Secular Low Nat Gas Prices – The Golden Age of Chemicals Returns to North America
It’s been fascinating to watch the consequences of the dramatic dislocation of US natural gas prices with both oil and Rest of World gas prices has made the US one of the lowest cost chemical producer in the world, second only to subsidized Middle Eastern associated gas prices. This, after a painful contraction of US chemical capital base during the last decade. And this week, a US oil/chemical entity, Chevron (through heir Chevron Phillips venture), announced plans to build an ethylene cracker in the US Gulf Coast — the first since the 1980s. More to happen here.
Have natural gas fundamentals bottomed? Prices have edged up over the last couple years, although still 70% off mid decade highs, and barely 5% of the international crude price. However, US service costs have risen faster, and one could argue that, despite higher prices, operating returns are even worse than they were at market lows. It has been extremely difficult to arbitrage low US gas prices into higher demand, as infrastructure challenges present a giant barrier to natural gas transportation schemes, and share gains against coal will probably require a significant coal-fired closures and gas fired plant construction. There is some possibility that an energy policy/bill compromise might open up some incentive for natural gas vehicles, but it is too early (or optimistic) to count on rational government participation in this, or most other, energy options.