13 February 2012 00:00 [Source: ICB]
The coming boom in US ethylene cracker expansions driven by low-cost shale gas could add a whopping 29% to existing ethylene capacity in the country by 2017, leading to a supply-driven bust in the cycle.
Shale gas has already led to new infrastructure such as these compressor stations in Pennsylvania
Copyright: Gerry Dincher
"Spot-integrated ethane-to-polyethylene margins rose to $0.42/lb this week, the highest levels since April 2010," said Vincent Andrews, analyst at US-based investment bank Morgan Stanley on February 6.
Andrew Cash, analyst at global investment bank UBS, noted that the plunge in US ethane prices this year has taken nearly all industry observers by surprise.
"We believe that logistical barriers are being overcome, enabling newly installed NGL [natural gas liquids] fractionators to run at high rates," said Cash. "Traders now anticipate that there will be adequate ethane inventories ahead of cracker shutdowns that will shutter 8% of industry capacity in April and 4.5% in May."
ETHANE DEBATE HEATS UP
But Andrews warns that US ethane prices are poised to recover in the second half.
"Although ethane will likely continue to fall in the coming weeks, we forecast ethane prices recovering in the second half of 2012," said Andrews.
"We caution investors against getting too excited over cheap ethane feedstock, as ethane demand could hit new highs by the end of the year, while there is limited evidence that supply growth will tip the balance into oversupply in that time frame," he added.
Andrews sees ethane demand rising in the second half as US producer BASF FINA Petrochemicals increases ethane cracking capabilities at Port Arthur, Texas, and US-based Dow Chemical restarts its cracker in Taft, Louisiana.
He points out that senior management at opposite ends of the ethane/polyethylene (PE) value chain have made contrasting forecasts for ethane prices.
Dow chairman, president and CEO Andrew Liveris said on the company's fourth quarter conference call that he expects US ethane to be structurally long in the second half of 2012 and beyond as new fractionation and pipeline capacity comes on line.
However, US natural gas processing and pipeline company Enterprise Product Partners chief operating officer Jim Teague sees the ethane market likely to stay in balance, even after its Appalachia-to-Texas ethane pipeline (ATEX Express) comes on line in 2014, noted Andrews.
The US ethylene capacity additions will come through the construction of new world-scale crackers, as well as restarts, expansions and debottlenecks.
THE ETHYLENE BUILD-OUT
Three producers are fully committed to building new world-scale crackers - Chevron Phillips Chemical (CPChem), Shell Chemicals and Dow. CPChem will build its 1.5m tonne/year cracker in Cedar Bayou, Texas, while Shell will select a location in the Northeast US, and Dow on the US Gulf Coast.
These three new crackers will likely amount to 1m-1.5m tonnes/year of capacity each and come on between 2016-2017.
South Africa-based Sasol is undergoing a feasibility study for a $3.5bn-4.5bn cracker of 1m-1.5m tonnes/year at Lake Charles, Louisiana, to be completed in the second half of 2013. Sasol already operates a 470,000 tonne/year cracker at the site.
Dow also plans to restart its 390,000 tonne/year cracker in St. Charles, Louisiana, by the end of this year.
In addition to new crackers, three companies are planning expansions or debottlenecks at existing sites - Westlake Chemical, LyondellBasell and INEOS.
The total additional capacity from these expansions amount to about 723,000 tonnes/year. The upgraded plants are planned to come on line by the end of 2013 through 2014.
All the above outlined expansions total an estimated 6.4m tonnes/year of ethylene capacity by 2017, representing 24% of existing US ethylene capacity of around 26.6m tonnes/year, based on an analysis by ICIS.
Given that the size of world-scale crackers announced recently have been in the range of 1m-1.5m tonnes, we assume a cracker size of 1.25m tonnes/year in our analysis. This was applied to Dow and Shell's new crackers. Shell has already announced the projected size of its cracker - 1.5m tonnes/year.
But this 6.4m tonnes/year of additional capacity does not include the potential expansions other companies are considering.
SCANNING THE HORIZON
Companies that have said they are evaluating the construction of a new world-scale cracker in the US include Saudi Arabia's SABIC, Taiwan-based Formosa Plastics and Brazil's Braskem,as well as US-based start-up Aither Chemicals.
Mexico-based Mexichem has said it would like to partner on a new cracker. SABIC also said it would look to partner on a cracker, but also would go it alone.
US-based Occidental Petroleum has not expressly said it would explore building a new cracker, but has hinted as much in its June 2011 press release.
The company said it is studying building an NGL fractionator at Ingleside, Texas. And this fractionator would "allow Oxy to explore various options for future supply of ethylene" for its chlorvinyls plant.
LyondellBasell is also weighing up another expansion at its 873,000 tonne/year cracker in Channelview, Texas, but no additional capacity or timeframe was given.
ONE MORE CRACKER
Assuming the equivalent of just one additional world-scale cracker is built at a size of 1.25m tonnes/year by 2017 - not an unreasonable assumption in our view - we arrive at 7.65m tonnes/year of additional ethylene capacity, or 29% of the total in the US today.
Plenty of downstream capacity ranging from PE to monoethylene glycol (MEG) will accompany this mammoth expansion in ethylene capacity.
Supply additions of this magnitude are likely to cause major upheaval in the market, leading to a downturn in the petrochemical cycle - at least regionally, and potentially globally.
Some of that capacity will be absorbed locally with economic growth, but much of it is likely to be targeted for export in the form of intermediates and polymers.
LITTLE ROOM FOR ERROR
Everything needs to go right for this supply to be absorbed into the global marketplace without a major margin squeeze.
Key components of this formula for success include a continued low level of US natural gas prices in relation to crude oil, as well as sufficient infrastructure and pipeline capacity to convert this gas into enough low-cost ethane available to crackers.
In addition to the new crackers and expansions, a number of North American producers are simply expanding their capability to process ethane.
BASF FINA Petrochemicals, for example, will undertake a 50-day project at its Port Arthur, Texas, cracker in April to increase its feedstock flexibility to use lighter feeds.
Others planning to boost ethane cracking capability include Dow Chemical at Plaquemine, Louisiana; NOVA Chemicals at Corunna, Ontario, Canada; Westlake at Calvert City, Kentucky; and LyondellBasell at Channelview, Texas. These projects represent another major draw on ethane supplies.
Other success factors for maintaining margins include moderate growth in the global economy, rationalization of high-cost naphtha-based capacity in Asia and Europe, the lack of huge new capacity additions in the Middle East, China, and Latin America, and the other countries not exploiting their own shale gas reserves for feedstock.
But already there are at least 15 world-scale ethylene projects being planned in China with most expected to start up in 2015-2016. World-scale crackers are also being planned in Mexico and Brazil, with start-ups in 2015 (Braskem Idesa's Ethylene XXI) and 2017 (Petrobras' Comperj), respectively.
One thing we've learned in these volatile markets is not to count on the status quo.
While the stars are lining up for the US to experience a boom in low-cost petrochemical and polymers production, a bust is more than likely to follow in 2017.
US shale gas does indeed change the game in global petrochemicals. It just doesn't change the cycle.
Additional contributions from William Lemos and Bobbie Clark in Houston
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