On a humid Thursday last April, hundreds of residents of Lake Jackson, a small town on the outskirts of Houston, jostled a college auditorium stage to catch a glimpse of Texas’s rip-roaring governor, Rick Perry. The governor was there to join Dow Chemical CEO Andrew Liveris in announcing the chemical giant’s plans for a $4 billion expansion of its operations in Southeast Texas, creating almost 5,000 jobs.

The mood was celebratory. "If you had told me 10 years ago I'd be standing up on this podium making this announcement, I would not have believed you,” said Liveris, citing the “miracle” of the shale boom. "Even though Texas had its great mechanisms to attract business, the cost of energy, the cost of feedstocks, which would have been the price of oil and the price of gas, was pricing the United States out of the market." He was referring to the recent revolution in the ability to extract natural gas from the country’s vast shale formations using hydraulic fracturing, also known as “fracking,” which has led to a bounty of cheap natural gas, one of Dow’s key raw materials.

[[nid:1109252]]

As production has surged, from 17.28 billion cubic feet in 1985 to approximately 25 billion cubic feet in 2012 (based on monthly reports from the Energy Department’s Energy Information Agency), the commodity’s price has plummeted from more than $13 per million British thermal unit (MMBtu) in the summer of 2008 to $3.18 per MMBtu a year later. Since then its price has ranged from a monthly low of $2.98 to a high of around $4 – by any measure a real bargain. That’s as good for manufacturers as it is bad for natural gas producers and drilling companies, since low prices mean reduced exploration and production.

As a result, the boom in production has created a rare fissure that runs through the heart of corporate America, pitting manufacturers like Dow Chemical Company (NYSE:DOW) against energy giants like Exxon Mobil Corporation (NYSE:XOM), which have been seeking to raise the price of natural gas by pushing the government to allow them to export to more countries. That concerns manufacturers, who warn that such an export-heavy policy will result in higher energy prices in the U.S. and hurt manufacturing. The policy proposal has also spawned a rare alliance between manufacturers and environmentalists, who have long argued that fracking pollutes water supplies and diverts water from agricultural uses.

Energy companies have been urging the Energy Department to let them export their gas to nations with which the U.S. does not have a free trade agreement (FTA), something only the Energy Department can permit, provided it determines that such ventures are consistent with the “public interest.” To date, 16 applications for multi-billion dollar facilities to turn the commodity into liquid natural gas (LNG) are waiting on Energy Department assessment.

'Shale Gale' Through 2040

The so-called "shale gale" is not about to blow over. On Friday the Bureau of Economic Geology at the University of Texas at Austin released the most comprehensive study to date on shale gas in one part of Texas. Along with similar studies, it shows that the nation’s reserves of shale gas are abundant enough to provide gas at or near its current price through 2040.

In other words, nearly three more decades of low natural gas prices, which concerns drilling companies like Parker Drilling Company (NYSE:PKD) and well service companies like Schlumberger Limited (NYSE:SLB). Low prices mean reduced exploration and production, something Wall Street is well aware of.

“For U.S. natural gas, we look for low prices to depress U.S. gas drilling activity. According to the EIA, after growing 8 percent and 4 percent in 2011 and 2012, respectively, natural gas production is expected to rise 1 percent in 2013, before a modest decline in 2014,” S&P said.

The energy business has only two options, tighter supply or higher demand, such as comes from Asia’s growing economies. The former is a virtual impossibility; the latter is – potentially -- two to three years away, if the Energy Departs takes a generally positive stance on the applications.

Dow’s profits document just what a bargain the shale gas boom – sometimes called the “shale gale” – and the resulting cheap natural gas has been. In 2010, the company reported net income from continuing operations of $2.32 billion compared with $566 million in 2009. Earnings were up in 2011, too, though not as dramatically. Last year’s earnings, on an adjusted basis, slipped to $2.25 billion from $3 billion but the company said its “purchased feedstock and energy costs” fell during the year by a whopping $2.5 billion.

[[nid:1109254]]

There’s more of the same ahead for Dow and its peers, according to Standard & Poor’s Capital IQ.

“The decline in the U.S. natural gas prices relative to global crude oil prices has improved the feedstock cost competitiveness of the U.S. petrochemical industry versus other global regions, such as Europe, thereby helping boost U.S. industry exports,” S&P said. “Thus, we look for higher industry sales and profits in 2013.”

Increase Exports, Hurting Manufacturers?

As the Energy Department considers the energy industry’s request, it commissioned NERA Economic Consulting to prepare a study of the consequences of more LNG exports, to help guide its determination of what is in the public interest. The consulting group completed its study in December 2012, and the results stung manufacturers.

“Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports,” the NERA report said. “Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports. In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices.”

Starting this month, the Energy Department will begin a case-by-case evaluation of the applications. Prospects of such permits being issued, especially if many are approved, are raising hackles in manufacturing company board rooms across the nation.

Some manufacturers are worried enough that the department will open the proverbial floodgates to LNG exports that they are willing to break long-standing industry ties. A few weeks ago, Dow rocked the American industrial establishment by dropping its membership in the 117-year-old National Association of Manufacturers (NAM), the largest manufacturing association in the U.S. with more than 12,000 member companies.

“In late January, with no discussion or notification, NAM adopted a new position on this issue which placed the interest of oil and gas producers above the interests of its manufacturer members,” Dow said.

The following month, Dow CEO Liveris, warned a Senate committee that unrestricted LNG exports could kill the “renaissance” in America’s manufacturing sector.

“If we shipped half or more of (natural gas production) overseas today as some propose it will have severe unintended consequences,” he said at the Feb. 14 hearing. “It would actually mean higher gas and electricity prices. It will actually mean higher transportation and utility costs for consumers as well as industry. These higher and more volatile energy prices will also cause domestic manufacturers to once again ship operations and ship jobs, to ship factories overseas to countries where natural gas is cheaper. And there are countries where natural gas is cheaper. America would sacrifice this once-in-a-generation competitive advantage …”

Dan DiMicco, executive chairman of Nucor Corporation (NYSE:NUE), also stresses a both-and approach.

To contact the editor, e-mail: