Fresh thinking for decision makersCONTENTROLAND BERGER STRATEGY CONSULTANTSAUGUST 2013The shale gas phenom- enon | Its potential to turn the global energy market on its head | Plus revitalizing the US economy | By reanimating the manu- facturing sectorWith the potential for self- sufficiency in energy, the US oppor- tunities are unlimited. This could be the American century.Jack Welch, former General Electric Co. CEO in a recent interview with Roland Bergers think: act MAGAZINE. Read more at: www.think-act.com/blogGermanyTurkey UkraineNorway FrancePoland Brazil Algeria Libya Canada South Africa Mexico Argentina USAChinaSource: IATECHNICALLY RECOVERABLE SHALE GAS RESERVES WORLDWIDEUS NATURAL GAS PRODUCTION20505050201265352000982Source: IA1,2758627746814853882902262311871808342158in trillion cubic feet (tcf)“ “Shale gas production as % of total natural gas productionCONTENT Shale gas phenomenonShale gas - natural gas trapped within shale rock formations - has the potential to boost the U.S. economy and give it a competitive advantage for decades. Some experts believe it could allow US companies (or foreign companies) to possibly bring more manufacturing operations back to the United States and to expand existing manufacturing opportunities in key industries.INTRODUCTION it is used as a raw material in the production of the most widely used plastics in the world, polyethylene (PE), and many other important deriva- tives like polyvinyl chloride (PVC) which is used in pipes and fittings. Ethylene can be produ- ced by cracking either natural gas or crude oil. The fall in natural gas prices has made it the preferred raw material source for ethylene production in the U.S. and consequently, the costs of production of ethylene have gone down.For players who are integrated downstream, the low-cost produced ethylene (which we saw above) will lead to production cost advantages in downstream products such as polyethylene and polyvinyl chloride as well. For instance, for linear low density polyethylene (LLDPE), a type of polyethylene, we see that the cost of production in the U.S. is significantly lower than in China and Europe.Example 2: Propylene & PDH Plant Investment. Propylene has been established as a major component of the global olefins business, second only to ethylene. Propylene is produced EuropeMiddle East140United States820430China1,1701,310using two processes either on-purpose using propane or as a by-product of naphtha crack- ing. With the advent of shale gas, there has been a shift in feedstock from naphtha to ethane, resulting in a tight propylene market. However, there has also been an increase in propane supply. This has driven the prices to a three year low. Given the low raw material prices, com- panies are increasing investment in the propane route (propane dehydrogenation or PDH). Here is some evidence that shows investments in PDH plants: Enterprise Products plans to build a 750,000 tonne/year PDH plant. Dow Chemical plans to build a 750,000 tonne/year plant at its Freeport complex in Texas Formosa Plastics plans to build a 600,000 tonne/year plant at its Point Comfort site in Texas. Example 3: Steel & Agriculture. Energy-intensive industries in the U.S., such as steel and agriculture, which were not globally competitive a few years ago will now become competitive because of low-price natural gas. Therefore, we are seeing investments being made by steel giants like ArcelorMittal and Nucor. Nucor plans to start a USD 750 million steel plant in Louisiana in 2013 that uses a new natural gas-fueled technology called Direct Reduced Iron to produce steel at a lower cost in its electric arc furnaces. Other steel companies such as Pittsburgh-based U.S. Steel Corp. are considering increasing their use of natural gas in operations as well.Example 4: Fertilizer Production. Even fertilizer production, which was in a state of decline in the US, is now in a period of transition. With no capacity being announced in the US in the last 20 years, suddenly there is an impetus among the producers to invest in the US. Companies like ThyssenKrupp Uhde have several major projects underway as part of this new wave of development in the U.S. Example 5: Electricity Generation. The EIA forecasts that all of the fossil fuel growth for electricity generation will be from natural gas and renewables. Approximately 50% of elec- tricity in the U.S. will be generated by both natural gas and renewables by 2040 (up from less than 40% in 2011). Example 6: Automotive & Transportation. Natural gas is not particularly a transportation fuel until you get to high levels of price discounting. Simple calculations suggest that MBTU times 7 gets to an implied oil price. It suggests that compressed natural gas and liquefied natural gas could reduce the cost of energy and electricity to the point that the US can drama- tically expand its production, sales and use of electric cars as a replacem