INSIGHT: US petrochemical industry eyes LNG price impact

31 January 2012 17:17  [Source: ICIS news]

By Ruth Liao

LNG exports a possible demand outlet for the USHOUSTON (ICIS)--US chemical producers and others in industry are watching closely to see whether natural gas liquefaction is developing as a threat to low natural gas prices.

The record-low Henry Hub futures curve has already attracted eight US liquefaction proposals totalling just under 10bn cubic feet/day (bcf/day), or 283m cubic metres/day, nearly 80m tonnes/year.

They could absorb about 14% of the 71 bcf/day of gas that the Energy Information Administration (EIA) says is being produced currently in the lower 48 states.

And though many US industrial users - from steel manufacturing to aluminium production - are eager to capitalise on low natural gas prices, it is the liquefied natural gas (LNG) export market and the petrochemical industry that are forging ahead with feedstock-cost-driven investment decisions on projects and expansions, many of which are expected to come on line between 2015 and 2020.

But the result of expansion by both industries could be a conflicting pricing picture. For US natural gas producers, LNG exports are a possible demand outlet to raise the profitability of drilling. Petrochemical producers are placing a long-term bet that low natural gas prices will remain low.

Based on recent analyst studies, significant LNG exports from the US are likely to force natural gas prices to rise, although by how much is less clear. The consulting firm Deloitte estimated that the price increase would be $0.12/MMbtu on US citygate (the location of where the gas hub transactions take place) prices in the span of 2016 to 2035, based on the assumption of 6bcf/day of US exports.

A preliminary report by the US think tank the Brookings Institution suggested that the export of up to 6bcf/day will have "modest impacts" on domestic prices.

A report by the EIA attempting to predict the impact of LNG exports on the domestic natural gas market said prices under any scenario will rise in the decade from 2025 to 2035. Although the EIA did not provide a definitive rate of increase in its study, LNG exports from the US could trigger a surge in domestic end-user prices of natural gas.

The increase could average 3% to 9% between 2015 and 2035, versus a scenario where no LNG leaves the US, according to the EIA report.

The price rise could be more robust if the EIA's high-capacity and rapid build-out liquefaction scenario comes to fruition. The government agency describes that as 12 bcf/day, or 340m cubic metres/day, of export capacity being built over three years.

The threat of US gas leaving as LNG into the global market and ultimately driving the price higher is what concerns petrochemical producers aspiring to cash in on the low-cost feedstock advantage.

"If you go back in history, petrochemical [producers] have always gotten burned on natural gas," said Peter Fasullo, an analyst with midstream consulting firm En*Vantage in Houston, Texas. "And they always feel like that the government shouldn't be involved and the gas should stay as a fuel or feedstock."

Petrochemical refiners and manufacturers are primarily after the liquids-rich ethane stream drawn out of the natural gas as a cheap feedstock to produce derivatives such as plastics and consumer materials. It gives them a leading edge compared with global competitors using naphtha-based feedstocks.

The petrochemical industry based in the US Gulf coast gains a cost advantage using natural gas as a raw material versus oil-based feedstock in production when the oil-to-gas price ratio is above 7:1, according to the American Chemistry Council (ACC). Lately, the oil-to-gas ratio has skyrocketed to as high as 22:1.

So far, industrial users, including members of the American Fuel & Petrochemical Manufacturers (AFPM), see the proliferation of shale resources in the US as a long-term insurance to keep production costs low.

"We're pretty confident we'll be in an advantaged position for quite some time unless something presents a significant challenge," said James Cooper, vice president of petrochemicals with the AFPM.

Cooper said the abundance of gas has staved off any concerns that domestic supply would tighten and shrugged off the possible upward pricing reaction that could take place as a result of LNG exports.

"We haven't been dwelling a whole lot on [LNG] exports," he said.

Likewise, the ACC said it does not oppose LNG exports, but added: “America’s businesses and policymakers should also consider the benefits of processing natural gas into value-add finished products for export. That is, by using natural gas here in the United States – as a feedstock, for example – we can grow US exports of manufactured goods.”

The industry has homed in on growing US petrochemical capacity. Such growth ambitions could support the construction of three world-scale ethane crackers, likely all in the US Gulf Coast, according to Fasullo.

"There's a flurry of activity to expand, and use natural gas liquids as a feedstock in the petrochemical area," said Paul Cicio, president of the Industrial Energy Consumers of America (IECA). "At this point, we'd only be guessing at what that demand would look like."

In 2009, petrochemical feedstocks made up 3% of total industrial sector consumption, according to the EIA. But the EIA has not yet built supply-demand models in anticipation of any announced petrochemical expansions. Its latest manufacturing survey contains figures from 2006, before the shale resources were uncovered.

The IECA does not oppose LNG exports, but instead is pushing for more prudent analysis by the US Department of Energy (DOE) on each individual LNG export application.

Petrochemical analyst Fasullo thinks gas prices could increase as much as 1.5 times to twice as much and still give an advantage to chemical producers.

The industrial sector accounts for 32% of total US natural gas demand, 85% of which consumed in manufacturing, according to the Brookings Institution interim report.

"[It] is clear that the US petrochemical and manufacturing sector will be a prominent competitor and potential beneficiary of abundant domestic natural gas," according to its initial report.

Additional reporting by Ryan Hickman and Brian Ford


By: Ruth Liao
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