Market intelligence: Many ways for chemical companies to extract value from shale gas

20 June 2011 00:00  [Source: ICB]

Chemical players move to take advantage of growing supplies of us shale gas. dow seeks integration and growth, while shell sees the big picture in polyethylene exports

 

More shale gas and NGLs to become available

Daniel Foster

If the shale gas "revolution" is to mean anything in chemicals in the US, then integration is the key ingredient.

Dow Chemical CEO Andrew Liveris suggested as much in April when commenting on the US-based company's plans to build a new world-scale cracker in North America and invest aggressively in propane dehydrogenation for on-purpose propylene (C3) production.

Significant new quantities of ethane and propane will become available as gas and liquids are extracted from shale deposits by hydraulic fracturing, otherwise known as "fracking."

In early June, Netherlands-based petrochemical company LyondellBasell pointed out to investment analysts that ethane extraction capacity in the US is expected to rise by 380,000 bbl/day, or 53%, between 2006 and 2015. As of yet, however, there is no ethane recovery system in the Marcellus shale field - the shale deposit that holds so much promise in the northeastern US - near where Anglo-Dutch energy and petrochemical firm Shell intends to build its cracker.

Shell plans to tap into gas liquids availability in the Marcellus field following the acquisition of prime gas acreage in its $4.7bn (€3.3bn) deal to purchase US-based energy exploration company East Resources. Shell plans to build its cracker somewhere in the Appalachian region.

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

EIGHT EXPANSIONS ANNOUNCED
Some have set 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-based ExxonMobil Chemical, has publicly suggested that while there is a cost advantage today, the long-term impact is unclear. It says it will seek normal debottlenecking opportunities in its US petrochemical 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 said during an interview with ICIS in March. Additional volumes of competitively priced feedstock, however, present a huge opportunity for players in the North American chemical market.

DOW EMPHASIZES INTEGRATION
For Dow, even as it shifts focus 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 chemical 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 requirements for its vital downstream specialty materials and chemicals businesses, some of which it purchased with US specialty chemicals firm Rohm and Haas.

So Dow is pushing ahead with on-purpose propylene production in Texas and the commercialization of its own technology for use in a new production facility by 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 (C2) 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 EO and derivatives, said Liveris.

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

The company is therefore finalizing plans to lift ethylene supply from its US Gulf Coast facilities by restarting a cracker and improving feedstock flexibility at plants in Louisiana. It has plans for a new US Gulf Coast cracker to start up in 2017.

The restart and expansions at existing facilities are designed to increase integration. The new ethane cracker on the Gulf is planned for growth.

THE BIG PICTURE
One of the reasons 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 in early June when the company announced its 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 northeast, 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); building gas-to-liquids capacity for fuels, lubricants and chemicals; and making gas for powering transport vehicles. So integration, in one form or another, comes into play.

OPPORTUNITY INTO PERSPECTIVE
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 cracking liquids continues. Some smart money will follow shale. One question is whether even smarter cash will stick to butadiene (BD).


By: Nigel Davis
+44 20 8652 3214



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