On Sept. 24, 2014, I attended the Detroit Economic Club meeting at the Detroit Athletic Club. Hans Engel of BASF Corp. spoke about how the explosive growth of shale gas production in the United States has created very advantageous economic condition for companies that rely on hydrocarbons. He indicated that along with the benefits of shale gas, conditions in the U.S. present some risks, as well. His view from abroad may provide us some insight for future policy decisions regarding regulation, education and investments in infrastructure.
BASF is a global company that has 100 production sites in the United States, which represents 20 percent of the company’s activities. A full one-third of the raw materials BASF uses in its production are hydrocarbon based. Before the recent development of shale gas resources, natural gas prices had steadily risen in the United States, which imperiled continuing domestic operations by BASF and other hydrocarbon-dependent companies.
Beginning in 2000, natural gas prices in the United States rose steadily until 2008, when they plummeted due to the technological developments in extraction. Compared to the rest of the world (as seen on the chart below that was published in the Oil & Gas Journal), our natural gas prices are extremely cheap. Mr. Engel concluded that this cost differential provides the United States with an extreme advantage over other nations for companies that use natural gas as feedstock for their products. As a result, BASF has invested hundreds of millions of dollars in its U.S. operations and has plans to spend $1 billion this year on two major projects to take advantage of cheap natural gas prices.
Mr. Engel also acknowledged certain risks that companies in the United States face that have the potential of retarding investment, even in the face of the competitive advantage of low natural gas prices:
Whether the low costs are sustainable over time. Investments BASF makes are based on long-term profitability, rather than short-terms gains, so significant changes in costs upward could stymie growth.
Stability of regulatory regime. Businesses rely on the ability to make plans based on the certainty that decisions being made today are based on conditions that will remain relatively constant. Without some stability, companies will question their investment decisions.
Skilled workforce. The modern plants require an educated and skilled workforce. BASF not only spends a significant amount of resources training existing employees, but also providing support to provide education to the workers of tomorrow. Mr. Engel indicated that BASF sees that it will need in the range of 40,000 to 50,000 skilled labor workers and that the lack of skilled labor could result in significant cost overruns, reducing profits.
Poor infrastructure. In the late 1980s to the 1990s, the United States was seen as having a competitive advantage over other nations due to its infrastructure. Now, that advantage has disappeared and is threatened by its aging and lack of investment, as poor infrastructure results in expensive delays.
Right now, the boom in development of shale gas provides the United States a significant advantage over other countries in the scramble to attract global companies that rely on hydrocarbons as feedstock for their products. As long as prices stay low here (and Mr. Engel expects that natural gas prices will rise to no more than $7/MMBTU), that advantage will remain. But, relying solely on low gas prices may not be enough, if we do not address other risks to growth that Mr. Engel described.