Engines of the Texas Economy

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Engines of the Texas Economy
Bay Area Houston, Texas June 29, 2005
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Texas Industry Cluster Initiative

• Objective of the Initiative
• The Texas Refining and Chemical Products Cluster
  is part of a recently launched intensive effort
  to identify, bolster and exploit Texas
  competitive advantage in six technology areas
  each considered to be key to the state future
  economic growth

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Competitive Landscape

• Global pricing mechanisms now are at work for
  both crude oil and natural gas.
• Given the rising global demand for crude oil and
  refined products, OPEC is not able to keep up its
  production.
• The continued strong demand for incremental
  barrels of crude is being funneled into
  energy-thirsty Asian customers, especially China
  and India.
• Production constraints and higher cost supplies,
  especially heavy crudes, from non-OPEC sources
  are re-setting the pricing base, but even these
  outlets are limited by refining capacity.
• Rising crude oil prices bring parity to energy
  costs, on a million BTU basis.
• As the energy potential of crude oil and natural
  gas reach this equilibrium point, operational
  efficiencies of Texas plants will finally deliver
  a slender marginal competitive advantage.
• Texas currently has 6 liquefied natural gas
  facilities under permit by the Federal Energy
  Regulatory Commission, with a total send-out
  capacity of some 15.5 BCF per day.
• These 6 facilities have a combined capacity of
  over 4 TCF per day, more than 3 times the current
  US capacity (including planned expansions), and
  over 2 ½ times the total European capacity for
  handling LNG imports.
• As these LNG facilities come on line, natural gas
  prices are expected to plateau, and eventually
  recede to near the 4.00/MCF level, resulting in
  an improved competitive position for Texas
  plants.
• Many Middle Eastern exporters of LNG are shipping
  wet gasses, due to the lack of facilities in
  that region, presenting an additional benefit to
  Texas plants to strip heavy gasses from the LNG
  mix
• These heavies can be used in a variety of
  products, from plastics to fertilizers, and could
  provide both a lower price feedstock and an
  opportunity to develop higher-margin niche
  products in existing facilities.
• Exporters will continue to ship wet gas,while
  beginning to construct stripping facilities.

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Assessment Methodology and Approach

• Launch cluster teams
• Review cluster identification data, industry
  trends and state strengths and weaknesses
• Draft legislative recommendations
• Conduct industry assessments
• Interviews with key stakeholders and cluster team
  members
• Online survey of statewide representatives
• Regional forums
• Final Report Development
• Collaborate in the development of a master,
  market-driven economic plan to position Texas as
  a global competitor
• Spur the collaboration between state government,
  academic institutions and industry.

Launch
Trends, SWOT
Draft Legislative Recs
Interviews
INDUSTRY ASSESSMENT
On-line Surveys
Regional Forums
Draft Final Report
Interface w/Other Initiatives
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Background and Operating Environment
Since 2000, Texas refining and chemicals
competitiveness has deteriorated. Recent record
high crude and gas prices have started a reversal
in this trend
US Gulf Coast Competitive Position
Cost of US Gulf Coast Natural Gas
Cost of Crude Oil /bbl
Petrochemical Markets
Period

• Advantage Lost

• 2.50- 7.00

• 20-35

• Weak

• 2000-2003

• Improving position

• 5.00 - 7.00

• 35-55

• Tight

• 2004-2005

Source University of Houston Global Energy
Management Institute
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Survey - Key Findings

• Business climate issues topped the list of
  challenges.
• Industry sees the commitment of state and
  regional leaders as two-fold dealing with
  taxation and educational reform. Taxation,
  especially property taxation, is seen as
  burdensome on an industry that has such a high
  concentration of fixed assets. Education, as an
  extension of the commitment question, relates to
  the lack of qualified workers entering the
  industry.
• fostering of new technologies, for the
  development of new or improved products, and for
  the development of new plant processes. Plant
  processes are seen as everything from a new
  catalysis process to innovative and less
  expensive ways to generate and delivery energy to
  the plants.
• The ability of Texas plants to reach new markets
  is of high concern. True commodity products are
  undifferentiated, so competition is based on
  economies of scale, margins, and volume. New
  markets should improve revenue, profitability,
  and jobs.
• Workforce concerns reinforce the difficulty of
  attracting talented technical professionals.
  Retaining technical professionals is even more of
  an issue to management. Since there is little or
  no pipeline from which to draw replacement
  workers, companies are forced to compete on
  employee retention, and tend to poach each
  others employees.
• New product development through research and
  development is also a high impact area for the
  industry. The commitment on the part of the state
  to foster collaboration, among companies, and
  between industry and the university systems, can
  help these players develop new and higher margin
  niche products, and develop robust entries into
  new markets.

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Industry Impacts

• North American expansion will be limited.
  Capacity should grow about 0.5 per year through
  2008. As a result, operating rates should climb
  to near full capacity towards the end of the
  decade, and any additional demand growth is
  expected to be filled by reduced exports and
  increased imports.
• At the same time, European expansion will be
  modest, and primarily located in Eastern Europe.
  
• The Chemicals sector customer base will continue
  to grow in developing countries, especially China
  and India, and manufacturing capacity increases
  will follow consumption.
• Health, safety and environmental concerns will
  continue to be a driving issue, both in workforce
  and technology development.
• As margins continue to drive operations, the
  importance of improved technology will remain a
  cost of competition.
• Environmental regulations will continue to impact
  the economic feasibility of expansions, and will
  emerge as increasingly important considerations
  in developing regions.
• The critical mass of Texas operating plants,
  pipelines, supply, and transportation
  infrastructure will continue to generate
  economies of scope and scale however, both
  capacity and process capabilities will need to be
  upgraded to remain globally competitive.
• Labor costs in developing countries will
  increase, but will remain dramatically lower than
  in the US.
• Globalization of downstream customers of the
  chemicals industry will threaten the Texas
  chemicals industry, as industrial consumers
  source intermediate product from less expensive
  regional providers.
• Low-cost feedstocks will continue to favor Middle
  East and Far East regions LNG capacities and the
  importation of wetter LNG may be the equalizer.

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Regional Forums
An Overview of Regional Strengths, Weaknesses,
Opportunities and Threats
Beaumont
Houston
Corpus Christi
Strength There is a highly skilled workforce,
supported by extensive infrastructure, existing
in the region. Weakness As regional plants
automate to try to remain competitive in a global
market, worker displacement will continue, and
workforce skills are lost to other industries and
regions. Opportunity At Lamar University, there
is an emerging center of excellence built on
composite materials development. Threat The
industry is looking for increasingly higher
education levels for entry positions high school
graduates no longer qualify for technician
positions. Entry level positions require more
math and chemistry skills than are being pursued
in local schools.
Strength The national perception of engineers
educated in Texas universities is that they are
the best qualified to graduate directly into a
job site position Weakness The industry is not
seen as an attractive industry because of its
cyclicality and image. Graduates dont see the
high tech content in these jobs Opportunity
There is a significant opportunity to create a
research triangle around petrochemicals in the
Houston region, based on the combination of
plants, universities, and supporting services
that are available. An example of such a
paradigm-shifting project would be in low sulfur
regulations, which necessitate the development
of new catalysis processes, providing a
competitive advantage Threat The ramifications
of the Clean Air Act, and Houstons position as
being at non-attainment, make it very difficult
to add to or build new refining capacity in the
region.
Strength Infrastructure a critical mass of
plants and support services, combined with
transportation assets such as sea, air, highway
connections, etc. - is a major strength, and
creates an environment of collaboration. Weakness
Millions have to be spent to improve a process
or remain compliant, as a cost of staying in
business. At the same time, these major capital
projects are slowed by the permitting process,
which only raises costs. Opportunity LNG is
one of the keys to the future of the region,
lowering costs, creating jobs, and guaranteeing
feedstock availability. LNG plants may require
new skillsets, which the industry can develop in
concert with state and regional workforce
authorities. Threat Current state and local
tax structures will continue to be a damper on
new development and expansion plans unless new
types of incentives are created to reduce cost of
location, expansion, and operation.
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The larger patters of clustered activities across
the Lone Star State ...
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mirror much of the Gulf Coast regions network
advantages of scale/scope
Source University of Houston Global Energy
Management Institute
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Creating Communities of Innovation
Knowledge Creation
Technology Transfer
Licenses Patents Incubators
Research Development
Innovation
Texas Globally Competitive
Venture Capital Angels
Clinical Trials Business Planning
Regulatory Approval
Marketing Sales Industry Alliances
Partners State Funding Federal RD
Supply Demand
Commercialization
Job Creation Product Development IPOs
Product Pipeline Workforce Training
Academic Curriculum Development
Clusters Networks
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What gives a Cluster a competitive advantage?

• Competitors will eventually and inevitably
  overtake any company that stops improving and
  innovating. Ultimately, the only way to sustain a
  competitive advantage is to upgrade it. So why
  are certain companies based in certain regions
  capable of consistent innovation? The answer lies
  in four broad attributes
• 1. Factor conditions. The regions position in
  factors of production, such as skilled labor or
  infrastructure, necessary to compete in a given
  industry. This also includes such factors of
  production as land, labor, capital, and
  intellectual property
• 2. Demand conditions. The nature of local market
  demand for the industrys product or service.
• 3. Related and supporting industries. The
  presence or absence in the region of supplier
  industries and other related industries that are
  internationally competitive
• 4. Firm strategy, structure, and rivalry. The
  conditions in the region governing how companies
  are created, organized, and managed, as well as
  the nature of domestic rivalry

From The Competitive Nature of Nations Michael
Porter Harvard Business Review, 1990
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Refining and Chemical Products Recommendations

• The Refining and Petrochemicals team, along with
  industry stakeholders across the state, met in a
  series of cluster meetings and regional forums.
  The groups were asked to develop opportunities
  that would impact both the industry and the
  region. These results were then reported back to
  the cluster team, were compared and prioritized.
  The three priorities, along with associated
  project recommendations, were collaboration,
  workforce, and education.

Recommendations Summary

• Advanced Industry Collaborative Alliance
• Economic Development and Facilities Expansion
• Applicant Screening

Collaboration

• LNG Skills Training
• Industry Image

Workforce

• Industry Demographic Study
• Just in Time Workforce

Education
Tax Policy Incentives

• Institute non-traditional economic incentives for
  expansion and jobs creation that mitigate the
  current tax structure

Workforce Displacement Re-Training

• Develop workforce intervention strategies and
  plans for re-training displaced workers

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Common Issues Arose Among the Clusters

• The education / workforce pipeline is not working
  in synch
• The state is facing a demographic cliff, in
  which it is losing workers from both ends of the
  career ladder, with high dropout rates and baby
  boomers preparing to retire
• The quantity and quality of educated workers is
  suffering
• Industry and state agencies must come together to
  explore and implement professional certification
  programs to counter the impending loss of workers
  to retirement
• School systems should be the most important
  economic development organization in the state
• The business climate in Texas can be more
  conducive to business recruitment
• There is a lack of coordination and collaboration
  in the economic development process
• Taxation and regulation issues are prohibitively
  expensive and have a high impact for capital
  intensive companies
• Incentives are primarily a local issue, and are
  not always aligned with a regional economic
  development process
• The Research and Development tax credit in Texas
  is considered by business to be inferior to
  broader based programs in other states
• The lack of training dollars in Texas is seen as
  an impediment
• States are going to stop recruiting businesses
  and start recruiting talent
• There is an increasing awareness of the
  possibilities presented by technology transfers
  from other industries
• Technology transfer must foster increased
  collaboration
• Collaboration will mean that all industries
  benefit in the long run

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Common Issues Arose Among the Clusters (2)

• The state must maximize the returns on its
  geography
• Texas has a strong resource base in its
  transportation infrastructure
• world-class highways, rail facilities, pipelines,
  seaports, airports, etc.
• There is a great opportunity to leverage
  workforce, education, and capital investments to
  develop an infrastructure for distribution and
  logistics
• what incremental investments will need to be made
  for broadband and communications capabilities?
• What incremental investments will be needed in
  infrastructure?
• The state is making strides in closing the
  commercialization gap
• There is a strong spirit of entrepreneurship in
  the State
• the role of the State must be to facilitate the
  commercialization process
• There is an abundance of capital for early-stage
  research and late-stage product release
• There must be more capital for product and market
  development to enable emerging technologies
• Multi-industry consortia will leverage Texas
  resources, focus technology and training
  investments, and lead to a Man on the Moon
  strategy for workforce development, and transform
  the base of the Texas economy from resources to
  knowledge

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Next Steps

• Cluster assessments and recommendations will be
  submitted to the Governors Office for
  prioritization
• Cross-cluster initiatives give the most bang
  for the buck
• Which recommendations require legislation?
  Funding? Regulatory action?
• Continue building relationships, connecting
  stakeholders, and encouraging collaboration
  across Texas
• Work with Governors Office to implement the
  Emerging Technology Fund plan
• Prepare a work plan for implementation of
  high-value, cross-cluster initiatives
• After receiving priorities for implementation
  from the Governors Office, the Chairs of each
  cluster team will brief their respective groups
  in core team meetings.
• Work teams will be selected for each project, to
  include industry, education, economic
  development, and others

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for more informationDoug B. RidgeIndustry
Initiatives ManagerTexas Workforce Commission

• Phone [phone]
• Fax [phone]
• Email douglas.ridge_at_twc.state.tx.us