INSIGHT: US petchems greatly expand use of natgas feedstock

12 April 2012 14:55  [Source: ICIS news]

Shale gas helps erode US crude oil demandBy Joe Kamalick

WASHINGTON (ICIS)--US petrochemical producers are increasingly moving to natural gas liquids (NGLs) as their principal feedstock and away from naphtha, part of a multi-front energy shift that is reducing US demand for crude oil, industry and market analysts say.

By all accounts, the advent of newly abundant supplies of shale gas is a major factor in easing the nation’s dependence on petroleum.

Investment banking and financial services firm Raymond James noted this week that “the US petrochemical industry has been undergoing a major shift in its feedstock mix, away from oil and towards gas”.

In an analysis provided to clients, Raymond James said that “the use of oil-based feedstocks (naphtha and gas oil) has been cut by more than half since 2005, with clear substitution in favour of gas-based feedstocks (ethane, propane and butane)”.

The shift from oil to gas feedstocks has been even more profound than that, according to American Chemistry Council (ACC) chief economist Kevin Swift.

“In 2005, roughly 65% of the petrochemical industry’s feedstocks were natural gas liquids, with the 35% balance chiefly in naphtha and gas oils,” he said.

“Now, in our 2011 data, the share provided by naphtha and gas oils is down to around 11%, so it has shrunk by about two-thirds,” he added.

The shift is of course due to the flood of shale gas that has come on stream in recent years, which in turn has hammered US natgas prices back down to their historic range of around $2/MMBtu.

That $2–3/MMBtu price range had been typical in the US market for more than 25 years leading up to 2000, and had given US petrochemical producers and downstream chemical makers a major feedstock cost advantage compared with most other global chemical manufacturers that were locked in to naphtha feedstocks and subject to much higher oil prices.

That changed beginning in 2001–2002 when, spurred by increasing domestic gas demand and lagging production, natgas prices began to climb, spiking up to $11–12/MMBtu (and even higher on the spot market) off and on in the 2005–2008 period.

A combination of the 2008–2009 US recession and the onset of broad development shale gas plays brought pricing down to the $5 range in 2010, and by the end of 2011 into the $3 range.

Just this week, the Henry Hub price for US natural gas closed below $2/MMBtu for the first time in 10 years.

“No mistake, shale gas has influenced the decision for petchems moving to natural gas liquids for feedstock,” said Jim Cooper, vice president for petrochemicals at the American Fuel & Petrochemical Manufacturers (AFPM).

With US gas at $2 and Brent crude at $120/bbl, US chemical makers have seen their feedstock cost advantage restored, and the industry has again become a net exporter.

“The cost advantage we’re getting now in ethane is a pretty darn good thing,” said Cooper, “and the move by producers to gas from naphtha is a logical progression.”

The ACC’s Swift noted that in 2005 the US petrochemicals sector was in “an undesirable high-cost position, but now shale gas has pushed us back into competitiveness”.

“Shale gas has been a game-changer for our industry,” said Swift, noting that US petchem producers now rank third globally in low-cost production, behind only Alberta in Canada, and the Middle East.

The restored feedstock cost advantage could last for a long time, said Swift, noting that the US Energy Information Administration (EIA) and other forecasters expect the low-cost edge to hold for the foreseeable future, out to 2030.

Analysts at Raymond James said that the petrochemical sector’s accelerating feedstock shift to natgas, along with growing US crude production and declining oil demand, “will likely drive the US to oil import independence during this decade”.

Raymond James cites US Department of Energy (DOE) data indicating that US crude demand this year could be 3% below that of 2011, and even as much as 6% down from last year.

“Whether the real decline this year is 3% or 6%, it is clear that US oil demand is falling, and falling fast,” the investment bank analysts said.

In addition to the US petrochemical industry’s move away from oil-based naphtha, Raymond James attributes the easing oil demand to rising fuel economies in automobiles, changing driving habits, and an increasing shift to natural gas vehicles (NGVs).

While Raymond James gives some credit to increasingly stringent federal corporate average fuel economy (CAFE) standards, “the reality is that higher gasoline prices are the main driver of improving fuel efficiencies”.

In 2011, the analysts note, the average miles per gallon (mpg) for new passenger vehicles was 33.8, a gain of 3.7 mpg compared with 2006.

“Remarkably, this five-year improvement is greater than it had been over the previous 15 years (1990–2006) combined,” said Raymond James.

“As households make their next vehicle purchase decision, they naturally place a greater weight on fuel economy than they would have five or 10 years ago,” the analysts added.

In addition, people are driving less, they noted, with US vehicle-miles travelled essentially flat since 2004, and lower now than during the 2008–2009 recession. 

More Americans are electing to take “staycations” instead of driving hundreds of miles for a family summer break. Also, commuter use of public transportation has increased to a new high, Raymond James said.

The number of autos per US household flat lined in 2007 and has been declining since, the analysts said.

Lastly, natural gas as a vehicle fuel is gaining ground.

Raymond James says that while the natgas transportation market is still in its infancy, “the infant is beginning to teethe” and “we expect accelerating growth in coming years, reflecting aggressive expansion in both fuelling infrastructure and the availability of NGVs”.

That growth will be largely in vehicle fleet operations, especially municipal buses and garbage trucks and other large mileage vehicle fleets, they said.

For fleet operators, the math is simple.

“Adjusting the costs appropriately, compressed natural gas (CNG) still comes out ahead with an all-in, pre-tax, ‘leaving the refinery’ cost of $1.31/gal, versus gasoline at $2.58/gal,” Raymond James noted.

($1 = €0.76)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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