The North American shale boom has meant that natural gas prices have dropped to historically low levels. This drop has led to a “Big Bang disruption” stage of tremendous growth in the North American oil and gas arena—and downstream, in the chemicals industry. As a result, the region has become increasingly attractive for gas-based chemicals production. Investment in petrochemicals is increasingly on the rise, potentially leading to an excess of up to 70 percent more ethylene derivatives than the US domestic market requires. But this tremendous growth due to the shale boom is not just another turn in the business cycle—it is fundamentally changing the industry.
As chemical companies focus on making the most of this growth, they also need to think about what comes next. Big Bang disruption is followed by a sudden decline in activity—a Big Crunch. That downshift would require a significant change in chemical companies’ operations and strategies, and they need to begin planning for how to deal with the coming industry shifts.
The Big Crunch: A sure thing?
How likely is it that this period of growth will lead to a Big Crunch? Experience suggests that such dramatic growth will eventually reach its limits and slow down. As more players invest in North America, the field will eventually become saturated. The industry will reach a point where the availability of low-cost gas is no longer “new,” and companies will be able to take advantage of North American gas and low-cost feedstocks from other regions. In addition, the possibility of North American exports of ethane—derived from natural gas—flattening the global cost curve could add another contributing factor to the Big Crunch. So when is this estimated to take place? Accenture’s research points to the Big Crunch likely occurring around 2020, ushering in a period of lower margins and increased consolidation and realignment.
Taking action for the coming crunch
The Big Crunch will require different approaches from those used during the Big Bang. To perform well in this coming stage, North American chemical companies will need to adjust their strategies, and Accenture recommends keeping four key imperatives in mind:
Achieving and maintaining first-quartile global production costs
Preparing for the “whipsaw” of oversupply and reduced margins
Increasing asset agility
Establishing effective contingency management
To successfully navigate through the current Big Bang disruption and into the upcoming Big Crunch, North American chemical companies will need to recognize and contend with rapid change, and be prepared to adjust business strategies and operations in a relatively short time frame.
While the shift will evolve over the next several years, North American chemical companies should begin preparing now. That means recognizing that the current boom cannot continue forever, and positioning themselves for the next stage of evolution. Taking time now to plan for this shift can help companies get into an ideal position to thrive now and in the future.
For more of our analysis on Big Bang Disruption and preparing for the Big Crunch, explore our study, “Exploiting Big Bang Disruption in the Chemicals Industry.”