A switch in time…

12 September 2005 00:01  [Source: ACN]

Petrochemical companies will find that having the flexibility to switch feedstocks is a useful attribute when, as now, crude and naphtha prices are hitting the roof.

Steadily eroding margins have forced some operators in Asia to evaluate their feedstock strategies, a situation which has become even more acute in recent weeks when events such as Hurricane Katrina have further disrupted oil supplies and refinery operations, pushing prices ever higher.

It wasn’t always like this. Not so long ago, industry people were extolling the virtues of cheap naphtha, and on the back of this a raft of new projects in areas such as the Middle East and China was announced. We expected significant new refining capacity to boost naphtha availability even more.

But, with most reasonable estimates suggesting that high crude and naphtha prices are here to stay – perhaps until the end of the decade – there seems to be a consensus that flexible feedstocks are key to maximising profitability and keeping costs down. A slate based on naphtha, liquefied petroleum gas (LPG), and heavy gas oil does, after all, at least allow products coming out of the cracker to be adjusted to meet pricing volatility and to suit demand.

That’s all right in theory, but not all plants in Asia have the technical capability to switch feedstocks. In Japan, though, some naphtha crackers are turning to cheaper LPG feedstock. A cracker at Keiyo Ethylene’s fourth train will be modified to accept heavier feedstocks next June after a debottlenecking scheme which will also increase olefins output. The cracker currently uses open-spec naphtha feedstock, but whether it will automatically switch to other feedstocks such as gas oil at that time would, it says, still depend on economics.

ENCOURAGEMENT FROM METI

Acknowledging the merits of feedstock switching, Japan’s Ministry of Economy, Trade and Industry (Meti) last year removed the consumption tax and slashed import tariffs on gas oil and kerosene, to encourage chemical companies to make the switch from naphtha if necessary.

Crackers at Malaysia’s Titan Chemicals have, meanwhile, been modified to enable them to crack the full range of naphtha as well as heavier liquid feedstock such as gas oil.

In South Korea, Samsung Total Petrochemicals is said to be optimising its feedstock slate by extending beyond naphtha to LPG and gas oil when prices are favourable. The company currently produces around 200 000 tonne/year of LPG, which, under normal circumstances, is sold locally as prices are attractive.

Even in China, where older non-worldscale crackers lack the technical capability to switch feedstocks, alternatives are being considered. The vice-president of the Shenzhen Petrochemical Industrial Association in China, Wang Zhende, says, for instance, that Guangdong province has the potential to develop liquefied natural gas (LNG)-based petrochemicals since it imports the material and the cost of a new gas-based cracker in Guangdong would be much lower than that of a naphtha cracker.

There has also been talk in China of using coal as a feedstock, an illustration of the lengths to which companies are prepared to go to fend off high feedstock prices. Coal is relatively cheap – a tonne could cost as little as Rmb100 (US$12) – and a coal-based project could well be viable if it were located close to a mine. But while there is plenty of coal in China, a lot of it is remote, thus restricting plant location. There is also concern over the environmental effects of widespread coal use, not to mention the appalling safety record of the Chinese coal industry.

Coal-based methanol, polyvinyl chloride (PVC) and olefins projects are on the drawing board (see table). China’s largest coal producer, the Shenhua Group, is said to be planning two coal-to-olefins (CTO) projects – a US$1bn project in Baotou in Inner Mongolia, which will have a coal-gasification unit to make synthetic gas (syngas), which will feed a methanol unit, from which methanol will be piped to a methanol-to-olefins (MTO) unit. A second project – in Yulin, Shaanxi province – is being studied by Shenhua and Dow Chemical.

How many?

How many Chinese CTO projects see the light of day is open to question, but coal-gasification and methanol technologies have been developed by companies such as ExxonMobil, Lurgi, and UOP/Norsk Hydro. With the feedstock issue becoming even more pertinent in the current price climate, it is perhaps no surprise that new technologies are sparking healthy debate among developers, licensors, and users.

Don’t expect a feedstock technological revolution too soon. The president of Shell Chemicals, Fran Keeth, says liquids cracking could be economically advantageous given that natural gas is no longer cheap, but the advantage would not necessarily be sufficient to cause a major shift to liquids or gas cracking to produce ethylene or other feedstocks.

In Europe, meanwhile, Shell Chemical has considered using naphtha from its gas-to-liquids (GTL) pool for petrochemicals production, according to Shell Nederland president director Rein Willems. He adds that this strategy is, again, unlikely to come to fruition soon since separate cuts would have to be made for naphtha, and that, at present, it is more profitable to place all the naphtha into GTL itself as part of the whole diesel component. Crackers based on a heavy liquid feedstock will have a competitive advantage, especially given high crude-oil prices and low ethane costs, resulting in higher US imports, he says.

With most new ethylene capacity coming onstream in either low-cost feedstock regions – such as the Middle East – or high-growth regions such as China, producers in North America and Europe are examining new technologies to produce ethylene and other olefins, such as propylene.

‘Certainly in the North American market, the past focus on building new steam crackers for meeting the needs of a growing ethylene market has and will continue to shift to one that is more focused on energy efficiency and feedstock flexibility,’ says Mark Eramo of CMAI. ‘In Asia and Europe as well, with propylene prices reaching new highs, more producers are looking to see how they can maximise propylene from existing steam-cracker operations.’

CO-PRODUCTS STREAMS

However, it remains doubtful whether co-product streams such as propylene and pygas will continue increasing their contribution to the bottom line of naphtha cracker operators.

‘With crude C4 values maintaining a consistent relationship to raw-material cost over time, the question looking forward is whether it makes sense to invest in heavier cracking capability based on an expectation of higher values from propylene and pygas,’ says Eramo. The CMAI forecast for pygas is for its historical relationship to feedstock costs to return by about 2007, whereas propylene will decline at a slower rate and stabilise at a value slightly higher compared with historical values.

‘While propylene prices are expected to be higher than that of ethylene, it is not clear if this will be enough to justify the incremental investment needed for heavy feedstock capabilities,’ notes Eramo. ‘As always, feedstock selection for a steam-cracker operator involves many variables, and the ultimate decision is based on a combination of the company’s upstream feedstock position as well as the downstream olefins requirements. For those companies that are looking to add heavy cracking capability, higher and sustainable values for propylene will be the primary incentive for this strategy.’

Heinz Zimmermann, product manager at Linde AG, admits that high demand for ethylene and propylene is still likely to be met by steam crackers, even though alternative routes to producing olefins offer considerable potential. The key drivers for alternative routes would be a switch to low-cost gas feedstock, high propylene prices coupled with a forecast shortage in the short term, structural changes in the market, and the new technologies themselves.  

Propylene manufacturers will probably also be looking for alternative production routes, especially in the Middle East, which is short on capacity. One solution, say experts, could be to boost propylene production at naphtha crackers through an integrated process, such as fluid catalytic cracking (FCC) units.

But this is only a limited source of additional propylene, as FCC units are mainly for gasoline production. Also, as the feedstock is linked to the crude-oil price, it would not be attractive when oil prices are soaring. Alternatives include converting methane through MTO and methanol-to-propylene (MTP) processes, through propane dehydrogenation, metathesis units, and olefin inter-conversion units. Raw-material costs are low, and high propylene prices make it attractive. In addition, high quantities of stranded gases – which are high in methane and propane – are available at low cost for these processes.

All this, however, again depends on feedstock availability and project capabilities.

‘At the end of the day, companies which hope to produce olefins through alternative routes have to weigh these issues. These are available only on a case-by-case basis. Steam cracking is still going to be the preferred route,’ one expert argues.

The issue of feedstock availability cannot be overlooked. Bertrand Jausseme of Samsung Total in South Korea warned earlier this year of concerns over the availability of heavy naphthas for aromatics production. Gas oil, he said, makes up 18% of the feedstock for Chinese crackers, and increased competition from domestic diesel demand means much of this could go into producing diesel.

MORE INTEGRATION

Feedstock availability concerns could well mean more plants integrating their processes to complement their products. In China, for instance, Shide is said to be keen to build a cracker because it needs to back-integrate its manufacturing facility. The facility will have access to feedstock, as the proposed cracker will be integrated with a 10m tonne/year refinery. Shide is also said to be in talks to secure crude-oil supply from Saudi Arabia.

State-owned Philippine National Oil Co (PNOC) is also looking at integration opportunities with foreign partners for its cracker project in Bataan. PNOC’s main concern for the project is, says a company official, to secure reasonably priced feedstock. He adds that PNOC may look at alternatives to naphtha for the proposed plant.

While PNOC has not yet firmed up a joint-venture agreement, it is reported to be talking to Petron, which operates a 180 000 bbl/day refinery, also in Bataan, which could provide feedstock that PNOC says it does not want to import.

The ability to switch feedstocks is seen by the financial community as an advantage. At the end of last month, Fitch Ratings (Thailand) upgraded the national long-term rating on Thai Olefins’ senior secured bonds to A from A-, which in part, it said, reflected the feedstock flexibility provided by its second gas-based olefins plant, which started up late last year.

Ultimately, whether companies switch feedstocks will depend upon the economics of the moment. A key question remains whether Asian petrochemical producers have the stomach to switch feedstocks, at least in the short term. Aaron Yap, an analyst at CLSA, points out that operators in the region currently ‘lack the confidence to switch feedstocks, as product demand is weak’.

Longer term, too, will it simply be more advantageous to set up crackers in more cost-competitive, feedstock-endowed areas such as the Middle East? As one Hong Kong-based analyst says, all signs point to a fundamental shift in investment to the Middle East, a concept reinforced by Sabic vice-president, corporate finance, Mutlaq Al Morished, in May this year when he reiterated the corporation’s ‘clear strategic and operational advantages’.

‘Producers in other parts of the world must depend on high-cost natural gas or naphtha-based feedstocks to produce ethylene, at a cost four times that of ethylene produced from natural gas,’ he said. ‘And since the cost of naphtha is linked to the world price of oil, non-competitive naphtha-based crackers are shutting down. This contributes to propylene shortages, since most propylene is the by-product of ethylene produced from naphtha,’ he said.

With a large number of cracker projects due onstream in Asia in the coming years – especially in China – feedstock economics could well assume even greater importance. How companies manage the issue, strategically and operationally, could well determine whether they sink or swim.

New technology to help meet demand

‘On purpose’ manufacturing is increasingly seen as a way of meeting growing demand for propylene while coping with a diminishing naphtha steam-cracking capacity. With growth in propylene capacity outpacing that in ethylene worldwide, and with the lightening of cracker feedstocks, some experts think steam cracking is unable to meet market demand.?Global propylene demand is about 63m tonne/year, and the portion from steam cracking is expected to shrink from 67.7% to less than 40% by 2014 as propane dehydrogenation (PDH) and other conversion technologies become more widely used.?‘There are more options available today than ever before for the production of propylene,’ says one expert. ?Key issues in selecting a technology include feedstock costs, feedstock availability and flexibility; yields of propylene and coproducts, and fit with existing production assets; production capacity; available capital; and refinery/petrochemical or gas production/petrochemical integration strategy.?PDH is employed at eight plants worldwide and accounts for 2% of the global propylene supplied for petrochemicals, according to experts. Six of the plants use a UOP-licensed process which uses a proprietary platinum-on-alumina catalyst. The yield of propylene from propane feedstock exceeds 85% of the feedstock weight, versus 15% with naphtha feedstock, while the amount of ethylene from propane feedstock is so small that it is usually not recovered.

China’s coal-to-olefins projects

Company/location	Products	Capacity, ’000 tonne/year	Status
Shenhua Group
Yulin, Shaanxi	-	-	Study to be completed next year
Baotou, Inner Mongolia	Methanol	1800	Waiting for final approval
	Polyethylene	300
	Polypropylene	310
	Butene	94
	Heavy alkanes	37
	Ethane/propane	14
	Sulphur	19
Shaanxi Xinxing Coal Chemical Technology Development Co, Shaanxi Investment Group and Shaanxi Coal Industry Group
Yulin, Shaanxi	Methanol to-olefins test unit	10	Under construction, start-up in August
Zhonghua Yiye Energy Investment Co
Yuheng Coal Chemistry Park, Yulin, Shaanxi	Methanol	2400	Study
	Ethylene	430
	Propylene	370
Source: ACN/ICIS news database

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