Interim Report on Reshoring of the American Chemical Industry

For the last five years, I’ve been enthusiastic about the reshoring of the American chemical industry, particularly along the rivers in the Midwest (Ohio, Mississippi, etc.). The driving force is the low-cost energy being produced by the horizontal drilling technology commonly called “fracing” or “fracking.”

When asked me for an update on the current status of reshoring, I thought it might be an interesting opportunity for a “Made in America” storyline. I anticipated a report of many chemical plants, including laboratories that would be starting production in the 2017–2022 time frame.

So, I started asking questions about new plants. So far, I have found several expansions of existing plants, but only one grass-roots startup. This is Shell’s ethylene cracker near Pittsburgh, PA.

What is going on? First, I learned that major new plants usually require 10 years to reach production stage after the project is announced. The first five years are consumed in permitting and site qualification. Design and engineering take two more years, and construction three. Thus, the anticipated five-year window starting in 2013 was/is unrealistically short.

However, there is a more ominous problem. It seems that the fracking boom may be short-lived and economically unsustainable. Chemical plants usually have a design life of 20 years or more. An article in The New York Times shows that the fracking boom is liable to be short-lived.

The problem is that the fracking is not economically viable for the long-term. Wells lose about 85% of their production capacity during the first year of production. This short productivity cycle makes it impossible to recover the drilling costs. “Frackers haven’t proven that they can make money,” says author Bethany McLean. The shale gas industry has a very bad history: money goes in and never comes out. The 60 largest fracking firms are not generating enough cash from their operations to cover their operating and capital expenses. Of the top 20 fracking companies, only five generated more cash than they spent in Q1 of 2018. The other 15 had negative cash flow.

McLean goes on to say that the fracking boom is only sustainable by the extraordinary low cost of capital after the economic meltdown of 2008. In normal interest times, fracking would not be profitable or sustainable. But, since interest rates were low (and are still), cash-rich investors searched for higher-paying opportunities. The cash-rich invested in fracking since the operations penciled out using optimistic legacy prices for natural gas and condensate facilitated by infinitesimal costs of borrowed capital. The rapid decline in production per well was not anticipated.

I suspect that the major petrochemical firms now see the shale gas boom as a short-term economic bubble. They are quick to take advantage of low prices in existing plants, but new plants are built for the long-term (20+ years). Their business planning departments are very shrewd: they foresee the problem coming in 10 years or so when well drilling is not the most glamorous game in town. Thus, they will probably favor site selection near major sources of energy produced using conventional technology.

Robert L. Stevenson, Ph.D., is Editor Emeritus, American Laboratory/Labcompare; e-mail: [email protected]

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