You might have noticed that we have a bit of a domestic energy boom on our hands, as energy companies invest billions to unlock the vast resources underneath our feet. That's making it cheaper to heat our homes, and it's also setting the stage for a petrochemical manufacturing renaissance.

A little background
The boom in the petrochemical industry comes from access to cheaper feedstocks to produce ethylene, which enjoys wide use in the chemical industry as a basic building block for plastics. It's produced by steam cracking, and the primary feedstock is ethane or naphtha.

Petroleum naphtha is derived from refining crude oil, but it's being increasingly replaced by ethane, which is the second largest component of natural gas after methane and is even more abundant in natural gas liquids -- and NGLs are the fastest growing area of oil and gas production. The reason for the switch is simple: There's a wide price divergence between NGLs and crude oil, so the petrochemical industry benefits in terms of profit margins.

How attractive are these margins?
According to top energy midstream operator, Enterprise Products Partners (EPD 0.56%)the naphtha-to-ethane profit margin differential has been widening over the past few years and has now widened to more than $0.40 per pound.

And that's why the U.S. petrochemical industry is undergoing a major retooling effort to maximize ethane consumption. It's all about maximizing profits.

Taking advantage of advantaged feedstock
A number of projects have been announced over the past couple of years to take advantage of the attractive profit margins of ethane-based ethylene. Dow Chemical (DOW) has applied for permission to construct its largest-ever plant, to be used in ethylene production here in the United States. The company is investing $4 billion to build a 1.5 million metric ton-per-year ethylene plant as well as up to two on-purpose propylene plants. These projects should come online in the 2015-to-2018 time frame.

Joining Dow with a major Gulf Coast ethylene complex is ExxonMobil (XOM 0.57%), which is planning its own 1.5 MM mt/yr unit. It will be ExxonMobil's first new U.S. plant since 1997, as well as its largest plant in the nation, and it expects the new cracker to be up and running by 2016. As the nation's top producer of natural gas, ExxonMobil is betting big on its future demand here in the United States.

Moving away from the Gulf Coast, Royal Dutch Shell (RDS.A) is progressing with plans to build a $2 billion ethane cracker just outside Pittsburgh, where it will be positioned to take advantage of the massive natural gas reserves in the region's Marcellus and Utica shale deposits. While the project is still years away from being developed, it would represent one of the largest single deployments of capital ever to hit the region.

Meanwhile, on a smaller scale, Lyondell Basell (LYB -0.15%) is spending more than $500 million to increase its ethane consumption, with projects that will increase EBITDA by $250 million to $500 million per year by 2014. The company is also planning a second round of ethylene de-bottlenecks, which include a 250 million pound-per-year expansion of one of its Texas crackers. That project is expected to be completed by 2015, and the company is already studying a larger expansion at another Texas cracker.

Understanding incentives
These projects represent just a small sampling of the U.S. petrochemical industry's renaissance, with even more projects on the way. All of them are made possible by both our abundant resources and the incentives drillers have to extract them. Not only does ethane make up roughly 8% of the value per thousand cubic feet of NGLs, but NGLs as a whole are 23% more valuable than dry gas:

As long as that profit motive remains, drillers will continue to focus on NGLs.

Foolish bottom line
There's good reason NGLs are a hot commodity and drillers are increasingly focusing their capital budgets on acreage positions that are more liquids-rich. This approach will continue to increase the supply of ethane and will probably keep ethylene margins attractive for the petrochemical industry. It'll also add a big boost to midstream companies such as Enterprise Products Partners, which will be transporting an increasing amount of NGLs from production basins to petrochemical complexes.