Ethylene is Big, but Who Will Benefit?

Inexpensive natural gas is boosting domestic chemical production and everyone wants in on the action.

The shale gas revolution in the US is producing plenty of winners.

Certainly, the companies involved in shale gas production are benefiting. But so too are local and state governments — thanks to new tax revenues and the growth in high-paying jobs — and the domestic manufacturing industry.

In fact, the energy-intensive chemical industry is among the biggest winners, as abundant feedstock supply at low prices provides a competitive advantage for companies with domestic manufacturing capacity. With natural gas prices in the US$4 per thousand cubic feet range in the US, compared to US$13–US$15 in Europe or Asia, domestic chemical manufacturers are enjoying a significant benefit.

For a time, the chemical industry was wary of the shale revolution, convinced that the surge in production was temporary, and later, that liquefied natural gas exports would cause domestic prices to increase.

But those fears have subsided for the most part, and now, the race is on to build or expand new capacity in the US. That’s especially true for important chemical building blocks such as ethylene, which is used in a wide range of plastics. The U.S. Energy Information Administration estimates that there are close to 15 ethylene projects currently planned or proposed for the US, with a total capacity of 10 million metric tons1.

Of course, not all of those are certain to be built. But some industry experts predict that by 2020, the US could have as many as six new world-class ethylene steam crackers online, boosting production to 12–14 million metric tons a year — a 50% increase over current levels of production2.

The interest in these facilities is coming not just from integrated energy majors or chemical giants. Manufacturers of products that contain large amounts of plastic are recognizing the value of producing their own ethylene in the US. Owning a dedicated ethylene plant — delivering such an important component at a low cost — would help any number of consumer product manufacturers compete more effectively on price.

To date, most of the proposed ethylene projects are planned along the U.S. Gulf Coast, where the states of Texas and Louisiana have a long history of permitting and where the industry itself is generally welcomed. The states’ pro-business environment and experience in petrochemicals typically leads to more timely regulatory approvals and an expedited journey from announcement to completion.

But other states — especially those close to major shale plays such as Utica and Marcellus — could benefit as well. Pennsylvania and Ohio, especially, are interested in attracting new manufacturing businesses and the jobs that will follow. Can those states compete with the petrochemicals powerhouses along the Gulf Coast, where a new facility can break ground in two years or less?

The benefits of doing so are clear — high-paying construction jobs and long-term employment once the facility is operational, along with new tax revenue and the opportunity to attract and sustain supporting businesses. Overcoming regulatory obstacles will be critical to these states’ success.

The other major question is whether new market entrants — ones that are more nimble than the big players — can move quickly enough to secure opportunities, either alone or in joint ventures with more experienced partners. Will we see, for example, a consumer products company partner with an infrastructure investor to build a dedicated ethylene facility to supply a steady stream of inexpensive plastics?

The answer to these questions will play out over the next two to three years. But soon, the domestic ethylene market will reach saturation, and those who hesitate will miss out.

States that are interested in luring ethylene producers to build greenfield or expanded facilities need to be aware that the window of opportunity will be open only briefly, and they must move quickly to ensure that they aren’t left behind. And manufacturing companies must do the same.

There is no doubt that the shale revolution is creating substantial value up and down the energy value chain, all the way to end users. But when it comes to ethylene and the domestic chemical market, it remains to be seen who the big winners will be.


The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.