Will natural gas prices turn off Louisiana’s chemical industry?

July 31, 2004

With the cost of a key fuel rising, the state’s chemical plants are closing and thousands of workers are being laid off.

The ammonia plant at Cytec Industries’ Waggaman chemical manufacturing complex sits and rusts, waiting for the day of its demolition. Just next to it, a methanol plant is also dormant, yet clean and sparkling. It had been in operation only five short years, before being “mothballed” in 1999.

The defunct plants are two among an increasing number of dead or dying chemical plants. The chemical-making industry, Louisiana’s largest manufacturing-sector employer, relies on natural gas to power its plants and as a basic building block for the chemicals it creates.

Since the late 1990s, soaring natural gas prices have slowly been strangling the chemical industry. About 4,000 chemical-making jobs have been lost in Louisiana since 1999, and economists estimate that at least 1,800 more will be lost this year and next.

The crisis first hit the state’s methanol and ammonia plants, whose products are created directly from natural gas. These two chemicals are used in many other products; ammonia, for example, is used in fertilizer and paper manufacturing, while methanol goes into plastics, plywood, paints and explosives.

Of the nine companies that owned Louisiana ammonia plants in 1998, six have closed all ammonia-producing operations: Borden Chemicals & Plastics, Cytec Industries, Farmland Industries, IMC-Agrico, Koch Nitrogen and Monsanto.

“We use ammonia like a baker uses flour,” said Mike Peters, who worked as an hourly wage equipment operator in the industry for 25 years before becoming a salaried member of Cytec’s technical staff.

Compared with much of the rest of the ammonia industry, Cytec’s workers consider themselves lucky. Many workers were relocated to other Cytec chemical plants. However, plant representatives said, employees still paid a heavy price, with pay cuts averaging 15 percent. The salaried workers, who hold higher-level administrative positions, took a hit as well: 40 percent were laid off.

“For the plant it was a painful period, but we had the rest of the yard to absorb that punch,” Peters said. He was working in the methanol plant when it closed, but moved to a new position.

To make matters worse, the plants often rely on natural gas to fire their boilers and provide electricity. Natural gas price increases have caused what industry spokesman Dan Borne calls a “double whammy.”

The boom years

From 1988 until 2000, the chemical industry was booming. Natural gas was cheap, and chemical plants were enormously profitable. The industrial future looked rosy for Baton Rouge, where Louisiana’s chemical industry is concentrated, and the chemical corridor from Baton Rouge to New Orleans along the Mississippi River.

The industry was so lucrative that Cytec’s now-dormant methanol plant, built in 1994 for more than $100 million, paid for itself after less than a year of operation.

“If you go back to about ’88 . . . Baton Rouge was the hottest place in the state,” said Loren Scott, an expert on Louisiana’s economy. “They were talking about it exceeding New Orleans in terms of population someday.”

“I don’t think they’re thinking that right now,” he added.

Chemical manufacturing has always been among the most attractive industry choices for Louisiana high school graduates. After a mere two years of technical training, a plant operator can earn a starting salary between $35,000 and 40,000 a year. Even after its wave of pay cuts, the average salary at Cytec’s local plant is $52,000. The industry’s wages are far higher than most other manufacturing jobs. In fact, in the state, only oil refining pays more.

But the boom didn’t last. In 2001, many expected a gradual return to low prices after a sharp spike in the price of natural gas.

Instead, prices stayed fairly high. Natural gas, which sold in 1999 at the wellhead for about $2 per thousand cubic feet, ran between $3 and $5 during much of 2001 and lately has been under $6. The reason: Demand for natural gas as a home-heating and electricity source has exploded, and the clean-burning fuel is now used to generate electricity for homes all over America.

The supply, however, could not increase fast enough to meet demand. Unlike oil, natural gas cannot be transported over oceans in its normal, gaseous state. It has to flow through pipes directly from the ground in the United States and Canada to the customer. While drilling and pumping stepped up a bit to take advantage of the high prices, gas stocks have slowly been depleted.

“The reservoir capacity per drilling hole has continued to drop because there’s not as much gas,” said Jas Gill, president of Cytec. “Natural gas unquestionably has a tremendous impact on the petrochemical industry.”

The result, said Larry Wall, spokesman for the Louisiana Mid-Continent Oil and Gas Association, is a shortage. America needs about 6.4 trillion cubic feet of natural gas a year. But, he said, North America can only supply about about 6.2 trillion.

When asked to identify a culprit, industry leaders often point to the environmental lobby. Many say that environmentalists block access to vast untapped gas stocks, stonewalling drilling at a time of dire need.

“We know where there’s lots of natural gas, we just can’t get to it,” said Scott, adding that roughly 7 trillion cubic feet of gas in the Rockies are inaccessible because of a drilling moratorium passed by Congress.

Others express frustration over the government’s seemingly ambivalent policy toward natural gas. Some politicians, as well as environmentalists, love natural gas for its clean-burning properties; others, however, are leery of ecological damage that drilling might cause.

“Federal policies encourage the use of clean-burning natural gas while discouraging the exploration and production of natural gas,” said Larry Deroussel, executive director of the Lake Area Industry Alliance.

Scott Kirkpatrick, policy adviser on natural resources to Gov. Kathleen Blanco, said he thinks the reasons for sluggish drilling in Louisiana are more complex than simple environmentalist resistance. Some aspects of Louisiana’s history may deter gas exploration.

“Because of our reputation for being a rather litigious state, some companies have indicated that they’re more hesitant about drilling in Louisiana,” he said. “There certainly is the perception out there that it’s easier to get sued by someone.”

According to state data, new drilling started in the beginning of 2004 and is expected to increase in areas throughout the state with “coal seam” pockets of gas. Blanco said she is optimistic that new drilling would commence.

“Permit requests for drilling are up dramatically. The market will play to the demand,” she said.

Getting burned

Since natural gas prices started to climb in 1999, the chemical-making industry began to suffer.

The ammonia industry was quickly decimated by the crisis, said Jim Harris, spokesman for the Louisiana Ammonia Producers, which represents state ammonia manufacturers — or what’s left of them. Industry representatives estimate that the price of natural gas determines about 90 percent of the price of finished ammonia, so natural gas price increases have taken a heavy toll.

“I’m working with some (companies) in pretty dire straits right now,” Harris said. “There really isn’t any short-term sunshine on the horizon.”

Because natural gas is generally less expensive in other countries, ammonia plants in those countries can produce the chemical far more cheaply. Ammonia users in this country typically find that it’s cheaper to import ammonia from overseas, a strategy Cytec has adopted.

In June of 1998, the ammonia association comprised nine companies directly employing nearly 4,000 people. Now, there are only three companies left employing about 800 people. Of those, none is operating at full capacity; to do so would simply be too expensive.

Plants that make other chemicals are hurting, too.

The DSM Elastomers plant in Addis, which makes polymers, will shut down at the end of the year. Hank McKenney, who is the plant’s site manager, said the price of natural gas contributed to its closure.

Another victim was Mississippi Chemical, which closed two Donaldsonville plants in March, laying off 72 workers. One plant made urea and melamine, other building-block chemicals derived from natural gas.

In May, Germany-based chemical giant BASF announced that it would be cutting as many as 500 jobs at its Geismar facility, which makes a wide range of intermediate building-block chemicals. And in 2001, Dow Chemical cut about 450 jobs at its St. Charles Parish facility following its merger with Union Carbide.

Even some non-chemical companies are having a tough time staying afloat.

Turner Industries of Baton Rouge, one of the largest construction firms in Louisiana, depended on chemical-plant construction projects for much of its work.

Roland Toups, the chairman and chief executive of Turner, said the company normally employs between 10,000 and 12,000 people. But because of the drop-off in chemical plant work, Toups estimates his company has had to lay off 20 percent of its workers.

“We’re going to survive, there’s no doubt about that,” he said. “This business has its normal peaks and valleys. . . . It’s just in this case the curve is a little more systemic and a little more sustained.”

Farmers have also been affected. As domestic ammonia plants close, fertilizer manufacturers will have to rely on ammonia shipped from abroad, which means added expenses and a less reliable supply stream.

Emigrating jobs

For decades, the line graph showing the United States’ net balance of trade in chemicals — that is, the value of its exports subtracted from the value of its imports — reflected the country’s status as a chemical manufacturing superpower. Between 2001 and 2002, however, the line plunged downward, dipping into the negatives.

Now the United States imports more chemicals than it exports.

But Blanco said the impact on the workers is the major issue. Lost chemical industry jobs represent fewer high-wage positions with strong health benefits available to Louisiana.

“I think it’s a very serious problem for our economy, but I think it’s more serious for the workers who are dependent on those jobs,” she said. “I’m looking for good-paying jobs with healthier benefits. . . . Too many of our work-force (members are) uninsured.”

Once lost, these jobs may forever remain overseas, said Scott, a former Louisiana State University economics professor, and it may become necessary to beef up other industries in order to provide more jobs.

“We’re getting some nice boosts in shipbuilding that are going to offset these losses,” he said. “But (the chemical industry job losses) are so big that we’ll be like a ship with an anchor dragging behind it.”

Blanco said that adding to the chemical plants’ troubles is the increasing difficulty of bearing the fixed costs of production. Plants are often located near one another and share in costs such as pipeline and road maintenance. When plants shut down, those remaining bear more of the burden.

Glimmers of hope

In the face of the havoc wreaked by natural gas prices, industry representatives and politicians are scrambling for solutions.

Blanco pointed to tax exemptions on debt and industrial equipment passed during the recent special session of the state legislature, saying that they would amount to $1 billion for the industry over seven years.

“It’s the best Louisiana can do right now, while dealing with our other troubles,” she said.

One avenue to gas-price reduction is to find alternate energy sources to reduce demand for domestic natural gas. The problem is that any effort would take years to make a dent.

By far the brightest light is coming from liquefied natural gas, or LNG, which economists and industry insiders regard as an essential growth area. It involves transporting natural gas in a super-cooled, liquid state aboard giant cryogenic tankers.

Though the idea of huge ships filled with super-dense natural gas makes some people uncomfortable, proponents point to Japan, which has gotten 96 percent of its natural gas from LNG for fifty years without a major accident.

However, expensive and enormous terminals are needed to turn the liquid gas into vapor again so that it can be pumped through pipelines. While energy companies are scrambling to build the terminals — Sempra, Shell, and Chevron have all started to plan their own in the Gulf of Mexico — it will be about eight years before any of them are ready.

But for Gill, the president of Cytec, it’s not appropriate to ask whether LNG will be sufficient to help the industry or whether its safety concerns outweigh its usefulness.

“I think the question isn’t ‘can it be used safely and effectively?’ I think it must be,” he said. “We’re focusing too much on the fear side of it.”

If there’s an upside to the chemical industry’s problems, it’s that most of its workers are nearing retirement; the average age of a chemical plant operator is 50, industry spokesperson Tia Edwards said. That means work forces are shrinking because of retirements, which means at least some laid-off employees may find a spot to fill.

Before the gas price hike, Scott said, the industry’s major problem was finding enough trained high school graduates to fill its plants.

“If you went back to the mid-’90s, the biggest problem was, ‘how can we find enough workers?’ ” he said.

Now, those spots can be filled by operators orphaned by closed plants.

Another glimmer of light is that, for some, the economy is doing well, orders are up, and many customers remain faithful to their U.S. suppliers.

“Our general feeling is our economy is definitely in the recovery stage,” said chemical industry spokesman Borne. “It’s not a boomer, but it appears to be progressive.”

At Cytec, that certainly seems true, though employee Peters grimaces as he recalls the turmoil of the methanol and ammonia plant shutdowns — and then he recalls the high-definition TV he recently purchased on his comfortable plant technician salary.

But what about McKenney, the Addis plant manager whose factory will be closed by the end of the year?

“Fortunately, I am very near retirement,” he said with a sardonic chuckle. “I’m hoping my company will do well enough to ensure my pension.”

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Michael A. Mohammed can be reached at mmohammed@timespicayune.com or (504) 826-3306.

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