INSIGHT: Seeking the gas advantage in the US and Middle East

21 December 2011 16:06  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--It has become fascinating to watch how the overarching shift in the world’s energy mix away from oil to gas and other sources of hydrocarbons is affecting chemicals. The shale gas revolution playing out in the US particularly grabs the attention: the opportunities to make more olefins, predominantly ethylene, are immense.

The shift to gas puts strain on product chains which rely on liquid feedstocks. And that strain will persist as new gas deposits are developed globally.

The current view appears to be that China will not be able to exploit its shale gas resources - estimated at just under those in North America - to any great extent in the current decade, so all eyes turn to North America

But consultants Booz & Co suggest in a recent report that shale gas and coal to olefins (CTO) technologies could over time add 30% to China’s feedstock capacity.

The combined potential impact of these new feedstocks in China represents “the greatest potential disruption to the global petrochemical industry and the most significant uncertainties,” the company adds.

Closer in time are the plans by producers to add new olefins capacities in the US based on the streams of additional ethane, propane and butane that are becoming available from shale.

The viability of these projects depends on the availability of feedstocks, which have to be separated from the shale gas streams; local and national logistics (largely pipeline) issues; and price.

But the rapid exploitation of shale is drawing attention from both US and non US-based firms. Just last week SABIC CEO Mohamed Al-Mady said his company would consider investing in a US cracker either with a partner or on its own. Al-Mady’s comments were apposite: “We are in the business of petrochemicals,” he said adding that SABIC pursues feasible feedstock opportunities.

Although there is a move downstream in Saudi Arabia and in other countries in the Middle East to help drive wider industrialisation, the relative shortage of attractively priced ethane gas feedstock is changing attitudes across the sector.

In Saudi Arabia, the price of ethane delivered to existing customers is set to rise in January 2012 but this increase may be delayed. Ethane feedstock costs, although very low by international standards, however, are expected to more than double over time.

SABIC and its affiliates, particularly, feel constrained by the lack of feedstock availability. The company’s recent expansions are the driving force for growth now and it clearly wants to maintain momentum.

Saudi Arabia’s petrochemical producers currently rely largely on associated gas for their ethane but more feedstock could become available as the country seeks to expand its natural gas production capacity.

And it was apparent from the Gulf Petrochemicals and Chemicals Association (GPCA) meeting in Dubai in mid-December that a race for investment between the Middle East and the now feedstock attractive US is emerging.

Petrochemical producers are drawn to invest primarily by feedstock availability and cost and then by market accessibility.

Kuwait's Equate Petrochemical is looking to venture outside the Middle East because of a lack of additional domestic feedstock supply, CEO Hamad Al-Terkait said on the sidelines of the GPCA meeting.

Building a new ethane cracker in the US makes sense if domestic and export market expansion is projected to be large enough. The new plants planned now would rely all but totally on downstream, polymer demand, whether domestic or export, to support their profitability.

Shell Chemicals looks likely to seek a polyethylene investment, for instance, to support its planned cracker in the US north east. Its executives have said before that the converter market in the area could support the plant – while other facilities on the US Gulf coast turned largely to export.

This is a challenging project for Shell, Ben van Beurden, the company's executive vice president for chemicals, has admitted, because the energy giant has to coordinate the timing of upstream shale gas exploration, mid-stream separation and downstream chemicals investment decisions.

The company is also moving ahead with plans to utilise ethane separated from natural gas from Qatar’s massive North Field in a cracker joint venture with Qatar Petroleum. The planned cracker would support the world’s largest monoethylene glycol (MEG) plant which would use Shell’s proprietary OMEGA technology.

The moves to capitalise on the shale gas advantage in the US directly challenge the Middle East in ethane-based chemistry.

Middle East producers have gained their advantage in this industry by utilising cheap ethane from associated gases and ethane from the gas field. They have found a ready market for polyolefins in China.

Producers in the US look to similar advantages although somewhat higher costs when tapping in to shale. They have the benefit of a large developed downstream converter sector and fast growing polyolefins markets virtually on their doorstep in South America.

Bookmark John Richardson & Malini Hariharan’s Asian Chemical Connections blog
Read Paul Hodges' Chemicals & the Economy blog for ICIS

By: Nigel Davis
+44 20 8652 3214

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