Europe's petrochemical industry reliant on naphtha, remains at a disadvantage

23 September 2010 18:23  [Source: ICB]

With petrochemical production reliant on an expensive feedstock, Europe's industry fights to be competitive

Because its production facilities are mainly based on naphtha feedstocks, it is predicted that Western Europe's petrochemical industry will struggle to compete with its counterpart in North America, which is bolstered by a significant ethane advantage.

North America has always had greater access to natural gas reserves than Europe, providing its industry with cost-competitive ethane. Natural gas in the US has become increasingly available, and according to Joe Pilaro, president of US-based petrochemical consultancy BRAE Partners, "we are just beginning to access the natural gas in shale," which is primarily wet gas - also called gas liquids - and suitable for ethane extraction.

The US will remain long on natural gas "for a very long time - 100 years. I don't see any change in the dynamics" between the US and Europe, says Pilaro. "Europe is always going to be at a disadvantage [and] has had a competitive disadvantage since forever. That is why the US was, at one point, exporting roughly 10% of ethylene derivatives to Europe."

From 1986 to 2003, there was no cost advantage between ethane and naphtha - and while Saudi ethane may have been cheaper, the logistics of transportation only raised its cost. "It's only in the past five or six years that we have seen potentially a major differential open up between ethane prices and naphtha," says Paul Hodges, chairman of UK-based consultancy International eChem.

But there has been a "very clear divergence" in ethane and naphtha prices in the past few years, with naphtha prices at a 117.8 cent/gal premium to ethane versus a 20-year average of 42.3 cents/gal, notes Hassan Ahmed, cofounder of US-based financial research firm Alembic Global Advisors.

Availability is a primary consideration for feedstock selection on a global basis, Ahmed points out. "In the Middle East, ethane crackers are dominant because suppliers have made ethane readily available from abundant natural gas supplies."

However, he notes, naphtha is more economical to ship than other feedstock options, such as ethane and propane, "so naphtha is the most logical feedstock for importing regions."

Meanwhile, an ethane cracker "will probably not be built in Europe," says Pilaro.

Europe has been at a competitive disadvantage since forever
Joe Pilano
President, BRAE Partners 
The divergence in pricing between naphtha and ethane is "not surprising as the crude oil market is a global one while natural gas still remains a local market with pricing dictated by regional supply/demand fundamentals," says Ahmed.

 Because of the substantial co-product credits realized by the naphtha cracker, which can help offset the higher feedstock costs, the cash cost to produce a tonne of ethylene from naphtha is generally lower than it is to produce the same tonne of ethylene from ethane, he adds.

"Where this rationale for investing in a naphtha facility breaks down, though, is when the gap in margins widens considerably - as is the case in the current environment, where naphtha prices are considerably higher than ethane prices, thereby having no advantage from input costs while also not getting enough benefit from co-product credits," says Ahmed.

As long as the current energy pricing situation exists, "even if a trough were to happen all we would see is ethylene prices falling to marginal or naphtha-based production costs and US ethane-based producers would continue to enjoy very healthy margins benefiting from the pricing umbrella provided by high cost naphtha-based producers."

But the US and Saudi Arabia may be joined soon in their ethane advantage by Russia. "There is an interesting development in Russia occurring now - Russia has huge natural gas supplies," and with that, they have ethane available, says Pilaro.

"The Russians will probably eventually build a 1m tonne/year ethylene plant," predicts Pilaro - and not incorrectly, it would appear. Russian chemical group SIBUR plans to build a gas pyrolysis cracker that will produce more than 1m tonnes/year of ethylene at Tobolsk, western Siberia.

It will use natural gas liquids (NGLs) containing propane, butane and ethane as its main feedstock.

SIBUR president Dmitry Konov told ICIS in early September that a decision about the project would be made in late 2011 and that the project, if approved, would be operational by 2015-2016.

Russia has not advanced its petrochemical industry "to the level to be a major economic power," and no sound economy can operate without polyethylene (PE), says Pilaro. Russia has been importing PE, "and they should be making it."

When its ethylene cracker is completed, Russia will not export any of its PE, says Pilaro. "It would be used internally."

Ethylene is the focus of another mega project being planned. UK-based chemical major INEOS plans to build a 1m tonne/year ethylene terminal at Zwijndrecht, Belgium. The company has not indicated where the ethylene will come from.

The estimated cost of the new deep-sea terminal will be €80m-100m ($103.1m-128.9m) to build. Operation is expected to start in 2012, and it will be connected directly to INEOS's ethylene consuming facilities in the Antwerp Rotterdam Area and into Europe via the ARG ethylene pipeline (formerly the Aethylen-Rohrleitungs-Gesellschaft pipeline).

"By connecting INEOS Olefins & Polymers Europe and the INEOS Oligomers LAO/PAO [linear alpha olefins/polyalphaolefins] facility in Belgium to the new terminal, INEOS will be able to efficiently balance its ethylene requirements over its facilities in Europe," said Hans Casier, CEO of INEOS Oxide, in a late-July press release.

"It is clear the new INEOS Ethylene Terminal will reshape the ethylene market in Europe, opening up a new gateway to world markets," added Casier.


Pilaro expects INEOS to make a deal of some sort, perhaps a joint venture (JV), with a Middle Eastern supplier: "If I were running INEOS today, I'd be spending time in Kuwait trying to make a [50:50 JV] deal with them."

The terminal could make INEOS the "largest buyer of ethylene in Europe today," free of European suppliers, says Pilaro. "They would love to have the independence. If INEOS wants to remain in a competitive position they have to have ethane-based ethylene available to them - and they know that."

It will take a long time to happen, but Pilaro hypothesizes that eventually "the European producers with naphtha plants are going to go out of the derivatives business" because of cost. "The highest cost plant goes first," he says. The European petrochemical industry needs to be more competitive, agrees Hodges: "You need to weed out the crackers that aren't as efficient anymore."

There is no European spot market for natural gas, as all of the capacity is traded under long-term contracts, the terms of which are kept confidential.

Neil Tyler, analyst at global investment bank J.P. Morgan, says: "The price of natural gas liquids tends, however, to track the price of crude oil, sometimes with a lag of three to six months."

But arguments in favor of tight crude oil markets are questionable, Hodges says. With a developing surplus of shale gas and NGLs, and the interchangeability of feedstocks, "this is another nail in the coffin of the argument that says the only way for crude oil prices to go is up," he says.

There is not enough demand to maintain $80/bbl for crude oil, and much of crude oil's pricing is artificially inflated by derivatives sellers, Hodges contends.

Auto fuel standards are improving and alternative fuel consumption is increasing. And in the US, over the next decade or so, many of the "baby boomer" generation will be retiring, and driving less, further lowering oil demand. While demand in other regions may be increasing, those areas do not come close to US consumption levels.

Add to that the growing crude and petrochemical surpluses, Hodges says: "It doesn't take much to say crude could return to $30-40/bbl. And then, does the price stop there?"

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By: Ivan Lerner
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