17 March 2011 16:40 [Source: ICB]
It was not long ago that the North American chemical market was considered to be low growth and low margin. However, in 2010 that changed dramatically for major producers.
US-based ExxonMobil Chemical's US chemical profits more than tripled to a record $3.14bn (€2.25bn). US-based Dow Chemical's North American sales increased by 16% to $19.4bn, which is the fastest growth of all geographic regions.
What has caused this turnaround, and is it sustainable? While there has been a recovery in regional demand, it has only been a return to demand levels of 2008 at best. Nexant would assert that the primary driver of renewed profitability and growth in the North American chemical industry has been the emergence of shale gas and the accompanying gas liquids.
SHALE PROVIDES BOOST
Shale gas production in the US has grown eightfold in the past 10 years, and now accounts for some 12% of total gas production.
This rapid growth in gas supply has resulted in the decoupling of natural gas prices from oil and refined product prices. US natural gas prices are currently about one-quarter that of oil on an equivalent energy basis.
Even more important than the lower-priced energy source has been the impact on natural gas liquids production, commonly found in shale gas. Ethane is the most economical feedstock for the largest-volume petrochemical, ethylene. At low natural gas costs, there is even more incentive to extract ethane from the gas. US ethane production has increased by one-third to 17m tonnes/year in the past five years.
US ethylene producers have been taking advantage of increasing ethane supplies. About 63% of 2010 US ethylene production of 24m tonnes was based on ethane - up from 46% five years ago, while the C5+ ethylene feedstocks accounted for only 19%, compared to 32% five years ago.
The result of these developments has been a significant increase in the competitiveness of US petrochemical manufacturers in global markets. The charts compare the integrated cash cost of high density polyethylene (HDPE) from numerous global sources including both HDPE produced from ethylene via ethane cracking, and naphtha cracking as it was in 2004 and as it is now.
In 2004, US natural gas prices were equal to that of crude oil on an energy-equivalent basis, and US ethylene cash costs from ethane were actually higher than those from naphtha. Now integrated HDPE cash costs from ethane have moved dramatically down the global cost curve.
Evidence for this can be seen in trends in US chemical exports. The US has gone from being a net importer of polyethylene (PE) five years ago, to a major net exporter today, especially in HDPE.
Polyvinyl chloride (PVC), a product in which the US was losing its export position, has shown a seven-fold increase in net exports over the past five years. One-third of US PVC production is currently exported, even in the face of dramatic increases in PVC capacity in China.
The reaction of the US petrochemical industry has been to initiate investments to increase feedstock flexibility to utilize light feedstocks, as opposed to heavier naphtha or gas oil. The tougher question is whether to actually increase petrochemical capacity significantly, when the incremental market to be served is the export market.
SHALE GAS PRODUCTION DRIVERS
How is one to address this question? First, there is the issue of the longer-term outlook for shale gas and other unconventional natural gas production and pricing in North America. North American shale gas production will be driven by:
Production wells - Due to the intrinsic characteristics of unconventional natural gas deposits, the transmissibility (flow) of fluids from the formations is severely constrained by the low permeability of the rock formations. In order to contact and effectively drain the reservoirs, more wells are required than for conventional gas reservoirs. The higher number of production wells also increases the production infrastructure and corresponding costs. Horizontal-drilling technology has helped to reduce the number of wells needed, however, as the cost of a horizontal well is substantially higher than that of a vertical well.
Fracture stimulations - The lower permeability of unconventional gas reservoirs also reduces the individual well productivities, resulting in a slower cost recovery. The improvements in hydraulic fracture stimulation technology - through new fluid systems, multistage and simultaneous stimulations - reduced damage to the proppant pack, and three-dimensional fracture simulators have significantly increased the production rates. However, the stimulations are expensive, requiring a substantial mobilization of equipment, materials and manpower.
Environmental protection - The management of produced waters, especially in coal seam gas operations, is a critical issue that can significantly impact the economics of unconventional gas projects.
Developers are employing innovative solutions to treat and dispose of the produced waters, including re-injection into reservoirs to enhance oil recovery.
The technical and operational challenges associated with shale gas development include:
Groundwater contamination - Because shale deposits are thick, the application of massive fracture programs increases the risk of generating and extending fractures into adjacent strata, potentially contaminating groundwater formations.
Land use - The development of shale gas deposits requires thousands of wells requiring numerous well sites, roads for access, water transport pipelines, and transmission lines for delivering the gas offsite.
All of these compromise large surface areas and could be detrimental to the competing use or interests of the landowners.
The tougher question is whether to actually increase petrochemical capacity significantly, when the incremental market to be served is the export market
Water availability - The fracture stimulations require hundreds of thousands of gallons of water for each fracture stage. In areas that have seasonal variations in the availability of water, the operators must construct reservoirs that are used to store diverted river water during periods of higher flow. The potential impacts include fresh aquifer and stream flow depletion, and disruption and shortages of drinking water.
Water disposal - One of the biggest challenges facing the operators is the cost to transport and dispose of wastewater from drilling and fracturing operations to offsite treatment plants. A typical hydraulic fracture for a well in the Marcellus Shale deposit in Western Pennsylvania returns between 2m and 3m gallons of water.
In addition, there is the outlook for overall energy demand and the role of natural gas in power generation as an alternative to coal. This will be another key driver in the long-term price of natural gas and gas liquids in North America.
Finally, there are the developments in the global chemical industry in which North America operates.
William Tittle, principal and director of Strategy, Americas and Asia at Nexant, has worked in the chemical business arena for more than 35 years in various capacities. He can be reached at firstname.lastname@example.org.
Nexant is initiating a multi-client study on North American shale gas and its impact. Contact Heidi Coleman at email@example.com
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