US shale boom shakes Britain’s $33B chemicals industry

By Nidaa Bakhsh
Bloomberg News

The U.S. shale gas boom is reverberating across Britain’s chemical industry, the nation’s second-largest export earner.

The 20-billion pound ($33 billion) chemicals business is losing sales to lower-cost competitors such as in the U.S., where new supplies from domestic shale drilling have reduced prices for natural gas, the fuel used in making chemicals such as plastics. By 2020 the chemicals industry in the U.S. will be 21 percent larger than in Europe, from near parity now, according to the American Chemistry Council.

The price of gas, also used to make electricity, in the past month averaged about two-thirds less in the U.S. than in Britain, the steepest discount in five years. That’s giving Americans an edge over U.K. chemicals makers such as Ineos Group AG, the largest. BASF SE,India’s Tata Chemicals Ltd. and Lotte Chemical Corp. of South Korea shut plants in Britain this year.

The U.K. chemicals industry has responded by joining the oil lobby in pushing the government to clear obstacles for drilling shale rock. The threat to chemicals, among the most energy-intensive industries, shows how the widening cost gap risks inflicting further pain on a U.K. industrial sector that’s yet to recover from the financial crisis.

“The chemical industry’s ability to underpin sustained growth in U.K. manufacturing is increasingly determined by the need for competitive and secure supplies of energy and feedstocks,” said Tom Crotty, a director at Ineos. “The safe exploitation of unconventional gas is central to that supply.”

Gas Suppliers

Essar Energy Plc, a unit of Mumbai-based Essar Group, is in talks with shale gas suppliers in the U.K., the company has said. It uses gas to power processing plants and as feedstock for its Stanlow refinery and chemicals site in the northwest.

The U.K.’s Chemical Industry Association has warned the government that electricity is expected to make up 70 percent of costs by 2020, from as much as 60 percent currently, risking competitiveness, and has urged lawmakers to speed up the development of shale. The group wrote to Chancellor of the Exchequer George Osborne to “broaden and deepen” measures and to close the gap with U.S. operators.

A study by the British Geological Survey found fields in northern England’s Bowland Basin may have enough shale gas to meet demand for almost 50 years.

While the U.K. government is encouraging shale drilling through lower taxes as reserves in the North Sea decline and imports rise, drilling has barely started, stymied by planning regulation and environmental pressure groups, who say exploration can contaminate water.

Soda Ash

Tata will close a soda ash and calcium chloride plant, the company said on Dec. 9. Lotte said on Dec. 3 it will shut a purified terephthalic, or PTA, plant, while Germany’s BASF said in October it will close its Paisley pigments facility.

BASF, the world’s largest chemicals maker, said America’s shale boom will be a challenge for Europe.

“In the long term, this would result in a relocation of energy-intensive companies with a knock-on effect for the subsequent value chains,” Chief Executive Officer Kurt Bock said in October.

The U.S. has seen $100 billion of new investments in chemical manufacturing as costs are as low as in the Middle East, Steve Elliott, head of the U.K.’s CIA, said by phone on Dec. 3.

Dow Chemical Co., which had been expanding in the Middle East, is returning home with plans to invest $4 billion to increase capacity in the U.S. Celanese Corp. announced this week it was closing plants in France and Spain and is continuing with a plan to build a factory that makes methanol from gas in Texas.

Saudi Basic Industries Corp., also known as Sabic, is seeking a partner to form a chemicals venture in the U.S. to benefit from low-cost shale gas supply, CEO Mohamed Al-Mady said last month in Dubai.

Jobs Threatened

Ineos’s Grangemouth site in Scotland faced closure this year, after months of losses, threatening more than 800 jobs before a deal was made with workers to save the plant.

The company, based in Rolle, Switzerland, will be importing ethane feedstock from the U.S. and is building an import terminal to handle the increased flows. It will close a unit at the site by 2015 to be able to operate a newer plant at full capacity while expanding at its site inNorway.

The U.K.’s chemicals industry, grouped with pharmaceuticals, represents an eighth of all manufacturing and is the fourth-largest after food, engineering and transport, according to the chemicalS industry. Sales for the sector amounted to 55 billion pounds in 2011, generating 20 billion pounds in added value for gross domestic product, it said. It was the largest export earner last year after motor vehicles and parts, according to government data.

Europe needs to catch up with the U.S. and Asia in unconventional exploration, Sabic’s Al-Mady said in a presentation in October.

“This is necessary to ensure that it can regain a cost leadership position to adequately serve its home market and support the entire advanced manufacturing supply chain in Europe,” he said.