17 January 2013 19:50 [Source: ICB]
The shale gas boom puts Texas at the centre of a remarkable turnaround in US petrochemicals, with new ethylene capacity planned in the Lone Star state and elsewhere expected to feed huge growth in petrochemical exports, according to a Federal Reserve Bank study.
Chesapeake Energy Corporation
Shale gas fuels US petrochemical recovery
Jesse Thompson, economist and author of the Fed study, noted that worldwide growth for ethylene production was slowing even before the recession, declining from 5% annual demand expansion on average in the 1990-2000 period to as little as 2.5% by 2009 when the US recession drew to a close.
But the end of the US recession in June 2009 was not followed by much domestic growth. "Demand for petrochemicals was increasingly concentrated in emerging markets where US manufacturers couldn't overcome a strong dollar and international transportation costs," Thompson noted - certainly not, with the domestic price of natural gas at $6/MMBtu and higher in the years leading up to the 2008-2009 recession .
"As a result," Thompson said, "US petrochemical firms confronted a steadily eroding outlook that left little justification for investment in new facilities."
Then came the shale gas revolution.
"The unlocking of hydrocarbons with shale and the resulting decline in natural gas prices - from $6.25 (€4.71) per thousand cubic feet (Mcf) in 2007 to $2.40 in the first half of 2012 - changed the petrochemical industry," he wrote.
"It is really an amazing story," Thompson said in an interview. "The US petrochemicals industry has seen a 180o turnaround from where it was just three or four years ago."
The feedstock numbers tell the story.
Thompson, an economist in the Houston, Texas, office of the Fed's 11th District Bank, noted that US petchems producers use natural gas liquids (NGLs), and mostly ethane within NGLs as their principal feedstock.
In most other areas of the world, excepting the Middle East, petrochemicals production is dependent on oil-based naphtha, which is tied to crude pricing.
"Underscoring the impact of diverging oil and natural gas prices," Thompson's report relates, by September 2012 in the US "it cost 60 cents [46 euro cents] to produce a pound of ethylene with nearly 12 cents worth of ethane."
Alternatively, at the same time "one pound of ethylene required $1.37 worth of naphtha" for producers outside North America and the Middle East.
That remarkable cost advantage for natgas-based petchems production is compounded, at least for the global ethylene market, by the output disparity between NGL-ethane and naphtha.
"When you take 100 pounds of ethane and throw it into a cracker," Thompson said in an interview, "you get 80 pounds of ethylene."
"But when you put 100 pounds of naphtha into a cracker, you only get 24 pounds of ethylene, along with other derivative products."
Nowhere will that huge feedstock cost advantage be more pronounced than in Texas and elsewhere along the US Gulf coast, Thompson said.
Not only does Texas already account for 72% of US ethylene capacity, its output is poised to make major gains.
Large producers have announced as many as a dozen new ethylene capacity projects, including new crackers, expansions at existing facilities, restarts of side-lined plants and debottlenecking at others.
In addition, that new capacity will feed off the NGLs practically underfoot, Thompson noted, with the Eagle Ford shale play underlying much of south and east Texas.
"The Eagle Ford is expected to produce more than 90m bbls of oil and 51m oil-equivalent bbls of natural gas in 2012 after yielding less than 10m bbls of both in 2009," the Fed report said.
"Total annual Texas oil production, which fell steadily for decades and bottomed out in 2007 at 391m bbls, may reach 712m bbls this year  - an 82% increase over five years," Thompson noted.
"The US, with Texas at the forefront, has become a highly cost-effective place to invest in new petrochemical plants, even if the market for that new production is in emerging economies," he said, citing the new planned crackers, expansions and restarts.
US ethylene capacity "is poised to increase almost 33% by 2017, pending completion of all new plants, expansions, enhancements and restarts of shutdown facilities that have been announced," he said.
The question is, are Texas and other US petchem producers getting too far out on a capacity limb?
"Overall, greater domestic ethylene production capacity will significantly outstrip projected domestic demand growth over the next several years," the report notes, adding: "As a result, US petrochemical exports, particularly from Texas, will expand significantly."
So much of that expanded US ethylene capacity and derivatives will have to be sold into Asia, especially China, and to Europe as well as to other foreign markets.
Export sales and related production rates for all those new ethylene plants consequently will depend on continued, if slower, growth in China and a recovering EU economy.
If China's economy should stumble and the eurozone crisis should deepen, that new US ethylene capacity could be excessive.
"Nobody over-builds like the petchems industry," Thompson said. "But of the dozen or so new ethylene capacity projects announced, maybe as few as five will actually be built."
Consequently, Thompson contends, if China and the EU continue to grow - or in the EU's case, returns to growth - "the expanding US ethylene capacity is probably going to be immune at some scale."
"As long as nothing really terrible happens to cause a global slowdown, the world can absorb that additional capacity," he said.
Nor does Thompson see a feedstock price threat in what could soon become strong growth in US exports of liquefied natural gas (LNG), drawing on the same shale resources that have triggered domestic petchems expansion and export gains. But LNG exports will not likely threaten chemical feedstocks, he said.
Citing an August 2012 study by the Baker Institute in Houston, Texas, Thompson said that US LNG exports - even if broadly allowed by federal regulators - will not have major impact on domestic natgas prices.
That Baker Institute paper contends that "the long-term volume of LNG exports from the US will not likely be very large, given expected market developments abroad."
Thompson also suggests that in the unlikely event that US LNG exports grew to significant volumes, that in turn would "tank the global price of LNG and reduce the incentive for LNG exports."
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