What's next?

Petrochemical industry, state look for answer to dire natural gas dilemma

By Sam Barnes

Yes, it's really that bad.

Demand for clean-burning fuel has increased considerably, while supply has declined. That means natural gas prices have shot into the stratosphere, damaging the petrochemical industry's ability to compete on a global scale.

Industry and state officials have been studying solutions to the problem, and terms such as "liquefied natural gas," "industrial clustering" and "modernization incentives" have dominated headlines and conversations.

"Over the years, the nation's policy has been to encourage the use of natural gas but to discourage exploration," said Dan Borne, president of the Louisiana Chemical Association of Baton Rouge. "Many plants were built on the economics of gas less than $3 per MMBtu (million British thermal units). Now, gas prices are $5 and $6.

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"Unless the government intervenes more industry will go overseas. Trinidad, Russia and other areas of the world have very inexpensive natural gas. A consistent environment of $6 gas or higher will effectively restrict or even eliminate a lot of future construction at petrochemical plants in Louisiana."

The chemical and fertilizer industries, the most dependent on the fuel, are the hardest hit, and LSU economist Loren Scott said the trend is expected to continue into 2005.

"Ammonia, ethanol and ethane-based ethylene are chemicals that are the most sensitive to high natural gas prices," Scott said. "The national recession hit sales in this sector very hard. It also weakened considerably the price of chemical products."

High natural gas prices not only raised operating costs but prompted several area chemical owners to lay off employees or close their facilities temporarily, partially or completely. DSM Elastomers and CF Industries have shuttered their plants, while Formosa Plastics, ExxonMobil, BASF and PSC Nitrogen have plans to lay off employees.

Mike Taylor, director of Petrochemical Refining & Environmental Technology Cluster Development for Louisiana Economic Development, said two factors have converged to create the current environment.

"Field reserves are declining while environmental laws are requiring we use more natural gas," Taylor added. "To take up the slack natural gas is being shipped from other countries, but that's not a very cost-effective solution."

Taylor and Borne agreed that tapping protected domestic gas reserves, such as gas pockets in the Rocky Mountains, would have the biggest impact on reducing natural gas prices.

"That would greatly improve the supply side of the equation," Taylor said.

Another possible remedy is the development of domestic processing facilities for liquefied natural gas, a byproduct of offshore oil drilling operations. The gas used to be "flared," or burned off, but new technology allows companies to capture the gas for processing.

LNG is natural gas that has been cooled to below minus 260 degrees Fahrenheit and condensed into a liquid, which allows it to be shipped in cryogenic tankers from remote locations to markets where it is needed. LNG is unloaded and stored at receiving terminals until it can be vaporized back into natural gas and moved via pipeline to customers.

Several companies are considering building LNG processing plants in Louisiana.

Most recently, Sempra Energy announced plans to build a new $700 million LNG receiving terminal near Lake Charles. The Federal Energy Regulatory Commission authorized the project in October, making it the first new LNG facility to be constructed in the United States in more than two decades.

The project is scheduled to begin construction in the first quarter of 2004 with startup in 2007.

"These developments allow us to concentrate on completing agreements with overseas natural gas suppliers who wish to bring the popular fossil fuel to the shores of North America," said Donald E. Felsinger, group president of Sempra Energy Global Enterprises, the umbrella for Sempra Energy's growth businesses.

"Sempra Energy stands alone as the first company to successfully acquire authorization from the federal regulatory commissions of the United States and Mexico for the construction of two new North American LNG facilities - Cameron LNG and Energia Costa Azul in Baja California, Mexico."

Cameron LNG will have the capacity to process up to 1.5 billion cu. ft. per day of natural gas. During peak construction the project will employ more than 800 workers and upon completion will have 50 to 60 full-time employees.
LED's Taylor said other companies are considering similar projects in Louisiana.

"We're talking with one owner about another possible LNG plant in the Lake Charles area," he added. "We're also working with Chevron to develop a Port Pelican deepwater LNG terminal and another owner to build an LNG facility at the Main Pass of the Mississippi River." ExxonMobil is looking to build its own LNG terminal somewhere along the Gulf Coast.

Taylor said that while the LNG plants will be good for the Louisiana construction industry, they will only minimally alleviate the natural gas problem.

"LNG supplies less than 1 percent of the nation's gas needs, therefore it is not the answer in itself," he added.

LCA's Borne said despite current woes Louisiana remains an attractive location for the petrochemical industry.

"We have an industry here because we have been blessed by both geography and geology," Borne said. "Sulfur, oil, gas and the Mississippi River continue to be big attractions.

"If you look at Louisiana's manufacturing sector, the chemical industry adds more value to the manufacturing sector than any other single component."

But for now, engineering firms say that significant expansion plans by chemical owners are at least one to two years away. Owners have also delayed general maintenance as much as possible - another blow to industrial construction activity.

"I'm afraid we have let the natural gas genie get away from us," Borne said. "I'm afraid we have written a script for disaster for the American economy."

Other possible solutions. LED is looking to industrial clustering and state-sponsored incentives for plant modernization as additional remedies.

"Clustering" consists of an anchor tenant surrounded by a group of its suppliers.

"The best current example is Proctor & Gamble of Pineville," Taylor said. "They're investing $160 million in an expansion so they can manufacture liquid detergents. To manufacture detergent you need bottles, so the bottle manufacturer is locating across the street. You need a company to pre-blend the detergent, so that company is also locating nearby.

"The closer they get to the anchor tenant the better all of their economies and bottom lines are, and the more globally competitive they become." Cost savings are realized primarily through reduced transportation costs.

To encourage clustering, LED uses the state's general fund to finance projects that enhance infrastructure around potential sites, including sewer, water and road improvements.

Another important LED initiative is the retention and modernization bill that was introduced and tabled during the Louisiana Legislature's last session. The bill, which will be reintroduced during the next session in January, would allow LED to provide tax incentives to owners that modernize their facilities to increase productivity or efficiency.

In the past, tax incentives were given only for projects that created new jobs.

"The modernization of plants is critically important," Taylor said. "We lost a plant this year and the site leaders there said that over the years they had fallen behind the modernization curve. They were no longer competitive in the global market.

"We believe Louisiana needs to partner with companies to keep these plants modern."