Monday, June 04, 2012

Another Example of How Abundant Shale Gas is Helping Spark a U.S. Manufacturing Renaissance

Fuel Fix -- "Exxon Mobil Corp. is planning a multibillion-dollar petrochemical expansion at its Baytown, Texas complex to take advantage of the country’s increasing supplies of natural gas.

“The proposed investment reflects Exxon Mobil’s continued confidence in the natural gas-driven revitalization of the U.S. chemical industry,” the company said in a statement.
The project would include a new ethane unit, which would provide ethylene feedstock for two new polyethylene production lines at the company’s nearby Mont Belvieu plastics plant. Polyethylene is used in a wide variety of consumer and industrial products.

Exxon Mobil joins other petrochemicals producers that have announced natural gas-fueled expansion plans in recent months. For example, Dow Chemical is expanding in Freeport and Chevron Phillips is building a new chemical plant in Baytown.

In its statement, Exxon Mobil also said the expansion could lead to significantly increased exports. “We believe the North American natural gas resource is abundant and can support both domestic energy needs as well as exports to the global market.”

The company says the project would create about 10,000 construction jobs. About 350 permanent jobs would be added to a workforce of about 6,500 full-time and contractor jobs in the Baytown area."

MP: Another example of the shale-gas-driven renaissance of energy-intensive American manufacturing.  In a March Merrill-Lynch report titled "An Industrial Revolution," the authors
listed 68 new major industrial investment projects totaling more than $200 billion that have been announced or started just since 2011 in a wide variety of manufacturing industries like petrochemicals, chemicals, steel, refining, autos, heavy equipment, aerospace, plastics and ethylene. Add Exxon Mobil's latest announcement to the growing list of planned industrial expansions in the U.S. as a result of the shale revolution.   

27 Comments:

At 6/04/2012 4:57 PM, Blogger Mark J. Perry said...

I guess Exxon Mobil didn't have access to VangeIV's inside information about a shale bubble before it decided to invest billions of dollars expanding to take advantange of America's abundant natural gas. If only Exxon had contacted VangeIV and hired him as a consultant, it might not have made this questionable investment decision.

 
At 6/04/2012 5:16 PM, Blogger Jet Beagle said...

VangeIV,

Not sure if you use snail-mail, but here's a mailing address:

Rex Tillerson, CEO
Exxon Mobil Corporation
5959 Las Colinas Blvd.
Irving, TX 75039-2298

I don't have his direct email address, but perhaps youca n use this link to reach him faster:

ExxonMobil Contact Us web page

 
At 6/04/2012 6:51 PM, Blogger Buddy R Pacifico said...

" Polyethylene is used in a wide variety of consumer and industrial products."

Obviously Exxon is creating bubble, after bubble after another bubble from natural gas liquids.

Professor, maybe VangelV is referring to bubble wrap, produced from the abundance of shale produced ethane. :>)

 
At 6/04/2012 6:51 PM, Blogger VangelV said...

MP: Another example of the shale-gas-driven renaissance of energy-intensive American manufacturing. In a March Merrill-Lynch report titled "An Industrial Revolution," the authors
listed 68 new major industrial investment projects totaling more than $200 billion that have been announced or started just since 2011 in a wide variety of manufacturing industries like petrochemicals, chemicals, steel, refining, autos, heavy equipment, aerospace, plastics and ethylene. Add Exxon Mobil's latest announcement to the growing list of planned industrial expansions in the U.S. as a result of the shale revolution.


What a joke. The shale gas producers are dying on the vine and you are hyping up reports that will never materialize. You really think that you can have sustainable cheap natural gas from drilling tight gas and oil in shale formations? Didn't you pay attention to the production profile in Montana? Or to the actual production data from the various shale formations? Haven't you been paying attention to the debt explosion and to the negative cash flows in the sector? Or listened to CEOs talk about funding gaps that will require further borrowing or asset sales?

No, because if you had you would not be hyping up projects that have lost so much money or projecting that companies could continue to produce natural gas at a price that is half the production cost for long enough to allow the investments in facilities that depend on cheap gas to recoup their investments.

You seem to have missed both the real performance of the industry and the fault in your logic. You can't have both cheap gas and a huge spike in demand.

 
At 6/04/2012 6:56 PM, Blogger VangelV said...


Obviously Exxon is creating bubble, after bubble after another bubble from natural gas liquids.


No. Exxon is trying to hide its reserve declines. Pretending that new investment in chemical plants can make its shale reserves viable is a good start, particularly when it can pick an EUR that is three times what the production data shows is prudent and it can use a 6:1 energy equivalency 'boe' conversion factor instead of the 30:1 price equivalency conversion factor.

Professor, maybe VangelV is referring to bubble wrap, produced from the abundance of shale produced ethane. :>)

The sarcasm aside I suggest how SEC rules allow shale reserves to be overestimated and the wrong boe conversions to be used. If shale gas were economic the producers would not have to keep adding debt to stay in business and would not be looking for a greater fool to sell their leases to. I have already explained how a conventional oil producer with depleting reserves needs to buy shale reserves to hide that depletion.

 
At 6/04/2012 6:57 PM, Blogger VangelV said...

I forgot to add this. What Tillerson should be doing is to look to methane hydrate deposits or to be purchasing coal, uranium, or thorium deposits while the price is still cheap.

 
At 6/04/2012 7:30 PM, Blogger Ankit Kumar said...

For various news on shale Gas please access

http://greenmela.com/Green/Search_GreenMela.aspx?text=shale%20gas

 
At 6/04/2012 10:39 PM, Blogger Mark J. Perry said...

It's a shame that none of those 68 companies listed by Merrill Lyncy contacted VangeIV before deciding to invest billions in new manufacturing facilities to take advantage of abundant natural gas. They are probably making a big mistake, and their accountants, economists and analysts obviously aren't aware of VangeIV's inside information of the natural gas hype/scam.

 
At 6/05/2012 7:08 AM, Blogger marmico said...

As if all the total planned additional ethylene crackers are going to be built.

Where does all this additional manufacturing capacity show up in construction spending? It doesn't even though the alleged shale gale is in its 4th year. So what's the explanation? Industry hyperbole at its finest.

 
At 6/05/2012 8:13 AM, Blogger Jon Murphy said...

Marmico-

I think you are looking at the wrong graph to measure this. You are looking at total manufacturing spending, which is public and private. Given the severe drops in public spending on construction (which includes private companies funded with government dollars), it would present a different picture than what is happening in the private sector.

I suggest checking out this graph and I think you'll see the increase in spending.

 
At 6/05/2012 9:15 AM, Blogger morganovich said...

the renaissance may not be as strong as advertised:

"New orders for U.S. factory goods fell in April for the third time in four months as demand slipped for everything from cars and machinery to computers, the latest worrisome sign for the economic recovery.

The Commerce Department said on Monday orders for manufactured goods dropped 0.6 percent during the month. The government also revised its estimate for new orders in March to show a steeper decline.

Economists had forecast orders rising 0.2 percent in April.

The Commerce Department report showed new orders for motor vehicles and parts fell 0.5 percent in April.

An increase in new orders for civilian aircraft buoyed the overall transportation sector.

Outside transportation, orders dropped 1.1 percent, with machinery down 2.9 percent and orders for computers and electronics off by 0.8 percent.

Orders for non-defense capital goods excluding aircraft — seen as a measure of business confidence and spending plans — dipped 2.1 percent in April.

that last number is a particularly bad one and seems quite contrary to notions that manufacturing is running with it's tail high.

 
At 6/05/2012 9:31 AM, Blogger Jon Murphy said...

True, April's Manufacturing New Orders was...less than thrilling, but not completely surprising, I should think. This year's seasonal rise is the weakest since 2008 (although still within normal).

That being said, annual New Orders are about 10% higher than last year and are about 1% below the pre-recession peak. We'll have to see how the data comes the next few months, but I don't think April needs to be too much of a concern. Of course, I'd be really happy once that Nondefense number starts creeping back up.

 
At 6/05/2012 9:44 AM, Blogger VangelV said...

It's a shame that none of those 68 companies listed by Merrill Lyncy contacted VangeIV before deciding to invest billions in new manufacturing facilities to take advantage of abundant natural gas. They are probably making a big mistake, and their accountants, economists and analysts obviously aren't aware of VangeIV's inside information of the natural gas hype/scam.

There is no 'inside' information. It is in the 10-Ks and on the conference calls. And you could have said the same about the homebuilders and the dot com companies. They invested billions and wound up eating the losses or going out of business.

The bottom line is simple. Shale gas is costing $7.50 or more to produce but is selling for less than $3 at the wellhead. Given the depletion rates, the more shale gas you produce the more you have to drill just to stay even. But the drillers cannot keep up given the crews that they have working and need to expand. That means increased costs and more capital.

Now you could argue that the shale producers can make money because increased demand will mean higher prices. But that does not work for companies who invested in plant and equipment based on sub $5 gas. Bottom line is that your logic is very faulty but you refuse to address it and refer to plans announced by companies that will probably downsize during an economic contraction instead of allocate capital to new projects.

 
At 6/05/2012 9:49 AM, Blogger marmico said...

I think you'll see the increase in spending

Apples to apples. What difference? Manufacturing construction is 70% of the prior cycle peak in this the 4th year of the shale gale.

 
At 6/05/2012 9:50 AM, Blogger VangelV said...

Where does all this additional manufacturing capacity show up in construction spending? It doesn't even though the alleged shale gale is in its 4th year. So what's the explanation? Industry hyperbole at its finest.

I have engineering friends who work for SNC and Hatch and usually are up to speed on actual spending increases. They don't see what Mark is claiming and are more worried about current projects being cancelled than about how to keep up with new demand. This does not mean that increased demand would not be a problem for them. They are already having a hard time finding qualified people to do the jobs that they have. With the tar sands expansion and a few mines being built here and there resources are already stretched thin and cost overruns are high. Their biggest problem is the supply chain. The manufacturers of specialized equipment will have a hard time meeting new demand because so many of the older workers are now retiring. This is why so many projects have been behind schedule and cost far more than planned.

What Mark is missing is the fact that the low interest rates do not mean more capital. Many of the plans being made depend on manpower, equipment and raw materials being available to complete them. But those are not available and if you get a spike in investment expect to see most of it written off as being uneconomic.

 
At 6/05/2012 9:58 AM, Blogger Jon Murphy said...

Manufacturing construction is 70% of the prior cycle peak in this the 4th year of the shale gale.

True, but you are talking about just one sector of manufacturing building. Manufacturing buildings include: food, beverage, tobacco, textile, apparel, leather, furniture, wood, paper, print, publishing, petroleum, coal, chemical, plastic, rubber, nonmetallic minerals, primary metals, fabricated metals, machinery, computer, electrical, transport equipment, jewelry, toys, sporting goods, etc.

 
At 6/05/2012 9:59 AM, Blogger Jet Beagle said...

vangeiv: " And you could have said the same about the homebuilders and the dot com companies. They invested billions and wound up eating the losses or going out of business. "

Not all the dot.coms were successful. But these certainly were:

Amazon
Google
Yahoo
Paypal
Skype
Expedia
Orbitz
MSN
eBay
Twitter
LinkedIn

Thousands - perhaps tens of thousands - of other internet companies have achieved fairly big success.

The internet bubble was real. But the billions of dollars earned by the survivors is also real.

 
At 6/05/2012 10:03 AM, Blogger VangelV said...

That being said, annual New Orders are about 10% higher than last year and are about 1% below the pre-recession peak. We'll have to see how the data comes the next few months, but I don't think April needs to be too much of a concern. Of course, I'd be really happy once that Nondefense number starts creeping back up.

I am sorry but the optimistic argument fails the smell test both in theory and in practice.

The practice side argument is clear. It costs a lot more to produce the natural gas than the gas is selling on the market. This means that you either have the companies go out of business, which means a lot less gas, or much higher prices paid for the input in all those chemical companies. (Keep in mind that the, costs will improve faces the depletion problem that Mark has ignored.) All you need to do is to look at the balance sheets and cash flow statements of the shale producers.

coninued below....

 
At 6/05/2012 10:04 AM, Blogger VangelV said...

continued from above...

That being said, annual New Orders....

The theory argument is just as clear:

The single best analogy for the Austrian business-cycle theory comes from Mises himself, and I will take some creative liberties with his original exposition for our purposes. Imagine a master builder. He has at his disposal the labor of many workers, as well as a collection of bricks, shingles, panes of glass, and so on. Mises then asks us to suppose that the subordinate in charge of counting the available supply of bricks inflates the number by 10 percent. Thus the master builder draws up the blueprint for the house, erroneously thinking he has more bricks to work with than he really does. Because of this error, he embarks on a building plan that is unsustainable; there are not enough bricks to finish the house as it is designed on the blueprint.

Now obviously, the sooner the builder learns of the mistake, the better. If he finds out immediately after the excavators have dug the hole for the foundation, the waste will consist merely of the extra labor and gasoline needed to use the earth movers to put back some of the dirt and make the hole smaller.


But suppose the builder doesn't find out until after he has already laid the foundation and erected the frame of the whole house. Now of course the waste is much worse. Given the materials at his disposal—and we assume that he can't go onto the market and buy more—the builder must now make some very tough choices. He probably will decide to leave the foundation as is, even though it is bigger than he would have designed it, had he known the true number of bricks from the beginning. He will have to redo the blueprints, naturally, and scale down the size of the house, though keeping the same size foundation. Some of the lumber already used might be salvageable, though some will have to be torn down and discarded. And of course, the finished house will be inferior in quality to the house the builder would have designed originally, had he known the true amount of his various supplies.

Now consider the scenario where the subordinates realize their mistake, but the master builder has not yet discovered it. They decide to deceive him as long as possible, by using tarps to cover up gaping holes in the stockpile of remaining bricks. "After all," they convince themselves, "look at how happy everyone on the site is, coming to work in the morning and building this fine house! Imagine how furious the master would be, if he learned that we don't have as many bricks as the blueprint calls for! Why, whole teams of the construction crew might be thrown out of work if that happened! He's got three guys alone working on the paneling for the third-floor balcony, but there might not even be a third floor in the revised plan. So let's just keep the good times going as long as possible, lest we end up with a bunch of guys standing around with nothing to do."

In Mises's story, it is clear that the builder's error is not overinvestment, but malinvestment, of resources. It isn't a question of how many bricks should be used on the house as a whole. Rather, the mistake is that the builder allocated too many bricks to the first floor. With each subsequent brick that his men put in place, following the original (and flawed) blueprint, the options for salvaging the project become narrower and narrower. In the worst-case scenario, the builder would only learn of the inflated brick count the moment he had laid the last brick—at this point, no subterfuge by his subordinates could deny the fact that they were physically out of bricks. And at that horrible point, the builder would have to survey the remaining materials littering the yard, hoping to be able to at least seal the unfinished house to keep the rain out. Whatever the outcome, the builder would have sorely preferred learning of the brick shortage much earlier.

 
At 6/05/2012 10:06 AM, Blogger VangelV said...

Not all the dot.coms were successful. But these certainly were:....

True. These companies had good business models that allowed them to sell for more than their costs. That is not the case for the shale sector companies where it costs around $7.50 to produce gas that is selling for less than $3.00.

 
At 6/05/2012 11:13 AM, Blogger morganovich said...

jon-

again, i think you are using such a long lag in your data that you have missed a turn in the economy.

the april orders were up 2.2% from a year ago and well off peak levels recently and sequentially down for the second month in a row.

a 2.2% nominal annual increase is a decline in real terms.

this series has really gone off a cliff in terms of growth in the last couple months (as has air freight at ohare fwiw)

using a ttm average is useful in series with long, stable trends, but ti will be very late to notice inflection points.

deflated at CPI, the revised q1 GDP numbers are essentially 0.

we have seen it in jobs, orders, pmi, etc. somehting nasty has happened in the last couple months.

 
At 6/05/2012 11:16 AM, Blogger Jon Murphy said...

we have seen it in jobs, orders, pmi, etc. somehting nasty has happened in the last couple months.

Yes. We've had a shit Spring. But I'm not so sure it will turn into an economic slowdown.

 
At 6/05/2012 11:18 AM, Blogger morganovich said...

mark and jet-

i don't really have a dog in this peak oil fight and don't have enough info to really weigh in meaningfully, but i am an avid student of bubbles.

one thing worth considering: oil and gas companies may be trying to maximize short term market cap and giving the market what it demands (reported reserves, short term production, etc) as opposed to trying to maximize long or even medium term profit.

if you can capitalize costs and recognize revs up front, lots of really bad investments can look great for a year or so.

i absolutely lack the knowledge to tell you if this is happening, but it is a plausible theory.

this would certainly not be the first industry to behave that way around a bubble.

just some food for thought.

 
At 6/05/2012 11:21 AM, Blogger morganovich said...

"But I'm not so sure it will turn into an economic slowdown."

i think it may have already done so.

deflate GDP at anything higher than CPI and q1 was a contraction. granted, it's not the only (or even the best) measure of economic output and well being, but i am seeing a lot more companies struggling all of a sudden.

june earnings are unlikely to be pretty.

 
At 6/05/2012 11:26 AM, Blogger Jon Murphy said...

Regarding the PMI in May:

The PMI was 53.5, signaling expansion in manufacturing.

The New Orders Component was 60.1, the highest it's been in over a year.

The Production component was 55.6.

Employment was 56.9

Exports were 53.5

Imports 53.5

Deliveries were virtually unchanged.

Really, the only bad numbers were inventories, prices, and backlog.


You and I will have to have a looooooong conversation another time. I think we've wasted enough of the good Professor's time with our butting heads :-P

 
At 6/05/2012 3:35 PM, Blogger VangelV said...

one thing worth considering: oil and gas companies may be trying to maximize short term market cap and giving the market what it demands (reported reserves, short term production, etc) as opposed to trying to maximize long or even medium term profit.

if you can capitalize costs and recognize revs up front, lots of really bad investments can look great for a year or so.


You might be interested in this commentary on the subject.

I wonder what Mark will make from this change in production levels just as all those new projects that are supposed to take advantage of all that gas start to hit the drawing board.

 
At 6/05/2012 10:25 PM, Blogger Ron H. said...

Jon M: "You and I will have to have a looooooong conversation another time. I think we've wasted enough of the good Professor's time with our butting heads :-P"

Keep in mind that others readers benefit from your discussions, and I don't think the Prof minds.

You may have noticed many long conversations here at CD with way less useful content than those between you and morganovich. :)

(I plead guilty, your Honor)

Comments are easy enough to skip, for those who aren't interested.

 

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