The Natural Gas Factor: New Market for Providers, New Competition for Capacity
The boom in natural gas and shale exploration in North America holds both good news and bad news for chemical companies.
The natural gas being extracted from shale plays across the United States and in Canada has emerged as a low-cost alternative source for powering industrial facilities. As a result, some chemical manufacturers are reshoring or onshoring production facilities to the United States, lured by energy costs that are now cheaper than in many global locations.
"Chemical companies—especially those producing plastics precursors—have been drawn back to the United States because the price of energy in their base stock is much less expensive than it is in most parts of the world," says Rob Kriewaldt, director of marketing for WSI, an Appleton, Wisc.-based 3PL . "It's changing the face of the U.S. chemical industry."
That change is a good one, according to the American Chemistry Council.
"Abundant supplies of shale gas have transformed America's chemical industry from the world's high-cost producer five years ago to among the world's lowest-cost producers today," notes the industry group's recent report, Shale Gas, Competitiveness, and New U.S. Chemical Industry Investment.
The United States also has become a magnet for chemical industry investment, the report adds.
The natural gas boom has opened up a new export market as well, with chemical producers gaining the ability to increase global sales.
"U.S. chemical and specialty product producers are starting to see opportunities to be more competitive in the global arena via exporting opportunities," says Mike Forbes, vice president of logistics solutions and engineering, KAG Logistics, a Canton, Ohio-based bulk transport and logistics provider. "These producers also benefit from the lower raw materials and feedstock costs natural gas is bringing."
KAG currently provides services including truck transportation and transloading for the shale plays, and is working to help set up distribution networks for liquid natural gas (LNG) producers.
"The challenge is that transport and logistics services will have to keep pace with increased production in order to provide supply chain capabilities," Forbes adds.
And that is the bad news. All the activity surrounding the natural gas boom has placed additional strain on logistics capacity for the chemical industry. Capacity for chemical transportation—already scarce because of a driver shortage and the impact of Hours of Service rule changes—has become even tighter thanks to competition from the shale plays.
"The natural gas boom is straining capacity for chemical producers," says Forbes. "There are railcar, truck, driver, and equipment shortages. This energy boom means producers are competing for resources that are part of the chemical supply chain."
Resources for natural gas producers may be in tight supply as well, notes Dan Gayford, vice president of Illinois-based A&R Logistics, a leading provider of bulk plastic and dry flowable transportation. "Natural gas discoveries will result in a lot of new capacity production in the Gulf of Mexico and other U.S. locations, and the transportation infrastructure can't handle that volume," he explains.
Because much of this new natural gas production will be slated for export, these companies need logistics partners that can help with transportation scenarios.
"These firms are coming to us for help moving their products out of the Gulf region to get closer to customers in the country's interior, or to the ports for safe, cost-effective export," Gayford explains.
A&R is also offering its global expertise to help these firms plan and develop their supply chains in advance of the production boom expected over the next few years.
These North American shale plays present a variety of interesting new business opportunities for logistics and transportation providers. But providing logistics support to the shale plays is no easy task.
"For the upstream portion of the shale plays—where the exploration, fracking, and drilling occurs—a lot of logistics work is required to get materials to and from the well sites: pipe, machinery such as compressors and pumps, as well as sand and water, all have to be trucked in," says Dan McHugh, group director for Ryder Dedicated, one of the leading supply chain and logistics providers involved in servicing U.S. natural gas exploration.
The well sites are also often located in remote areas that lack sophisticated infrastructure, making transportation a challenge. And specific products are required to set up and run the drilling sites, which means transportation must be specialized as well—for example, water-hauling and sand-hauling trucks, as well as pump trucks and flatbeds for pipes, are all common.
"We use fleets that are custom-fit in nature, we run special equipment, and our drivers follow specific handling requirements to make these deliveries," McHugh notes.
In addition, the timing of these logistics services is crucial. LNG companies involved in the shale plays are heavily invested in these sites, and until the wells are producing product—and revenue—they are not recouping their investments. So a well site that sits idle because of a missed or late delivery does not go over well.
"The timing is key. These companies are bringing in thousands of trucks of sand or water to be able to frack a well to produce natural gas," McHugh explains. "If a delay occurs at one drilling site, and trucks start to pile up waiting to be unloaded, it causes a ripple effect."
Ryder Knows the Drill
Ryder's unique service offering for the shale plays is helping a variety of major oil and gas producers run their drilling operations efficiently and cost-effectively. The company provides a trio of important services to these firms.
First, Ryder supplies leased vehicles and dedicated fleets to these companies; its fleet contains more than 200 natural-gas-powered vehicles. Using natural-gas-powered vehicles allows these producers (and companies in all verticals that utilize Ryder's truck assets) to reduce costs and boost sustainability initiatives—the second benefit.
Third, Ryder's logistics expertise and technology round out its service offering to the shale plays.
"We provide these companies the IT systems they need to better execute their operations, as well as logistics engineering expertise to manage all the activity and coordinate with their carriers," McHugh notes. "We also manage their carrier bids, contract with carriers on their behalf, pay their freight bills, and manage insurance and safety requirements."
Ryder's Control Tower service offering ensures that these producers have better visibility to the activity occurring throughout their entire drilling operations.
With Control Tower, producers' orders flow to Ryder's Transportation Management Center (TMC) in Fort Worth, Texas, where a combination of proprietary software and customized off-the-shelf solutions optimize those orders by customer-specified requirements such as time and costs. The solution runs a variety of models to determine the best transportation scenario, and sends orders to the appropriate carriers.
"Then we use Control Tower to manage the orders in real time, provide updates, communicate exceptions, and provide visibility throughout the process," McHugh explains. After the shipments have been delivered, Ryder also bills carriers and performs reconciliation.
The Control Tower also provides standardization to an industry that has developed in "cowboy style," according to McHugh.
"Because the industry is still in its infancy, producers are looking to partners that can help them standardize and collect data," he explains. "They have been so focused on the drilling aspect that everything else has been ancillary. We help them standardize terms and conditions, and build databases. Then we can start to engineer and gain control over the network, cut costs, improve speed and reaction time, and give visibility to issues before they become expensive ones."
Other logistics providers are similarly supporting the shale plays. Dupré Logistics, for example, is hauling the product being extracted from the ground, as well as supporting the industry as a whole with inbound chemicals and other raw materials needed at the well sites.
The 3PL has also seen an increase in deliveries to the well areas for ancillary building and development projects. "Producers often develop barren land, so the area becomes busy with development for housing, restaurants, and other residential projects," explains Earnie Seibert, vice president of sales and marketing for Dupré Logistics in Lafayette, La.
The shale-related boom has been so strong that Dupré now counts the shale plays, and the chemical industry overall, as its two largest growth areas.
"We are excited about this growing market," Seibert says. "With Dupré's deep history of hauling refined products such as gas, diesel, and additives, we know it takes safety leadership and a strong reputation to be trusted with these loads."