INSIGHT: Industry investment patterns change to feedstock tune

21 May 2012 16:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--A changing global feedstock and energy picture is having a profound effect on chemicals.

Currently, US producers find themselves in an advantaged position given the abundance of ethane from shale. Natural gas and ethane costs have come down sharply while petrochemical prices have tracked the price of crude oil.

In the Middle East, additional ethane feedstock supplies are hard to come by and prices could rise. Globally, those cracking naphtha and other liquids benefit from co-product credits – the money earned on ethylene co-products such as propylene, butadiene and aromatics – but they play a high cost game.

It is feedstock advantage, however, that is re-shaping the petrochemicals landscape. Investments are starting to flow in different directions.

Typically, new cracker capacity is built to take advantage of a feedstock position – based on availability and projected cost – and market growth.

The most recent “wave” of new capacity built across the Middle East, was the subject of years of debate. Built largely to produce polymers and glycols for export, to China and the wider world, the largest slug came on-stream in 2010.

Subsequent additions are well down on what was at one time planned due to a combination of factors including the 2008 financial crisis and changing feedstock availability.

Increasing demand for natural gas to drive power generation and desalination units has, however, crimped new ethane supply in Saudi Arabia. And promotion by the Saudi government of a more broadly-based chemical sector means that more naphtha, propane and butane are being cracked.

The ethane cost advantage is being challenged – it could rise by two thirds although the increase could be delayed – and new producers are forced to crack higher-cost feedstock alternatives. The domestic ethane price was set at $0.75/m British thermal units (Btus) in 1998.

The major ethylene capacity additions in the next few years will be in China and, to a much lesser extent, across wider Asia. New cracker and coal to chemicals projects in China will add close to 7.5m tonnes/year of additional ethylene capacity between 2012 and 2015, according to ICIS data. The capacity is needed, alongside derivatives imports, to feed China’s still fast-growing demand for chemicals.

It is the extraction of increasing volumes of ethane from shale gas, however, that has shifted global investment patterns. Lower cost natural gas and ethane in the US – prices driven down by increased gas availability from the fracking of major shale deposits – have transformed the outlook for the petrochemical industry.

Project announcements indicate that US ethylene capacity could increase by as much as 28% by 2017.

Plans for most of the derivatives units that are likely to be associated with various new cracker projects and capacity expansions have yet to be revealed.

A major change in global investment patterns in petrochemicals is taking place, consultants Nexant claimed earlier this month.

The assumption is based on the dramatic fall in feedstock costs in the US; feedstock constraints in the Middle East; the cracking of more cost-advantaged liquids feedstocks, and the processing of coal and even bio-based feedstocks in some parts of the world.

That is why the company is taking a new look at cost competitiveness in the sector.

What has become apparent, in a relatively short period, is that while the shift to lighter feeds has continued apace, competition among local, regional and global players has become a lot fiercer.

With the advent of shale, the cost competitiveness of different plants in different regions has changed considerably. Producers are faced with more choice, but also more complexity, and a tougher call on their investment dollars.

Read John Richardson & Malini Hariharan's Asian Chemical Connections

By: Nigel Davis
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