US Shale Revolution Makes Fracking A Must For UK Industry

  • Date: 14/06/17
  • Anthony Hilton, London Evening Standard

A post-Brexit Britain is going to have to exploit every source of wealth to stay afloat. In this, energy costs are key because you can’t make anything without energy. That means fracking whether people like it or not.

Ineos is one of Britain’s leading chemicals companies with $55 billion (£43 billion) of assets, 18,600 employees and 105 manufacturing plants in 22 countries making it one of the giants of Europe.

From a standing start just under 20 years ago, Jim Ratcliffe, its multi- billionaire founder, chairman and major shareholder — bought chemical plants when they were no longer wanted from the likes of ICI in 2001, BP in 2005 and BASF, Bayer, Dow Solway and Norsk Hydro at other times, rationalised them, ran them better, invested in them and created an empire. Remarkably, given the capital intensity of the industry and the huge costs involved, he achieved all this while keeping Ineos private.

But now that empire is under threat. Earlier this week it was disclosed that the company is to invest €2 billion (£1.76 billion) expanding its European petrochemicals capacity, though there is still some debate about where this massive new plant will be sited. However, Belgium, rather than somewhere in the UK, seems to be the favourite.

Now, on one level this massive investment looks and is a show of strength. But on another, it illustrates how Europe’s petrochemical industry is vulnerable as never before because of the shale oil and gas boom in the US, which has made energy costs there just a fraction of those in Europe.

Once you have built a major chemical complex, your main (in many ways, your only) worry is the cost of the raw material you need to feed into it. This can account for half or more of total production costs, and is similarly crucial for other energy-intensive industries such as refining, iron and steel, glass, cement and paper.

Until a few years ago Europe and America paid more or less the same amount for their petrochemical feedstock — the US had a slight advantage but not so great after transport and other costs had been factored in. (Middle East plants, sited right by the oilfields, did have such a price advantage but lacked scale.)

This is no longer the case thanks to the fundamental changes across the Atlantic. The Marcellus field, which spreads over several states and is just one of many in the US, produces 15 billion cubic feet of gas a day which is almost twice the UK’s entire consumption. But the result is that US prices have disconnected from the rest of the world and the subsequent feedstock prices have given American chemical plants so vast a price advantage that, on paper at least, there’s no way Europe can compete. It is staring down the barrel of bankruptcy, not now, but in a few short years, unless it can find some way to get its raw-material costs down to American levels.

Thus far, the effect has been muted — and the European industry has had a little time — because the US petrochemical industry was originally not built for indigenous US gas and oil supplies but instead located near ports and configured to process supplies of oil from the Middle East.

But this is changing fast. There has been virtually no big petrochemical investment in Europe in the past decade whereas in the US since 2010 some $85 billion of petrochemicals projects have been completed or are under construction. Spending on chemical capacity to 2022 will exceed $124 billion, according to the American Chemistry Council, creating 485,000 jobs during construction and more than 500,000 permanent jobs, adding between $80 billion and $120 billion in economic output. After years where chemical capacity has run neck and neck with Europe, the American industry is about to dwarf it.

So this is the backdrop to the Ineos investment, and what is special is that this new plant will be supplied by a fleet of purpose-built liquefied natural gas tankers of sufficient number and size to create what Ratcliffe calls a “virtual pipeline” of US gas supply across the Atlantic. Even that, however, is not the key to the economics of the deal — rather it is that Ratcliffe has taken advantage of the fact that the US chemical plants seeking to use gas are still being built, and as a result we have been in a period where prices have been artificially low.

Seizing the moment, he has secured a decades-long supply contract at rock-bottom cost, low enough to cover a major chunk of his transport costs which he hopes will enable him, for a while, to live with US competition.

But the rest of Europe’s industry — here and on the Continent — has, for the most part, not been so fleet of foot. As a result it faces an existential challenge. Unless it can secure similarly low feedstock prices it will be forced to shrink dramatically, raise its efficiency and specialise.

This, in turn, will add further fuel to the debate on fracking in the UK, because it is the declared view of Ineos and presumably other energy-intensive firms, that only UK-produced shale gas can deliver feedstock at the price the industry needs to survive.

Hence Ineos, without courting publicity, has assembled some interesting onshore fracking licences with a particular focus on the East Midlands where test drilling is now taking place.

Perhaps because this is an area which at one time drew its prosperity from the Nottingham coalfield, local opinion has been largely supportive, helped — no doubt — by Ineos’s decision to give local communities a 2% cut of revenues.

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