INSIGHT: Europe looking hard at its ethane, shale gas options

20 May 2013 16:48  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Cracker operators and other chemical producers in Europe are desperate to move down the cost curve but tend only to see a future of rising costs.

Europe’s fragmented and costly energy policies are largely to blame alongside the loss of energy security.

Chemical producers look at other parts of the world, maybe not Asia, but certainly the Middle East and North America, and see their competitiveness slipping away. By far the largest cost elements for a cracker and a typical petrochemical plant are feedstocks and energy. Europe has its large and sophisticated markets but it continues to lose out on the energy fundamentals.

True, an argument can be made that cracking liquids, as most European cracker operators do, provides a great deal of added value and streams of products that over time globally could become increasingly tight.

But the shift to lighter, largely ethane, feedstocks is changing the nature of the petrochemical game and putting pressure not just on those who crack naphtha but also the downstream industry segments that process increasingly expensive naphtha-based raw materials.

The shale boom in North America is redefining the industry in more ways than one. Producers are having to adopt month-to-month tactics as well as their longer-term strategies.

The response to shale has been swift, with new investment in the US and Canada revitalising an industry that had become increasingly moribund.

Not surprisingly, producers outside the region have looked on the new feedstock and energy abundance with some envy and thought “why can’t we have some of that?” And the cry of “give us shale gas now” is being raised in Europe.

Rather than just waiting for Europe to make a business out its own shale and other tight hydrocarbon resource, petrochemical makers are looking at how they might tap into US ethane.

INEOS has led the way - it operates one of the few gas crackers in Europe and has the infrastructure in place to help move ethane across the Atlantic from Marcus Hook in Pennsylvania to Rafnes in Norway.

Ethane is not easy to move – it has to be liquefied and requires dedicated carriers. INEOS has struck a 15-year shipping agreement with Evergas and the shipping company has in turn ordered state-of-the-art, medium-sized (27,500 cubic metre) liquefied natural gas (LNG) carriers from China, the first to be delivered in 2015.

INEOS has looked into developing shale gas receiving capability at its cracker in Grangemouth, Scotland, but INEOS CEO Jim Ratcliife was quoted in the UK’s Sunday Times newspaper this month that this was an investment the company could not make on its own. Early indications were that the costs of converting Grangemouth to accept ethane imports could be 50% higher than in Norway.

It is the cost of infrastructure that weighs heavily against widespread ethane exports from the US, even if NGLs are expected to be in oversupply for a few years at least this decade, or until new planned world scale crackers start up in the US.

Shipping ethane does not come cheaply although firms like Evergas are keen to develop in the business. The question is who is willing to place a bet on a long enough window of opportunity on US ethane to make an investment, estimated by some for tanks and shipping vessels, of about $500m.

Alembic Global Advisors analyst Hassan Ahmed suggested last week that a further 8% of European cracking capacity could be switched to ethane cost effectively – 3% of Europe’s ethylene plants are ethane fed currently.

The switch could be made by an incremental 39% of the region’s ethylene capacity “but at much higher capital outlay”, says Ahmed.

Delivery costs for ethane are estimated at $222/tonne.

A number of players in Europe and farther afield are looking at possibly importing ethane from the US, and US Gulf Coast ethane exports are likely to be considered. Whether players other than INEOS do so to any meaningful extent remains to be seen but the payback time on the initial investment in an import project could be relatively short.

Producers in Europe currently, while relying so heavily on the value of co-products from their naphtha cracking, look to the region’s own shale exploration and development as a way of opening up energy options.

There is deep concern, as the European chemicals trade group Cefic stressed last week, about the EU’s national and supra-national energy policies and the lack of coordination between them. Climate change goals are also largely seen as being responsible for high and increasing energy costs.

“Further increases of EU energy prices will risk a vicious circle in which higher prices lead to reduced competitiveness and inhibit investment,” Cefic president Kurt Bock, said in a letter to president of the European Council, Herman Van Rompuy on Friday. The letter was sent ahead of a critical energy and climate policy debate in the European Council meeting of EU heads of state on 22 May.

“What matters most is the overall energy cost situation, including the availability of conventional and unconventional energy sources, and the sometimes conflicting EU and national energy and climate policies,” Bocks’ letter said.

Certainly not every country in Europe supports the development of indigenous shale resources but among those that do, industry is clamouring for more positive action.

Cefic wants to see the EU encourage the exploitation of shale gas. The UK’s Chemical Industries Association (CIA) will say in a soon-to-be-published report that its member companies want an all-out push for shale gas.

The UK’s energy minister last week said that there was nothing to stop fracking licensees putting forward new drilling plans. More than 300 licences for onshore oil and natural gas exploration had been issued since a moratorium on fracking in the UK was lifted in December 2012, he said.

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By: Nigel Davis
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