Robinson presents shale gas implactions for US manufacturing renaissance


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

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Robinson presents shale gas implactions for US manufacturing renaissance

  1. 1. Logistics Engineering Supply Chain Shale Gas Implications for US Manufacturing Renaissance Prepared for Taylor Robinson, President December 5, 2013 Houston, TX 1
  2. 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 2
  3. 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¢ 3
  4. 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 4
  5. 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 5
  6. 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 6
  7. 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 7
  8. 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 8
  9. 9. Ethane is the “Building Blocks” for Manufacturing Feedstock/ Intermediary Finished Products 9
  10. 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 10
  11. 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, ‐ 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 11
  12. 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 12
  13. 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 13
  14. 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 14
  15. 15. Thank You! For follow up questions and information, please contact: Taylor Robinson, President +1 (508) 982-1319 15