Market outlook: Is North American shale gas an opportunity or threat for global petrochemical producers?

19 October 2012 15:34  [Source: ICB]

North America's cost position in ethylene will be significantly enhanced. But it still may not be enough to topple Middle East producers

The fall in natural gas prices and increases in gas liquids production, driven by dramatic increases in North American shale gas production during the past five years, has been the primary driver for renewed profitability and growth in key segments of the North American petrochemical industry.

In response to rising margins and enhanced global competitiveness due to attractively priced ethane relative to the cost of the naphtha, the principal steam cracker feedstock in other major markets, firms are considering major capacity additions in the US for the first time in decades.

Multiple brownfield capacity additions are being considered as well as several greenfield projects on the US Gulf Coast and in the US northeast near the Marcellus shale gas resource. These major capacity additions are being developed even though growth in North American demand for ethylene derivatives over the next 5-10 years is expected to absorb limited increases in regional production.

North America's large shale gas resource base and growing output have generated a degree of optimism about the region's longer-term production prospects.

North American shale gas production is expected to approach 40bn cubic feet per day by 2030. The US will account for over 83% of this figure (see chart on p40). By the end of the forecast period, the Marcellus shale formation will be the largest source of US shale gas production, followed by the Haynesville and Barnett shales.

By 2030, shale gas could account for 46% of total US gas output. Canadian shale gas production also is expected to add up to 44% of total Canadian natural gas output, mostly from the western provinces. North America's robust shale gas production outlook will help contain domestic natural gas prices.

Surging North American shale gas production coupled with a sluggish US recovery from the recession has substantially depressed regional gas prices. Henry Hub prices have essentially decoupled from crude oil prices. The current disconnect between Henry Hub and crude oil prices has favoured increased US shale-based natural gas liquids (NGL) production.

The favourable outlook for North American ethylene production rests upon this dynamic. To date, low natural gas prices and high oil prices have encouraged upstream players to focus on liquids-rich shale gas plays, resulting in high levels of ethane output.

NGL production in the US has increased significantly over the past few years, owing to rising shale gas production, depressed domestic gas prices, and very high oil prices. It approached 2.2m bbl/day in 2011 and is forecast to increase to 3.2m bbl/day in 2025.

Canadian NGL production will continue to be affected by the forecast decline in conventional gas production in western Canada. Although new unconventional sources of gas are expected to increase total future gas supply, these new sources generally have lower gas liquids content.

US ethane production is forecast to increase from 19m tonnes/year in 2011 to over 31m tonnes/year by 2025, in line with the projected increases in ethane demand associated with Nexant's ethylene market outlook.

Output from the northeast and gulf coast regions are equally expected to account for over 90% of increased US ethane production by 2025.

Ethane production in the northeast will develop in concert with increased gas production from the Marcellus shale and construction of new ethane pipelines out of the region to the US gulf coast and Ontario, Canada.

In contrast, Canadian ethane production has declined over the past five years and is forecast to further decline in line with Canada's decreasing conventional natural gas production.

Propane recovered from US natural gas production is forecast to increase from 18m tonnes/year in 2011 to 26m tonnes/year by 2025. The US has become a net exporter of propane and most of the increased production is expected to be exported since only limited growth in US propane demand is anticipated.

Its use as a fuel is forecast to continue to decline, with its use as feedstock in propane dehydrogenation (PDH) facilities to produce propylene being propane's key domestic growth area. Propane exports are forecast to approach 7m tonnes/year by 2025.

Naphtha and heavier feedstocks accounted for 32% of US ethylene production during the 2003-2005 period when the focus on cracking liquid feedstocks peaked.

However, naphtha and heavier feedstock use has declined since 2005 while ethane feedstock use has increased to 65% of US ethylene production (see chart).

US gulf coast olefins producers with feedstock flexibility have already been maximizing ethane feedstock use, with propane as the second best option. They generally have lightened up their feedstock mix as best they can. The continued use of heavy feeds is very site and company specific.

Since US ethane availability is forecast to increase on the back of increased shale gas production and associated NGL recovery, Nexant expects olefins producers to continue maximizing ethane feedstock use in the future.

Producers have already implemented simple operational changes and executed the easiest capital projects. Further steam cracker modifications to enable more ethane cracking will be larger and more expensive undertakings, whereas the construction of new, ethane-based steam crackers will increase ethane use even more.

Nexant's ethylene outlook assumes that several new world-scale ethane crackers will be built by 2017 to take advantage of the expected increase in ethane availability in the US.

As a result of these anticipated developments, ethane demand will continue its upward trajectory, accounting for almost three-quarters of US ethylene production by 2025.

Ethane's share of Canada's ethylene production will rise prior to 2015 on the back of the completion of the Mariner West pipeline project and modifications to NOVA Chemicals' Corunna cracker, but remain largely unchanged thereafter.

Shale gas developments in North America have significantly increased the competitiveness of US and Canadian petrochemical manufacturers worldwide, as evidenced by the high density polyethylene (HDPE) cash cost of production for US and Canadian plants based on ethane feedstock during 2011, relative to other key producers around the world (see chart).

Due to the enhanced competitiveness of North America's crackers relative to competitors abroad, Nexant expects that North America will account for about 15% of global ethylene capacity additions over the next 10 years.

The increase in US ethylene production will primarily serve the growth in demand for ethylene derivatives in North and South America, with exports of derivatives over longer distances to Europe and Asia playing a smaller role.

Nexant has also developed an alternative US ethylene production scenario based on higher levels of US ethane production and ethylene capacity additions in order to identify the locations around the world that would be most significantly impacted by a higher level of US ethylene production.

Although North America's competitiveness as an ethylene producer has improved, it cannot hope to topple the position of existing Middle East producers, which will remain the world's lowest cost source of supply.

Chinese production has a higher HDPE cost, but is expected to have be competitive when serving its domestic market because of the impact of import tariffs.

Nevertheless, the US can expect to strengthen its competitiveness as a polyethylene (PE) producer over the coming years, and possibly compete for western European and Asian markets on the back of competitive ethane cracking costs relative to naphtha.

John Boepple, principal at Nexant, has evaluated petrochemical feedstock and refinery issues for Nexant's clients for more than 20 years. For a multi-client study, contact Heidi Coleman at:

To learn more about Nexant's areas of expertise, visit the company

Author: John Boepple

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