Engineering News

Dow Bets Big on Natural Gas
April 25, 2011

"Just one word . . . plastics."

Sound career advice when the movie "The Graduate" was released in 1967, it wasn't over the past decade of chemical-industry layoffs. Still, were Benjamin Braddock graduating today, he just might consider it.

Dow Chemical has just announced an expansion of its U.S. capacity to produce ethylene, a bulk chemical used to make plastics and other items. It follows similar plans from Westlake Chemical and Taiwan's Formosa Plastics.

The very thing that killed the U.S. chemicals industry is now reviving it: natural gas. Ethane, derived from natural-gas liquids, or NGLs, is a primary ingredient for ethylene. When the price of gas -- and by extension, NGLs -- spiked in the middle of the past decade, mostly because of falling production, U.S. chemicals producers became uncompetitive and mothballed factories.

Abundant shale gas has changed that, sending gas prices lower. NGLs have followed. They are now much cheaper than naphtha, an oil-derived alternative to ethane. With oil prices so strong, the highest-cost naphtha-based plants produce ethylene for about $1,200 a ton, says Hassan Ahmed of Alembic Global Advisors. Ethane-based U.S. producers' costs are about half that. That should mean rising profit and stock prices for Dow and Westlake in the next couple years. Their expansion plans also should benefit NGL processors such as Enterprise Products Partners, says Darren Horowitz of Raymond James.

Above all, Dow's decision demonstrates increasing faith that shale drilling has stabilized gas prices in the longer term. A U.S. manufacturing success story based on energy prices? It could happen.

Source: The Wall Street Journal

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