Adapting to Pricey Oil
Energy costs pushed Air Products to transform its business
New direction. Air Products is the world's leading producer of hydrogen—a potential future energy source. But the future is now for the oil industry, which needs the gas to make cleaner fuels. Refiners used to make their own hydrogen, but then came the 1990 Clean Air Act. "We had some folks that read all these regulations and figured out that this is going to change the dynamics of the hydrogen needs of a refinery," says John McGlade, Air Products' chief operating officer. In the early 1990s, the company began selling a new idea: Air Products would build hydrogen plants near refineries, just as it had marketed oxygen for steel decades ago.
The best part of the deal for Air Products: long-term contracts that pass natural-gas costs through to the customers. Who better to take on that risk than oil companies, which see revenues soar when energy prices rise? "We deal with volatility every day," says J. Douglas Sparkman, senior vice president at Marathon Petroleum. In cases where it makes economic sense, Sparkman says Marathon could still make its own hydrogen, but for recent refinery expansions, it hired Air Products. "This is absolutely their core business, and they bring a reliability component that has a value," he says.
High oil prices further boosted hydrogen use, to improve the heavy, sour crude that is ever more abundant and cheaper than light, sweet standard. Air Products now has more than 30 refinery plants, six built in 2006—each at a cost of more than $200 million. In this business, Air Products has twice the capacity of its competitors—Praxair and Paris-based Air Liquide. It's one reason Air Products is growing faster, despite its rivals' bigger shares of the overall gas market.
Another Air Products energy foothold: It dominates the global market for the enormous equipment used to liquefy natural gas. Only when natural gas prices are high do companies invest billions to transport the fuel from remote locations by cooling it to liquid at minus 260 degrees Fahrenheit. The United States has recently looked to LNG, as Japan and other energy-short nations have done for decades. Air Products won its first LNG contract in Libya in 1964. Air Liquide had proposed to build from the ground up in the desert, where labor was scarce and construction problems inevitable. But Air Products proposed to construct the huge heat exchanger in Wilkes-Barre, Pa., and ship it overseas, ready to go. Since then, Air Products has provided 76 heat exchangers to about a dozen countries, more than 80 percent of the units in operation. The $25 million to $100 million units take 18 to 24 months to build. They look like rockets, weigh 500 tons, and stand 180 feet tall. Inside is a spaghetti of up to 1,000 miles of aluminum tubing for the refrigerant. Gas-rich Qatar has purchased a half dozen of Air Products's new high-capacity units.
The company kept one chemical business—a venture started in the 1970s with a nitrogen pipeline to serve fledgling companies in Santa Clara, Calif. But Air Products now reaches beyond the Silicon Valley as a supplier of cleaning and etching mixes that transform silicon wafers into logic and memory chips. More than half its business is now in Asia, although it still does research at its Pennsylvania headquarters. One recent breakthrough: a new insulation that will allow the semiconductor industry to continue on the path to smaller, faster, more powerful chips. Jones admits electronics is notoriously cyclical but says Air Products isn't hurt by falling prices for laptops, MP3 players, and game systems. "Our business is much more driven by the square inches of silicon produced," he says. And that has been growing rapidly enough that Air Products showed 23 percent profit growth in electronics this past quarter.
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