INSIGHT: Assessing cracker options

04 February 2013 17:34  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--How effectively petrochemical companies capitalise on the shale advantage in North America will colour financial performance across the sector for years to come.

Upstream at least, domestic companies, and some foreign players, have rushed to lay claim at least to capacity based on cost-advantaged ethane and propane feedstock.

If all announced ethylene capacity additions are realised then US capacity alone could rise by 33%. The addition of significant propane dehydrogenation (PDH) capacity will also shift balances in the C3 (propylene) chain.

As with all these things, firms have to weigh the advantages of being among the first to add capacities and to strike new feedstock supply and product off-take agreements, against taking time to consider their options.

The early work of converting existing plants to crack more natural gas liquids, (NGLs) principally ethane, has mostly been done. The next steps will either involve major investment decisions or significantly more ‘capacity creep’.

The results of the early steps have been highlighted in the fourth quarter and full year financial results of the major US petrochemical producers.

The levering of the low-cost ethane advantage directly into polymers was clear from the Dow Chemical results released on Thursday 31 January. ExxonMobil said that $330m (€241m) of the $415m increase in its fourth quarter chemicals earnings, which reached $958m, were due to higher margins, mainly in commodities.

Ethane-fed cracker margins in the US were much higher in the fourth quarter than a year before and had been close to this level through 2012. The ready availability of natural gas NGLs from shale had seen to that and helped keep the ethane price low. And with a higher ethylene price in the fourth quarter most companies were doing well.

LyondellBasell’s Americas olefins business, for instance, continued to benefit from the revolution in natural gas and NGLs, the company said last Friday.

It has lightened its US Gulf Coast cracker feed significantly with NGLs accounting for 85% of the total in 2012 versus 75% in 2011.

The company’s NGL supply programmes worked well over the course of the year and in the fourth quarter. “We exceeded nameplate capacity in the third and fourth quarter of 2012,” LyondellBasell CEO Jim Gallogly, said. “Our cracker operations have been rock solid”.

Gallogly believes that “a reasonable number” of the new cracker and cracker expansion projects in the US will go ahead but he is not so sure of some of those announced more recently.

LyondellBasell is expanding ethylene capacity by debottlenecking at its La Porte, Channelview and Corpus Christi sites in the US and has talked about a “condo”, or shared investment cracker at Channelview.

The lower cost debottleneckings can be brought on-stream fairly quickly – at La Porte in 2014, Gallogly said – so can start to produce dividends earlier.

LyondellBasell is also taking advantage of increased condensate availability from the Eagle Ford shale deposits in Texas and has increased propane metathesis to tap into cheaper propane.

But Gallogly is more sceptical about the longer term advantages of propane which is likely, he believes, eventually to be fairly easily exported away from the US.

Supplies of propane could tighten in the future as companies build export terminals, a trend that could cause some chemical producers to pull their plans for on-purpose propylene plants, he suggests.

The ethane picture may not be propane writ large but ethane costs will be key to the success or otherwise of the multi-billion dollar cracker investments planned for North America.

When things are not right the negative side of feedstock supply and cost equation can hit hard.

Shell on 31 January, for instance, reported fourth-quarter chemicals earnings down 45% and full-year 2012 chemicals earnings down by 30%, in some part due to “supply constraints of advantaged feedstocks in the US”. Refinery turnarounds in the US meant that Shell’s crackers could not be supplied with price competitive feedstocks and chemicals margins suffered as a result.

Shell CEO Peter Voser said that the two half years in 2012 were “very bumpy” for the company’s chemicals business, the first half good and the second hit by the “macro chemical drive downwards”.

Shell has moved swiftly to capitalise on shale gas and shale oil in North America and has plans for a world scale cracker in Pennsylvania which would be integrated directly into feedstock supply from its own exploration and production operations in the Marcellus field.

It said at the end of December that it had been granted a six-month extension to evaluate the construction site.

The company has also just struck a deal with Kinder Morgan to possibly export cost-advantaged liquefied natural gas (LNG) from the US at Elba Island near Savannah, Georgia.

 “I would warn now,” Voser said, “if too many LNG projects and too many crackers are coming into the construction phase in the US you will see costs go up very fast. You have seen this in the past.”

Shell has lowered the US natural gas price range it uses for planning purposes to $3-5/m Btus (British thermal units) from an earlier $4-6/mBtu. It has yet to make an investment decision on the Marcellus cracker.

($1 = €0.73)

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By: Nigel Davis
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