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Dow Chemical Wants Natural Gas All to Itself

By Tyler Crowe - Apr 23, 2013 at 6:31PM

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Dow Chemical has taken a firm stance against exporting natural gas, and here's why.

The debate over natural gas exportation has created some unfamiliar enemies and even more unfamiliar friends. While it's pretty obvious who the supporters are, some of the largest opponents are not who you would expect: manufacturers. Leading the charge is a group known as America's Energy Advantage, and they have a wide range of supporters including stalwarts of manufacturing. The largest and most vocal opponent being Dow Chemical (DOW).

Let's look at why Dow Chemical wants to keep natural gas on U.S. shores and what it's doing to keep it here:

Keep the gas, keep the profits
The one simple reason that Dow and its partners in America's Energy Advantage are advocating for not exporting LNG is to keep the gas here to power energy-intensive manufacturing. Industries like steel and chemicals demand large amounts of energy, and cheap gas in the U.S. gives these companies incentive to produce here.

Steel giant Nucor (NUE 4.69%) will be opening a direct-reduced iron (DRI) plant in Louisiana. This plant was built in large part because of favorable energy prices due to cheap natural gas and will be the only one of its kind in the U.S. Alcoa (AA) is another proponent of keeping the energy source within our borders. The aluminum giant has joined up with America's Energy Advantage group to protect a cheap source of energy.  In the case of Dow, though, there is so much more than energy behind this move.

Even though Dow creates a wide variety of products, most of them are derived from fossil fuels. Ethylene, one of the principal building blocks for these chemicals, is derived from two feedstocks: ethane (a natural gas product) and naptha (a petroleum-based product). With the large boom in natural gas production, the price for its feedstocks has fallen drastically, and now the U.S. is one of the cheapest sources for ethylene. 

Source: Enterprise Products Partners investor presentation

This cheap feedstock has sent production up over one-third in the past five years, and has given a nice pad to chemical company earnings. LyondellBassell (LYB -0.26%) reported that 2012 was a record year in terms of earnings despite a 6% drop in revenue. These kinds of results have resulted in a mad rush to increase capacity. The entire industry has plans to spend about $30 billion in new plants to take advantage of cheap feedstock. Dow personally is looking to invest $1.7 billion to build what would be the company's largest ethylene facility and would increase the company's ethylene capacity by 1.5 million tons per year. With so much invested in cheap natural gas, it should come as no surprise that the company will look to protect that position for as long as possible. 

New friends, new nemeses 
Before Dow became such a vocal voice against natural gas exports, it first needed to rid itself of any connections with natural gas exports. It has pledged that it would not participate in building export capacity at the Freeport LNG import facility, in which the company has a partial ownership stake. Dow has also terminated its membership in the National Association of Manufacturers after it announced its support for LNG exports.

Aside from being the leader of the America's Energy Advantage coalition, the company has also spent about $10.5 million for lobbying last year. Much of its efforts have been geared at showing the economic benefits of keeping a lion's share of natural gas here in the U.S. to use for manufacturing. According to the America's Energy Advantage website, the difference between 5 billion cubic feet per day being used in the U.S. for manufacturing vs. exporting it is about $2.5 billion in economic activity for the U.S.. This lobbying effort has put Dow at odds with ExxonMobil (XOM 3.05%), which has previously been a strong partner in several lobbying endeavors.

Surprisingly, the company has also found themselves allied with environmental groups, who see natural gas as a means to cut greenhouse gas emissions. Environmentally conscious House members have introduced bills in committee including the Keep American Natural Gas Here Act and the North American Natural Gas Security & Consumer Protection Act. While both groups may not have the same interest, at least they have the same foe.

What a Fool believes
The debate over natural gas exportation has taken several turns. And the longer the U.S. waits to make a definitive decision, the further LNG exports will fall behind competitively. As far as Dow is concerned, that may be all it needs to keep natural gas here.

After so many years of fretting over the fate of the U.S.'s domestic resources, it's rather refreshing to have to debate about what to do with excess supply. Whatever side this debate lands on, there are benefits for the American economy. 

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Stocks Mentioned

DuPont de Nemours, Inc. Stock Quote
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