INSIGHT: Extracting the real value from shale

13 June 2011 16:10  [Source: ICIS news]

If the shale gas ‘revolution’ is to mean anything in chemicals then integration is the key (Photo provided by Shell)By Nigel Davis

LONDON (ICIS)--If the shale gas ‘revolution’ is to mean anything in chemicals then integration is the key.

Dow Chemical CEO Andrew Liveris suggested as much in April when commenting on the US-based company’s plans to build a cracker in North America and invest aggressively in propane dehydrogenation.

Significant new quantities of ethane and propane will become available as gas and liquids are extracted from shale deposits by ‘fracking’.

Netherlands registered LyondellBasell pointed out to investment analysts last week that ethane extraction capacity is expected to rise by 380,000 bbl/day or by 53% between 2006 and 2015: And as yet there is no ethane recovery system in the Marcellus field, the shale deposit which holds out so much promise in the US north east.

Shell has revealed plans to tap into gas liquids availability in the Marcellus field following the acquisition of prime gas acreage in its $4.7bn deal to purchase East Resources. The Netherlands headquartered energy giant has plans for a cracker located somewhere in the Appalachians.

Ethane and propane are already available from the significant Eagle Ford shale deposits in Texas. Chemical producers have recognised the potential advantage.

Some have staked out their plans in various levels of detail. There have been eight new cracker shale-gas based capacity announcements in North America to date.

At least one major player, US-headquartered chemicals giant ExxonMobil, has publicly suggested that while there is a cost advantage today, the long-term impact is unclear. It says it will look for normal debottlenecking opportunities in its US petrochemicals operations rather than look to build a new cracker.

“We invest selectively in advantaged projects, but never build new capacity because of demand,” ExxonMobil president Stephen Pryor has said.

Additional volumes of competitively priced feedstock, however, present a huge opportunity for players in the North American chemicals markets.

For Dow, as it shifts focus corporately from basic chemicals and plastics towards advanced materials, the opportunities lie in further feedstock integration.

Liveris’s comment that “the specialty chemical graveyard is littered with companies that didn’t understand the importance of integration,” is telling. Successful integration is a cornerstone of a successful chemicals business no matter where you sit in a product chain.

Dow’s position in propylene is, in Liveris’s words, “unsustainable”. The company is the largest propylene consumer in the US and purchases 50% of its needs for its vitally important downstream specialty materials and chemicals businesses, some of which it purchased with US specialties firm Rohm and Haas.

So Dow is pushing ahead with on-purpose propylene production in Texas and the commercialisation of its own technology for use in a new production facility in 2018.

It is looking for additional propane feedstock from the Eagle Ford and Marcellus Shale regions. It has ethane and propane supply contracts from Eagle Ford - and is looking for more. It is even talking about a joint venture fractionator in Texas.

Dow needs ethylene for ethylene oxide (EO) and more.

The company is also taking advantage of low-cost ethane feedstock for ethylene production, which is also used in downstream products such as ethylene oxide (EO) and derivatives, said Liveris.

Dow can’t continue as a buyer of ethylene for its downstream businesses, Liveris has said. That makes clear sense given the current shale gas opportunity.

So the company is finalising plans to lift ethylene supply from its US Gulf Coast facilities by re-starting a cracker and improving feedstock flexibility at plants in Louisiana. It has plans for a Gulf Coast cracker for 2017 start up.

The restarts and integration are designed to increase integrations. The new ethane cracker on the Gulf is planned for growth.

One of the reasons why most shale-gas based project announcements in chemicals to date have been so sketchy is the question of growth. Companies quite rightly will jump at the chance of improving feedstock economics and some are prepared to invest significantly to integrate further.

The big, step-out plan, however, is easier to contemplate than to justify.

“Building an ethane-fed cracker in Appalachia would unlock significant gas production in the Marcellus region by providing a local outlet for the ethane,” Shell’s executive vice president for chemicals, Ben van Beurden, said when the company announced it US cracker plan.

Shell wants to turn most of the ethylene from its proposed Appalachian plant into polyethylene (PE). Local regional demand for PE is expected to grow making the shale gas/ethane/cracker configuration attractive.

However, the big picture is that the US will be a “significant” exporter of PE, Van Beurden said. Logic suggests that US PE exports would be made from the US Gulf rather than the north east, he added.

For Shell, extracting ethane and other natural gas liquids (NGLs) is one option for the gas it expects to produce from the Marcellus shale. Other plays can include plans for shipping liquefied natural gas (LNG); gas to liquids capacity for fuels, lubricants and chemicals; and gas for powering transport vehicles. So integration, in one form or another, comes into play.

Many industry executives believe it is important to put the shale gas opportunity into perspective.

There will not be a huge, overall, global impact, some suggested at a recent round table discussion hosted by ICIS in Europe.

New capacity is unlikely to be built purely for export but the competitiveness of the US petrochemical industry will be improved. Additional domestic volumes will also replace imports.

The pinch will come in C3s and C4s as the shift away from liquids cracking continues. Some smart money will follow shale. One question is whether even smarter cash will stick to butadiene.

By: Nigel Davis
+44 20 8652 3214

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