North America's shale boom is prompting the biggest expansion of natural gas-fed petrochemical plants in 15 years, helping Exxon Mobil Corp. (XOM) beat Mitsubishi Chemical Holdings Corp. with raw materials that are half the price of the oil product used in Asia.

Hydraulic fracturing of shale rock formations, known as fracking, is giving U.S. chemical makers an edge in making ethylene, a building block in everything from plastics to antifreeze. Record gas production has driven down the cost of ethane, a component that's converted to ethylene, by 60 percent this year and prompted Japan to shut units running on oil-based naphtha that's up 2 percent.

Exxon Mobil and Westlake Chemical Corp. are among companies building ethane-fed plants to benefit from shale output that cut gas prices by about 75 percent since 2008. Mitsubishi plans to shut an ethylene unit, partly blaming the "emergence of shale gas" in North America, while Mitsui Chemicals Inc. also anticipates cutbacks. Closures may spread to South Korea and Taiwan, according to Credit Suisse Group AG.

"They believe they are losing cost competitiveness," said Masami Sawato, a chemicals analyst at Credit Suisse in Tokyo. "That's why companies like Mitsubishi Chemicals are planning to shut down part of their operations."

Gas liquids, mostly ethane, supply about 85 percent of feedstock for U.S. ethylene makers. Almost all plants in Northeast Asia use naphtha.

Shale Boom
The boom in oil and gas production helped America meet 83 percent of its energy needs in the first six months of 2012, Energy Department data show. If the trend continues, it will be the highest level of self-sufficiency since 1991. Marketed gas production will reach a record 68.85 billion cubic this year, according to department estimates.

Ethane at Mont Belvieu, Texas, the supply hub for Gulf Coast chemical makers, has fallen more than 60 percent this year to 32.3 cents a gallon, according to data from Liquidity Partners. The cost of naphtha in Japan has gained to $932.75 a ton, according to data compiled by Bloomberg.

LyondellBasell Industries NV (LYB) and Westlake Chemical produced the commodity in the U.S. this year for an average of about 18 cents a pound using ethane, according to analysis by Goldman Sachs Group Inc. That was 20 cents less than naphtha-based producers. Ethylene sold for about 49 cents a pound.

A Japanese plastics factory that uses naphtha is near or below break-even, according to Bloomberg Industries. A similar plant in the U.S., run on ethane, is making about $812 a ton.

Ethylene Capacity
Mitsubishi plans to reduce capacity by 293,000 tons a year in 2013 when it decommissions one of the two units at its Kashima facility, the company said in a June statement. Mitsui Chemicals is implementing "optimization and rationalization measures" at the 920,000 ton-a-year petrochemical complex it operates with Idemitsu Kosan Co., the company said in September.

Japan will probably stop producing the ethylene that it typically exports as U.S. output increases through 2018, since it won't be able to compete with the cheaper gas-derived product, according to Sawato.

"The double whammy these guys will suffer is they are high cost and subscale and the export market they used to rely on is starting to wither away from them," Hassan Ahmed, a New York- based analyst at Alembic Global Advisors, said by phone. Closing unprofitable plants should boost margins globally, depending on how much capacity is eliminated, Ahmed said. "Clearly this means profitability will start improving," he said. des

Chemical Losses
Mitsubishi Chemical made a loss of 5.6 billion yen ($69.8 million) in the three months ended June 30, down from net income of 24.5 billion yen in the year-ago quarter. Mitsui Chemical's loss was 2.16 billion yen. LyondellBasell made $770 million, compared with $804 million a year earlier, while Westlake's earnings rose to $115.5 million from $81.1 million.

Some of Japan's disadvantage is offset by the prices fetched for other products derived from naphtha during the ethylene production process, such as butadiene and propylene, Paul Hodges, chairman of London based International eChem petrochemical consulting firm, said in a phone interview.

North American ethylene output increased 7.7 percent to 29.8 million tons in 2011 from 2008, when gas prices peaked at a then two-year high of $13.577 per million British thermal units, according to Nexant ChemSystems data compiled by Bloomberg Industries. During that period, production in Japan, Taiwan and the Korean peninsula grew by 0.6 percent.

North America
Companies operating in North America plan to boost annual capacity next year by 1.7 million tons, or 4.4 percent, the most since 1998. New plants and expansions will boost output by as much as 11 million tons, or 28 percent in the next five years, according to Bloomberg Industries.

A new unit at its refinery complex in Baytown, Texas, will produce 1.5 million tons of ethylene annually starting in 2016, Irving, Texas-based Exxon said in June. Chevron Phillips, a joint venture equally owned by Chevron Corp. and Phillips 66, plans a $5 billion plant in Baytown that will produce 1.5 million tons a year after it begins operation in 2017.

Japan and South Korea may be hurting their petrochemical industries by supporting shale gas extraction in North America, Yonghun Jung, an energy adviser at South Korea's Ministry of Knowledge Economy, said at an Oct. 3 seminar in Tokyo. The two countries have agreed to buy at least 22.9 million tons of liquefied natural gas a year starting 2018 from proposed U.S. and Canadian projects, according to data compiled by Bloomberg.

LNG Imports
"To some extent the natural gas LNG imports from the United States into Asia will help the ethylene industry in the U.S. because it is a byproduct of shale gas," Jung said. "It will have a very serious impact on Northeast Asian petrochemicals."

If China's manufacturing activity remains depressed and the country can meet its own ethylene needs with domestic production and cheaper U.S. imports, South Korea and Taiwan may join Japan in cutting capacity, said Sriharsha Pappu, a Dubai-based analyst at HSBC Holdings Plc.

"In that scenario the highest cost producers will get squeezed out and those are the Japanese, Koreans and the Taiwanese," Pappu said. With bigger, newer ethylene plants and weaker currencies, Taiwan and South Korea have so far managed to remain more competitive than Japan, Pappu said.

China's gross domestic product expanded 7.4 percent in the third quarter from a year earlier, the seventh quarterly deceleration. The International Monetary Fund on Oct. 9 reduced its estimate for growth this year to 7.8 percent, which would be the weakest pace since 1999.

Middle East
Capacity is also growing in the Middle East, where producers are using ethane released during oil extraction. The use of this so-called associated gas, which would otherwise be burned off, helped ethylene output in the Middle East and Africa increase by 46 percent to 24.6 million tons in 2011 from three years earlier, according to Bloomberg Industries.

China, which currently uses naphtha and coal to produce ethylene, could boost production if it makes progress in developing its own shale gas resources, Credit Suisse said in a September report. Output increased 50 percent to 15.2 million tons in 2011 compared with 2008.

"Assuming shale gas also comes into use as a major feedstock, companies could make ethylene products from shale gas and non-ethylene products from coal," he said in the report. "Such diversification of China's petrochemical feedstock would have an even larger impact on Asia's petrochemical industry than the U.S. shale gas revolution."