Episode 10 – Site Selection Drivers for Heavy Industry Today
Rick Weddle: Welcome to Site Selection Matters where we take a close look at the art and science of site selection decision-making specifically and economic development generally. I’m your host, Rick Weddell, president of the Site Selectors Guild. In each episode, we introduce you to leaders in the world of corporate site selection and in economic development. We speak with members of the Site Selectors Guild, our economic development partners, and corporate decision-makers to provide you with insight into the best and next practices in our profession.
In this episode, we have as our guest Ron Crum, practice leader for Industrial Site Selection for CSRS, Inc, a major engineering planning, architecture, and program management firm in Louisiana and Texas. Ron has led dozens of searches for a wide range of heavy industry, including many in the refining and chemical industry. Ron also is a member of the Site Selectors Guild. Today, Ron will talk with us about the principal site selection drivers for heavy industry, a topic that will, no doubt, be interesting and informative to everyone in interested in investment promotion and new job creation. Join me as we welcome Ron Crum to the Site Selection Matters.
Ron, our focus today is on site location drivers for heavy industry. To get us started, take a minute and explain exactly what you mean by heavy industry and maybe how it’s different in its needs from other types of industry.
Ron Crum: Thank you, Rick. It’s a pleasure to be here today, and I wanna thank you for your leadership in initiating the field’s superb series of podcasts. This is certainly an honor. Your question, Rick is an excellent and a necessary clarification before we get into the heart of the matter. Heavy industry typically means the oil, shipbuilding, chemical, mining, steel, machinery manufacturing, and similar industries. It is a very capital-intensive industry, meaning that they require enormous sums of money to build a plant before they can produce the first gallon of product or before they produce the first widget.
It is not unusual for a facility to cost a billion dollars or even $3 to $5 billion. The largest project with which I’ve been involved was a capital investment of $21 billion. So, the investments can be massive. Additionally, certain types of heavy industry requires large parcels of land varying from 300 acres to 1,000 acres or more. And it’s not unusual to hear of a 2,000-acre project. Employee counts can easily exceed 1,000 or more. And as you might imagine, these facilities can result in a massive economic boost to the local and regional economy. Due to the nature of the industry, a site search for a heavy industry site has very significant challenges when compared to most other industrial classifications. So, I think I’ll turn it back over to you, Rick.
Rick: You know, Ron, this is really interesting. It reminds me of my days when I first got into the business when it was not economic development. It was industrial development with an eye and much of what we worked on were these large kinds of projects. It seems like you’re saying that site selection searches for these heavy industries are quite different from searches for other types of operations. Could you share with our audience some of the key differences you might see in that?
Ron: Sure, Rick. Let me address your question by citing three typical types of site searches that we see every day and then drill down into a little bit of the, how a heavy industry site search is different. Each site classification, such as data centers, chemical plants, and distribution centers typically have a clearly defined set of key criteria critical to the success of the overall siting effort. These criteria are generally listed in the site search materials, commonly called the RFI, that we Guild members prepare and send out to EDOs around the country.
The key criteria used by siding professionals to separate the wheat from the chaff, the criteria they’re going to demonstrate that the site has fatal flaws and should be eliminated from further consideration or that it is suitable for a more detailed review. Let me give a quick overview of some high-level criteria for three classifications of projects. We’ll talk briefly about data centers, automotive parts suppliers, and distribution warehouses, and then get into a little bit of discussion about heavy industry.
As my first example of key criteria, data centers have exacting electrical demands, including a need for power redundancy, power reliability, and low-cost power. They also have to have immediate access to low-latency data nodes and multiple telecom carriers. A site missing any of these criteria will be excluded from further consideration immediately.
As a second example, let’s look at the automotive parts manufacturing industry. Automotive parts manufacturers typically wanna be in close proximity to the automotive OEM facilities they supply. The best sites are generally located within just a few hours’ drive of multiple OEM facilities. The just-in-time delivery requirements of most automotive OEM facilities require parts suppliers to be able to deliver quickly and on-demand.
As a final comparison with heavy industry, let’s take a quick look at the distribution warehouse. Distribution warehouses have similar siding restrictions that guide the site selection effort. Often distribution warehouses wanna be in close proximity to major air shipping hubs of FedEx, UPS, or DHL. Alternatively, while the RFI may not explicitly state it, they may want to be in proximity to either Amazon or Walmart distribution networks. The facility should also be located with excellent access to the interstate highway system.
Site selection searches for heavy industry are radically different and much more constrained than searches for other industry categories like those we just discussed data, centers, distribution warehouse, and call centers. Rick, does that adequately address your question?
Rick: It does indeed. Those three different classifications of projects have three unique and distinctly different drivers, frameworks, or interests in that. My guess is that however, some of your searches are really looking for very specific things that may be unique to the particular firm or industry you’re considering. Can you unpack this a little bit and maybe give us some examples?
Ron: As your question suggests, there are stark differences, but important differences inherent in the site search for a heavy industry facility. Let’s discuss a few of those differences and how these differences affect the overall site selection process. The first major difference is that the key criteria may seriously limit the sheer number of possible sites. As an example, a planning site for a distribution facility in and around Hebron, Kentucky to gain access to Amazon’s new CBG air hub might require 40 to 80 acres and a pad for construction of a 1 to 2 million square foot facility. Literally, hundreds of sites roughly meet those requirements within a one-hour drive down I-75 and I-71 in the Cincinnati area.
While finding a warehouse site in Hebron may be fairly easy. Siting a heavy industry project requires a more detailed search and site fatal flaws are rampant. For example, identifying a site for a $2 billion facility that requires a thousand acres and 2 million gallons per day of processed water is a bit more difficult. The number of sites that meet the above criteria are limited, but when you add the need for rail access or access to a 20-inch or 36-inch natural gas transmission line, the number of qualifying sites plummets, making the match much more difficult. When you compound the problem with the requirement for 2,000 highly skilled construction workers for an 18 to 24-month period and 300 to 1,000 skilled workers long-term, the complexity of the search becomes huge.
And citing one type of heavy industry that’s even more restricted, identifying a site for a major chemical or refining or petrochemical plant can revolve around the availability of a key chemical required in the process. As an example, my team was searching for a site for a new $1.5 billion polycarbonate plant, polycarbonate being a super-strong, pure plastic used heavily in cars, eyeglasses, stadium roofs, and bulletproof glass.
The key raw material used in manufacturing polycarbonate is bisphenol A and our search revolved around finding a 1,200-acre site within a few miles of a bisphenol A source. Recent data indicates that a 12-inch pressure pipeline, steel pipeline, to transport the bisphenol A costs $4 million a mile. As a result, the pipeline costs limited our search to sites in just six small communities in the U.S. where bisphenol A was manufactured.
The facilities are Baytown, Texas, Freeport, Texas, Deer Park, Texas, Haber Hill, Ohio, [inaudible 00:09:51] Alabama, and Mount Vernon, Indiana. All had Greenfield sites that made the initial short list. Had the client site required a deep-water dock, the sighting study would have been even more limited, as only Baytown, Deer Park, and Freeport were able to accommodate deepwater graph ships. And good sites at any one of those three locales would have certainly made the short list.
In another search for an FDI that is foreign direct investment, our project for an Asian client required a site without standing access to cheap natural gas and access to deep water draft shipping. The goal of the project was to construct a $3.7 billion methanol plant and ship the finished product back to Asia via the Panama Canal. The cost of shipping and access to vast quantities of natural gas resulted in a site search limited to either Texas or Louisiana where the client could buy natural gas from either the Haynesville shale in Louisiana or Eagle Ford formation in Texas.
As an aside, while cheap natural gas was available in the Marcellus shale up on the East coast, the higher shipping cost from the East Coast was unacceptable to our clients. Ultimately, we were able to identify quality sites in both Texas and Louisiana. Rick, my apologies for being so verbose, but I’m a detailed sort of guy, but I will stop here and see if you have further thoughts or comments.
Rick: Well, you’re a detailed sort of guy, but you’re also a detailed sort of business we’re in. A lot of complex information is needed in this whole process. You mentioned earlier RFIs, or to unpack that, request for information in your comments. Can you briefly provide our listeners with some pointers on how to best respond to what sounds like a very technical and demanding request for proposal?
Ron: Rick, I love the question because it’s frustrating for both the EDO and the site selector in pulling data on sites. One of the more frustrating aspects of the site search process is to issue a detailed RFI and to receive submissions afterwards that are not on target. When looking for a site for heavy industry, the key criteria dominate the search and time is always in short supply. Our clients always have an economic window of opportunity they need to meet, and they always want to get their projects started as soon as possible.
So, we ask for a lot of detailed data with a quick-hitting deadline. The only way an EDO can properly respond with sufficient and accurate data is by submitting certified sites. More often than not, we ask that they only submit certified sites as we do not have time to investigate the sites ourselves due to the time crunch.
It also helps if the EDO has an engineer on staff or a consulting engineer that can assist with the preparation of the RFI response. Numerous questions we typically ask are easy to misunderstand and misconstrue without some technical assistance. Questions on dock feasibility, [inaudible 00:13:08] bearing pressures, and attainment zones are just three of the few dozen questions that are often skipped or answered incorrectly when responding to an RFI.
Rick: It almost makes my head hurt to think about the complexity of responding to one of those RFIs. I’m glad you have such a systematic approach. You know, I noted earlier in our comments that you were one of our Site Selection Guild members. How does being involved in a professional organization like the Guild help you in your business?
Ron: Rick, to be honest, I love the Guild. It’s made a huge difference in my professional life and my growth as a site selector. While it was an honor to be accepted, I was initially wary of meeting with 50 other professionals who were in the same basic business as mine. However, the collegial atmosphere of the meetings and everyone’s complete openness and acceptance of me makes me look forward to each of our gatherings. I have to say meeting with 50 super-smart folks several times a year keeps you on your toes.
The culture of the Guild is highly conducive to teaming and sharing of ideas. I do not want to be too effusve in my comments, but I can certainly say that the Guild has actually been both fun and a learning experience.
Rick: Ron, I don’t wanna put you on the spot, but I’d like to ask, if I could, what you see coming down the pike as major changes afoot in your business and how these changes will impact heavy industry site locations over the next few years.
Ron: Rick, that’s an excellent question. And venturing out into what the future holds is always difficult territory, but I’ll attempt to answer it by saying this. A C-change event took place in the U.S. way back in 2008. in the midst of the great recession, and the U.S. is still reaping the fruit of that C-change. For most Americans, the C-change was invisible. But if you’ve worked in heavy industry, the change was quite startling.
That year, the U.S. energy industry perfected the process of fracturing shale formations and freeing up the mega barrels of natural gas from geological deposits heretofore thought impractical and economically infeasible. In 2008, the price of natural gas plummeted from $16 per million BTUs to $3, slashing a major cost factor for heavy industry in the U.S. The U.S. was suddenly awash in cheap natural gas. Just as suddenly, the U.S. became the cheapest place in the world to manufacture a whole state of chemicals, plastics, and steel products.
For decades, the U.S. had been losing manufacturing jobs to overseas markets, but overnight the U.S. became the place to be. While prices for natural gas in Europe topped $9 and Asia $12, the price in the U.S. was $3 and actually fell below $2 for a period of time. This resulted in the U.S. gaining hundreds of thousands of new high-paying jobs in a wide variety of manufacturing sectors. The operating cost of innumerable industries like steel, shipbuilding, refining chemicals, pipe manufacturers, and many others plummeted.
Here in Louisiana, where I live, we saw numerous plants closed down in the years leading up to 2008, like fertilizer plants, and methanol plants that both use lots of natural gas. The $16 per million BTUs killed them. Here on the Gulf Coast; we saw one of our fertilizer plants disassembled and shipped to the mid-East. A methanol plant was shipped to Chile, and a scrap iron plant was shipped to Puerto Rico.
Since 2008, the entire Gulf Coast from Florida through Texas has seen a huge wave of new plants from steel plants, to pipeline manufacturing, to chemicals. It’s been 50 years since the Gulf Coast has seen a [inaudible 00:17:12] investment of this magnitude. And those plants are coming back to Louisiana. The methanol plant that was shipped to Chile is now operating in Louisiana again, and the other two plants will soon be operating.
And I became a very busy person about that time. In 2014, the price of crude oil also plummeted. Tracking the price of natural gas when the U.S. shale fracking created a global glut of crude, the U.S. became energy independent. And American consumers saw their gasoline prices at the pump plummet,. And still another wave of foreign companies made their way to the U.S. The energy revolution of the past 11 years has resulted in a massive surge in foreign direct investment in the U.S. with over $1.5 trillion in new FDI interests the last five years.
And I am as busy today as I’ve been in years. Today, in our practice at CSRS, we’re seeing huge levels of interest from both foreign and domestic companies continuing to take advantage of the cheap price of natural gas and crude. We have almost weekly meetings with companies seeking sites for a wide variety of chemical plants, steel processing facilities, pipeline facilities, and other energy-intensive manufacturing processes.
As much about practice deals with foreign and entities, Rick, I think it might be instructive for your listeners to understand why numerous foreign companies seek to build projects in the U.S. In our meetings with them, they generally cite six primary reasons attracting them to the U.S. Number one, they cite the stability of the U.S. government. That’s something that I normally wouldn’t think about, but the stability of U.S. government. They also cite a predictable permitting process. And, of course, they cite the cheap access to energy.
They also cite ethical government practices. No bribes are needed to get a permit and so forth, and they cite the great infrastructure, including pipelines, ports, roads, and airports. And finally, they want to come to the U.S. for unfettered access to U.S. domestic markets. Rick, I know that was a long-winded answer to your question, but I must say while the short-term economic outlook might be weak, the long-term outlook is outstanding. The U.S. is a great place to be today and will be a great place in the coming decades for heavy industry.
Rick: You know, Ron, you’ve given us a lot to think about today. What a great conversation and so appropriate for you to wrap it up with a really a masterclass on U.S. business climate and business environment. Thank you very much for that, but, you know, that’s about all the time we have today. So, let me say thanks to Ron Crum for talking with us today on this episode of Site Selection Matters.
Ron: Thank you, Rick. I enjoyed it so much. It was certainly a pleasure to be here.
Rick: Thanks for listening to this episode of Site Selection Matters, and a special thanks today to Ron Crum, with CSRS, Inc for helping us get inside and better understand the key site selection drivers for heavy industry today. What an informative discussion that leaves us with a lot to think about. Again, I’m Rick Weddell, president of the Site Selectors Guild. We hope you will subscribe to Site Selection Matters podcasts on Apple, podcasts on Stitcher, on Spotify, or wherever you listen to podcasts. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.