02 April 2012 23:47 [Source: ICIS news]
By Nigel Davis
SAN ANTONIO, Texas (ICIS)--Although the jury is out in most markets as regards end-user demand and its current influence on petrochemicals, producers remain confident in the near-term outlook.
A strong oil price underpins sector profitability. Still-deep macroeconomic uncertainties must give cause for some anxiety, but most players remain optimistic.
In the US there appear to be few concerns about still slow business in China, for instance. Domestic market tightness is the factor that comes highest in executive's minds.
That and the opportunities presented by shale.
Given that feedstock and energy are the major costs by far in upstream petrochemicals, it is hardly surprising that the mood of sector players is transformed given the ready availability of attractively priced natural gas liquids (NGLs) from shale.
The projected volumes and availability of shale gas and the liquids from that gas were the hot topic of discussion from the start of this year’s conference. They look good.
In upgrading LyondellBasell debt last week, Standard & Poor’s homed-in on the shale gas phenomenon and other factors affecting the polyolefins giant’s financial performance.
“The upgrade reflects our opinion that LyondellBasell should continue to benefit during the next several years from an improved competitive position and strong operating results, stemming in part from the availability of low-cost natural gas in the US,” S&P said.
“We believe that the North American petrochemical sector is entering a multi-year period of low-cost production economics and will likely see an increase in domestic capital investment,” it added.
"However, we think LyondellBasell will focus primarily on moderate-cost, high-return projects with quick returns. We believe it will consider larger investments only if management believes the company can maintain credit metrics consistent with the current ratings.”
The expected LyondellBasell approach underscores the mid- to longer-term concerns over shale as much as the short-term, low-cost, ethane supply opportunities.
There can be no doubt that low-cost ethane and other NGLs can transform the industry. But as Gallogly points out, shale gas wells can produce significant volumes of gas at first but supply can tail off quickly. “You have to drill, drill, drill to sustain gas production,” he said. The gas production curve can fall away rapidly.
The US petrochemical business will be driven by supply/demand economics despite the shale gas boom, Gallogly suggests.
This is why he believes that the “condo” cracker concept, in which equity in expensive cracker and derivatives ventures are shared, might take hold.
US ethylene output could rise by as much as 32% if all the cracker plans announced on the back of shale come to fruition.
A great many derivatives plants would have to be built to absorb additional olefins whether or not those intermediates and polymers are destined for local markets or for export.
The feedstock volumes and opportunities presented by shale exploitation are immense. Producers currently are presented with what one commentator has called a “feedstock buffet”. But when it comes to sampling the buffet, companies have to take a view on the longer-term. How secure are the additional volumes. And for how long can NGL prices stay low?
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