In the last 10 years - during which shale gas became commercial in the US - its use has grown from near zero to about 20% of the already enormous US gas stream. Shale production in the U.S. has increased from practically nothing in 2000 to more than 13 billion cubic feet per day, or about 30% of the country’s natural-gas supply, heading toward 50% in coming years. Production of shale gas is controversial in some areas because of concerns over the hydraulic fracturing process. Fracking involves injecting water and chemicals underground to generate microscopic cracks in the rock releasing natural gas. Hydraulic fracturing (fracking) and horizontal wells now make it possible to economically produce natural gas from low permeability shale rock, greatly increasing natural gas supplies while reducing prices. These shale rock formations are found primarily in Louisiana, New York, North Dakota, Pennsylvania, Texas, and West Virginia. Their development is helping many downstream businesses grow and create jobs. Although shale deposits are distributed globally since centuries, its popularity and increased use as an alternate source of energy has been possible only because of the Research and Development in USA with its entrepreneurial risk-takers. Other countries are investing funds in the expertise and reserves of US shale gas companies. As more wells are drilled, investment will be seen in exploration, pipelines, storage facilities, cheaper and cleaner electricity leading to more competitive US manufacturing, good jobs, and as dependence on sources of energy from overseas reduces- possibly a better US balance of payments. Ohio’s steel industry has felt the economic impact of the revival of shale production. Production of oil from shale rock formations has enabled North Dakota to more than double its oil production in the last three years. Forecasts indicate the state will rank second only to Texas in oil production soon. Increased gas supplies from the Marcellus Shale have reduced electric power costs to industrial customers from around 6 cents/kilowatt hour to less than 4 cents and also help lower costs of production. energy-intensive manufacturers of chemicals, plastics, and steel are beginning to bring home operations that they once exported, as input costs become cheaper. The shale gas exploration and production boom continues to fuel significant cost advantages for North American commodity chemicals producers as relative costs of natural gas and oil-based feedstocks remain far apart. Fitch sees the increased availability of cheap natural gas liquids (NGL) feedstocks as a critical factor supporting the competitive position of North American commodity chemicals firms by pushing them down the cost curve vs global competitors. Innovation in drilling technology, including widespread use of horizontal drilling and hydraulic fracturing (fracking) has sharply boosted liquids supply from unconventional shales in North America, in turn pressuring prices of North American NGLs. Upstream E&P companies such as Marathon Oil, Occidental Petroleum, and Conoco Phillips have directed more capex to onshore liquids-rich shale plays in USA and Canada, paving the way for further supply growth. For downstream producers of petrochemicals and plastics, access to lower-cost NGL feedstocks has boosted export competitiveness in products such as ethylene, polyethylene (PE), and other derivative products. European producers, in contrast, which rely on heavier crude oil-based feedstocks such as naphtha and vacuum gas oil (VGO), continue to see a feedstock cost disadvantage. Since 2008, light feedstock (ethane) prices as a percentage of Brent crude oil have declined from approximately 43% to 27% at current market prices. In response to these favorable input cost shifts, companies such as Dow Chemical, Chevron, Westlake Chemical, and Nova Chemicals have announced major expansions of North American nameplate petrochemical production capacity, including various ethylene cracker projects. In addition to expansions along the Gulf Coast, Shell Chemical has announced plans to build a facility in West Virginia, near the Marcellus shale in the Appalachians. 'The surge in shale liquids availability has been a game-changing event for downstream chemical producers dependent on inexpensive light feedstocks,' says Mark Sadeghian, Senior Director in Fitch's Corporate Finance group. Unconventional gas resources now account for approximately 25% of North American natural gas supplies, and that share is likely to grow significantly in coming years. The surge in shale gas availability has contributed to a halving of natural gas prices in the U.S. compared with three years ago, when unconventional gas exploration began to accelerate. Despite growing signs of a global slowdown and reduced growth rates in Asian export markets, North American chemical producers may still benefit materially from the shale gas revolution, with the differential between gas and oil-based feedstocks likely to remain at historically wide levels over the near to medium term. Thanks to cheap natural gas, U.S. ethylene plants can now compete with cheaper foreign competition-, Royal Dutch Shell is studying sites for a new ethylene plant in Appalachia; LyondellBasell Industries plans to increase ethylene output at one or both of its Texas plants in Channelview and LaPorte; and Williams Companies will spend up to US$400 mln to expand its Geismar, La., plant. Its relatively low price gives U.S. manufacturers an advantage over many competitors around the world that rely on naphtha, a more expensive, oil-based feedstock. Growth in domestic shale gas production is helping to reduce U.S. natural gas prices and create a more stable supply of natural gas and ethane, as per a report by the American Chemistry Council (ACC). ACC analyzed the impact of a hypothetical, but realistic 25% increase in ethane supply on growth in the petrochemical sector. It found that the increase would generate: * 17,000 new knowledge-intensive, high-paying jobs in the U.S. chemical industry * 395,000 additional jobs outside the chemical industry (165,000 jobs in other industries that are related to the increase in U.S. chemical production and 230,000 jobs from new capital investment by the chemical industry). * US$4.4 bln more in federal, state and local tax revenue, annually ($43.9 billion over 10 years) * A $32.8 billion increase in U.S. chemical production * US$16.2 billion in capital investment by the chemical industry to build new petrochemicaland derivatives capacity * US$132.4 billion in US economic output (US$83.4 bln related to increased chemical production (including additional supplier and induced impacts) plus US$49 bln related to capital investment by the US chemical industry). This report presents the results of the analysis conducted to quantify the economic impact of the additional production of petrochemicals and downstream chemical products stimulated by an increase in ethane availability. With the development of new shale gas resources, the US petrochemical industry is announcing significant expansions of petrochemical capacity, reversing a decade-long decline. The petrochemical industry is unique in that it consumes energy as a raw material in addition to using energy for fuel and power. At a time when the United States is facing persistent high unemployment and the loss of high paying manufacturing jobs, these new resources provide an opportunity for new jobs in the petrochemical sector. The developments in shale gas will engender the wider availability of low cost, domestic energy. Because US petrochemicals predominantly use ethane and other natural gas liquids, the competitiveness of the industry is heavily dependent upon the price of these liquids and US natural gas, as well as the price of competitive feedstocks. As a rough rule of thumb, when the ratio of the price of oil to the price of natural gas is more than 7:1, the competitiveness of Gulf Coast-based petrochemicals and derivatives vis-à-vis other major producing regions is enhanced. In the United States, over 85% of ethylene, for example, is derived from natural gas liquids while in Western Europe over 70% is derived from naphtha, gas oil and other light distillate oil-based products. The price of naphtha, gas oil and other light distillate oil-based products are related to the price of oil, a commodity with prices set by global supply and demand. The price of naphtha (in Western Europe, for example) is highly correlated with the price of oil (Brent). As a result, prices for naphtha will parallel the price for oil. On the other hand, natural gas markets are regional in nature, with the United States and Canada being an integrated regional market. The price of ethane is correlated with US natural gas prices (Henry Hub). As a result, prices for ethane will tend to parallel the price for natural gas. The correlation has weakened in recent years and other explanatory variables such as the prices of alternative feedstocks (like propane, butane, and naphtha) are important. The latter tend to be correlated with the price of oil. The economic effects of new petrochemicals investment in the United States are overwhelmingly positive. Recent breakthroughs in technology have made it productive and profitable to tap into the vast amount of shale gas resources in the United States. Barring ill-conceived policies that restrict access to this supply, further development of our nation’s shale gas resources will lead to a significant expansion in domestic petrochemical capacity. Indeed, a new competitive advantage has already emerged for US petrochemical producers.