INSIGHT: Naphtha or ethane: costs are key

12 October 2007 14:26  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--North American petrochemical producers that can crack naphtha as opposed to ethane are benefiting from the changed cost ratio between the two feedstocks and stronger cracker co-product credits. That advantage might be expected to continue.

US natural gas prices have risen only marginally since the beginning of the year - 0.2%, analysts at HSBC said this week -while ethane prices have climbed 57%.

The tight ethylene market has helped buoy naphtha cracker co-product credits to the advantage of those producers that process the heavier feed.

Judging the relative profitability of one company’s naphtha cracker complex and another’s ethane-based business is far from easy, but currently the advantage of using naphtha over ethane in North America is at its highest level in 15 years.

That is well over the long-run advantage of 4 cents/pound, HSBC says.

The cash cost of producing one tonne of ethylene from naphtha is generally lower than producing a tonne of ethylene from ethane given the value of the naphtha-based co-products.

As ethane prices have become decoupled from natural gas prices, it looks as though the naphtha based producers are winning out.

The question has to be, of course, for how long - and whether the cash cost of producing ethylene is the right sort of measure to estimate profitability in the first place.

"Given that no two companies have the same exact feedstock position and the same co-product value, either because of plant scale and product demand, it is easy to see why this business presents such complications around judging competitive position," HSBC says in a note to clients.

"It is also clear why a number of companies can claim that they each are the most efficient operation in the US," they add.

Westlake Chemical and Nova Chemicals are the most exposed to ethane in North America, Westlake making 81% of its ethylene from the gas and Nova 72%.

The olefins/polyolefins businesses also account for a significant proportion of both companies’ turnover.

Nova can rely to some extent on its so-called Alberta ethane cost advantage. Not surprisingly, HSBC’s view on Nova’s stock is "neutral" and on Westlake’s "underweight".

Petrochemical players' feed strategy is coming increasingly to the fore as feedstock costs fluctuate, sometimes violently, and feedstock availability issues arise.

In most respects it is the volatility of feedstock prices that cause the worst headaches. In such an environment, feedstock flexibility becomes increasingly important as companies strive to achieve real competitive advantage.

The ready availability of low-cost ethane in the Middle East has transformed the business and to a great extent will continue to do so although continued low-cost ethane availability is an issue.

What is not also widely recognised outside the core of the sector is that operating costs can be significantly diminished if plants are in the top quartile and operate effectively.

Indeed, for the seemingly less advantaged plants - some more than 30 years old - feedstock flexibility and energy efficiency are key.

At the CMAI pre-NPRA conference in Houston earlier this year, ExxonMobil Chemical senior vice-president Sherman Glass made the point that his company had evaluated more than 100 different cracker feedstock streams worldwide over the prior 12 months.

ExxonMobil can switch cracker feedstock in its plants within a few minutes. It has its own cracker furnace technology, runs 81 furnaces around the world and re-tubes them regularly.

ExxonMobil should know how to run an ethylene plant. It started the cracking business in Baton Rouge, Louisiana in 1941 and its original plant is still operating.

That unit now consumes less than half the energy per tonne of ethylene produced than it did 60 years ago.

The importance of driving down the costs of energy consumed in stream cracking cannot be over-estimated in today’s hyper competitive global petrochemicals operating environment.

So is it ethane or naphtha or a much broader feedstock slate that is the most advantaged?

Preferably the latter given the pressure in most regions on the ready availability of feedstocks and the energy costs of cracking.

An example of what might be achieved to help extend the life of important petrochemicals assets was demonstrated this week in the announcement from refinery developer SONHOE that it wanted to build a £2bn ($4bn/€2.9bn) oil upgrader facility on Teesside, in the northeast of England.

Close to the Wilton petrochemical complex, the refinery could supply naphtha - derived from heavy, sour crude - for petrochemicals use.

The development currently, however, looks highly speculative. Naphtha for the 865,000 tonne/year cracker in Wilton is sourced mainly from Algeria. How a local refinery might compete on price remains to be seen.

Securing advantaged feed and developing the ability to crack disadvantaged hydrocarbons will together shape the future of this business. Indeed, as is so often the case in petrochemicals, integration is key.

Effective local solutions will be required to help drive regional and ultimately global competitive advantage.

Stefan Baumgarten contributed to this article

By: Nigel Davis
+44 20 8652 3214

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