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A resurgence in the chemicals industry is in progress, primarily driven by unprecedented growth in U.S. oil and gas production. The discovery of abundant reserves of natural gas trapped within shale rock and new and economical methods of extraction are the primary factors driving such production growth.

New methods of extraction such as horizontal drilling and hydraulic fracturing have provided access to shale reserves which were earlier inaccessible. They have also lowered associated costs, in turn pushing down prices of many key inputs for petrochemical production and ethane in particular. Ethane is used to produce ethylene, the starting point in the production of plastics like polyethylene.

As a result, petrochemical majors like The Dow Chemical Company (DOW - Analyst Report), Exxon Mobil Corporation (XOM - Analyst Report) and CPChem – a joint venture of Chevron Corporation (CVX - Analyst Report) and Phillips 66 (PSX - Analyst Report) – are helping the U.S. chemicals sector grow by setting up facilities to produce ethylene from ethane. Yet, only about three years ago the chemicals industry was projected to decline over the long term.

The likes of Dow Chemical were earlier considering investing in the Middle East and going into production of specialized products. However, the shale powered resurgence has changed the situation quite radically. According to the chief economist of the American Chemistry Council (ACC), the U.S. is now the ideal location for chemical manufacturers.

The ACC says that no fewer than 17 projects have been initiated only to produce ethane from ethylene. The companies setting up these projects are not limited to the U.S. Royal Dutch Shell plc (RDS.A - Analyst Report), LyondellBasell Industries NV(LYB - Analyst Report), Braskem S.A. (BAK - Snapshot Report) of Brazil and Formosa Plastics from Thailand are also looking to set up facilities for ethylene production.

Goldman Sachs Group Inc. (GS - Analyst Report) believes that shale gas investments and production are being driven by the high prices of crude oil worldwide. This has led to the higher investment in the U.S. oil and gas industry. In 2011, exploration and production expenditure amounted to $138 billion in the U.S. compared to $35 billion in China, $10 billion in Russia and $5 billion in Saudi Arabia. Goldman Sachs’ global head of commodity research believes that a tax regime which is favorable has also led to an increase in investments.

The rise in crude prices has subsequently led to an increase in the cost of naptha, which is produced from oil. Naptha accounts for around half of the world’s ethylene production and now costs around $100 a barrel, increasing marginally over last year. On the other hand, the price of ethane has declined from 80 cents from over a year ago to below 23 cents. This is a consequence of the additions to natural gas capacity over the period.     

It is of course generally being accepted that the price of ethane will increase over time. The chief executive of Dow Chemical, Andrew Liveris believes prices will stabilize on the higher side of thirty cents. But investment research group Alembic believes that even if ethane costs between 40-50 cents per gallon, the cost of production of ethylene will be between $400-500 a ton in the U.S. compared to $1,200 a ton in Europe. This has led to companies like Bayer setting up ethane manufacturing facilities in the U.S.

Not just the chemicals sector, the rise in shale gas production has led to positive effects for the entire economy. Prices of electricity have fallen and energy independence has increased. Former U.S. secretaries of energy Bill Richardson and Spencer Abraham believe the U.S. could even emerge as a net exporter of liquefied natural gas by 2016. The U.S. Department of Energy thinks LNG exports could in turn spark off $47 billion in new economic activity for the U.S. by 2020.

Additionally, the use of gas in place of coal to generate power has led to carbon emissions in the U.S. falling to levels last witnessed in 1992 in the first quarter of 2012.  Clearly, the shale gas revolution is here to stay.

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