AFPM: Shale gas leads to mega-projects

02 April 2012 00:00  [Source: ICB]

Cheap and bountiful ethane feedstock in the US will change the dynamics of the global petrochemical industry. But it won't change the cycle

It is less than 10 years since the US petrochemical sector collectively took a vow never again to build a cracker in the US. After all, the world was awash in ethylene and derivatives and the industry was suffering mightily.

A building boom in the US and Canada, which started in the late 1990s, brought ­several new crackers on line. That coincided with a building boom in the Middle East, where feedstock advantaged petrochemical sites proliferated, changing the game and flooding the world with unchallenged, cost-competitive ethylene.

Four new world-scale crackers are being planned 

Four new world-scale crackers are being planned

Copyright: RexFeatures

The severity of the downturn by 2002-2003 was so pronounced that industry declared the period to be the worst in memory for the US petrochemical industry. The spikes in US natural gas prices destroyed any hopes for global competitiveness. Desperate calls for everything including government relief on offshore drilling restrictions and intervention in the commodity futures markets ensued.

Today, the US shale gas boom is spurring an unprecedented wave of expansions in the petrochemical sector with four new world-scale crackers hurtling towards completion by 2017.

US producer Formosa Plastics is the latest player planting its flag in the ground. On February 27, the company announced it will spend $1.7bn (€1.3bn) to build an 800,000 tonne/year cracker at Point Comfort, Texas, along with a 300,000 tonne/year low density polyethylene (LDPE) plant and a 600,000 tonne/year propane dehydrogenation (PDG) plant to produce propylene. Construction on the projects is expected to be complete by 2016.

Local producers fully committed to building new world-scale crackers are Chevron Phillips Chemical (CPChem), Dow Chemical, Shell Chemicals and Formosa Plastics. CPChem will build its 1.5m tonne/year cracker in Cedar Bayou, Texas, while Dow will also select a site in Texas. Meanwhile, Shell is seeking a location in the northeast US - in Pennsylvania, West Virginia or Ohio - in close proximity to or on top of the natural gas liquids-rich Marcellus Shale.

These four new crackers will amount to 800,000 tonnes-1.5m tonnes/year of capacity each and come on line between 2016 and 2017.

South Africa-based Sasol is undertaking a feasibility study for a $3.5bn-4.5bn cracker of 1.0m-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, four US producers are planning expansions or debottlenecks at existing sites - Westlake Chemical, LyondellBasell, INEOS and Williams. The total additional capacity from these expansions amounts to around 995,000 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 7.4m tonnes/year of ethylene capacity by 2017, representing 28% 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 1.0m-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. But this 7.4m tonnes/year of additional capacity does not include the potential expansions other companies are considering.

Companies that have said they are evaluating the construction of a new world-scale cracker in the US include Thailand's Indorama Ventures, Saudi Arabia's SABIC, Brazil's Braskem, US-based Occidental Petroleum (Oxy) and US-based start-up Aither Chemicals.

Indorama, SABIC and Mexico-based Mexichem have all separately said they would like to partner on a new cracker. But SABIC also said it would go it alone if needed.

Occidental Petroleum has not expressly said that it would explore building a new cracker, but hinted as much in its June 2011 press release.

The company said that it is studying building an NGL (natural gas liquids) fractionator at Ingleside, Texas. And this fractionator would "allow Oxy to explore various options for the 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 upon request.

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 8.6m tonnes/year of additional ethylene capacity, or 32% of the total in the US today.

And plenty of downstream capacity from polyethylene (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 - potentially globally.

Some of that capacity will be absorbed locally with US economic growth, but much of it is likely to be targeted for export in the form of intermediates and polymers. Yet in the meantime, US petrochemical and polymer producers are poised to enjoy fat margins as feedstock ethane prices have come off around 34% since the beginning of the year from around 80 cents/gal, to 52.5 cents/gal as of March 2.

Spot-integrated ethane-to-polyethylene margins were $0.40/lb the week ended March 2, noted Vincent Andrews, analyst at US-based investment bank Morgan Stanley on March 4.

"Our proprietary leading indicator suggests US PE prices will rise by 8 cents/lb over the next two months," said Andrews on February 23. "We believe PE demand fundamentals are under-appreciated."

Morgan Stanley's proprietary leading indicator comprises a basket of chemicals and commodities whose prices tend to react faster to changes in demand patterns than US PE, he said. "On average, our leading indicator is two months ahead of spot prices with an [r-squared] of 0.79 since 2008." R-squared is a measurement of how closely two figures are correlated. 1.0 is a perfect correlation.

US Ethylene Expansions

But while US ethane is cheap today, some question whether this will be sustainable.

There is another side to cheap US natural gas prices. While consumers are reaping the benefits, producers are hurting. Chesapeake Energy, the second largest natural gas producer in the US, announced on January 23 that it will slash its capital spending on undeveloped properties from $3.4bn in 2011 to $1.4bn in 2012, and shut dry gas drilling to wet gas drilling to exploit the opportunity in natural gas liquids (NGLs).

But while cutting spending on drilling could put upward pressure on natural gas prices, ethane prices may yet remain low.

"Despite threats by gas drillers to slow drilling to lower supply and increase prices, the industry continues to benefit from the current glut driving down production costs. In actuality, drillers are opting to drill less 'dry gas,' and are instead choosing to drill more 'wet gas,' which contains more ethane and propane. Therefore, less drilling will likely not have a negative impact on dynamics," says Frank Mitch, analyst with US-based investment bank Wells Fargo.

Dow chairman, president and CEO Andrew Liveris said on the company's fourth quarter 2011 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, on the other side, 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.

Timing of US Ethylene Expenasions 
The heavy US cracker turnaround schedule will end in the second half of 2012, boosting the demand for ethane. In addition, a number of North American producers are 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.

Everything needs to go right for all the coming US 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.

Other factors for maintaining margins include moderate growth in the global economy, rationalization of high-cost naphtha-based capacity in Asia and Europe, and the lack of huge new capacity additions in the Middle East, China and Latin America. Plus, other countries will also seek to exploit their own shale gas reserves for feedstock.

Already there are at least 15 world-scale ethylene projects 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.

Ultimately, as the stars line 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. The likely addition of 32% of existing US ethylene capacity - with the bulk coming in 2016-2017 - will cause a supply shock regionally, and potentially globally.

US shale gas does indeed change the game in global petrochemicals. It just doesn't change the cycle.

Author: Joe Chang

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