding lead in this country [in hydraulic fracturing], and we’ll maintain that for a long time,” he said. “The rest of the world will play catch-up.”