22 March 2013 09:26 [Source: ICB]
The shale oil and gas boom in the US has been widely reported and analysed, especially when it concerns the issue of US energy independence. Fears about energy dependence on the Middle East underlined a deep insecurity in Washington about future energy resources.
Such angst has been exacerbated by ageing US infrastructure, which has kept domestic oil in Cushing, Oklahoma - the US oil storage hub - and has drawn a kind of wall across the US from Detroit to New Orleans. Heavy crude produced in Canada has not been able to reach the US east coast because the pipelines to carry it simply do not exist, creating a bottleneck in Cushing.
East coast refineries are already equipped to process lighter, sweeter crudes, such as those produced from shale
Brent crude owes its name to the Brent field in the North Sea where it is produced, but the term is now used generically to describe the crudes deliverable to the Brent futures contract, long considered the world's oil benchmark.
As oil has flowed into Cushing, the lack of pipeline infrastructure has caused oversupply of the domestic West Texas Intermediate (WTI) crude, forcing prices to drop drastically against Brent, and creating a sharp difference in price between the two contracts - the WTI/Brent spread.
At the end of 2011, the spread had reached $28/bbl, although it had decreased to $19/bbl at the end of 2012.
Even with that spread decrease, east coast refineries have been long forced to pay a premium for Brent, putting them at a competitive disadvantage against midland refiners that can easily access cheap WTI crude.
And then there is the reversal of the 500-mile Seaway pipeline, which now runs from Cushing to the US Gulf Coast. Gulf Coast refiners are now able to access heavy crudes, which their plants are set up to handle, still at a discount against Brent.
Whether the opening of Cushing stocks will have the effect of balancing out the price of WTI against global markets is still unclear, however. "This is widely debated. We might still have WTI being heavily discounted against Brent as the US can't export crude due to legislation," said Anthony Pears and Stefan Glassel, analysts at global commodities trading house Trafigura."A lot of Gulf Coast refineries have made changes to be able to run more heavy, sour crude, so they will need to be incentivised to shift back to the light, sweet shale crudes that are building up." KNIGHTS IN SHALE ARMOR
Enter shale. Because shale crude is lighter and sweeter, investigations into whether it can be used in refineries along the east coast - already set up for processing light Brent - have sparked acquisition interest, and not only from private equity.
Delta Airlines purchased the Trainer refinery in June, and plans to spend $100m on it in order to optimise jet fuel production.
Meanwhile, private equity firm The Carlyle Group announced it will take a two-thirds stake in Sunoco's Philadelphia refinery. Further inland, TPG Capital joined three other private equity firms to buy the majority of Marathon Oil's assets in Minnesota.
At the same time, oil companies have begun to bring domestic shale east by rail then ship it down the coast, while Carlyle Group is building a high-speed rail facility so that the Philadelphia refinery can receive it.This would provide east coast refineries with enough access to cheaper domestic supply to allow them to move away from dependence on more expensive Brent from Africa and Europe. Such a move could produce quite impressive margin improvements. PETROCHEMICAL TWIST
Propylene is used as a feedstock to produce a number of other olefins used in the automotive, construction, packaging, medical and electronics industries.
Historically, propylene has been produced as a co-product of heavy liquid cracking. However, the increased processing of shale - which also produces natural gas liquids (NGL) - has meant an increase in propane availability, causing prices to decrease. Over the last year, the price of propane has decreased from $2.87/gal to a current $2.48/gal, after a low in October 2012 of $2.37 per gallon.
US propylene supply declined in the first quarter of 2012 to 6.5m lb/day, 8.5% less than the first quarter of 2011, largely due to the fact that cracking the cheaper, lighter feedstocks produces significantly less propylene co-product than cracking heavy liquids does.A number of companies are rushing to fill that demand gap - among them PetroLogistics, which uses propane to produce propylene via dehydrogenation. If the companies behind pipeline and infrastructure expansion have their way, refiners on the east coast could gain access not just to cheap domestic feedstock, but also to a high-demand propylene market, both domestically and abroad. THE EXPORT CONUNDRUM
How much LNG should be exported, and the effect that it would have on domestic prices, competitiveness and margins has yet to be clarified.
Considering Japan is also one of the world's largest buyers of LNG, it should perhaps not come as a surprise that Japanese Prime Minister Shinzo Abe requested the right to import US shale gas when he met US President Barack Obama in February.Meanwhile, BASF announced its enthusiasm for shale gas production in Germany, aware of the competitive advantage the US could develop over Europe should feedstock prices remain comparatively high in the eurozone. RELENTLESS COST CONTROL
"Operators must squeeze every dollar out of their cost structure. Proper management of the big levers such as contracted costs, labour productivity and material spend are all implicated by the shale boom," says Dirk Frame, managing partner at T.A. Cook Consultants.
"Refiners cannot sit back and hope to ride the wave without contributing to it. Made in America requires petrochemical sites to look hard at their operating practices and question long-standing assumptions relating to the effectiveness and efficiency of processes governing maintenance, shutdowns and capital expenditure," he adds.
The outcome of the US-EU trade talks, Japan prime minister Abe's request and the effect shale development will have on global oil and chemical markets remains to be seen. But for the moment at least, it looks as if the east coast has been given a second chance.
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