Market outlook: Europe battles for rational energy policy

31 May 2013 09:42  [Source: ICB]

The European chemical industry makes strong arguments for a simplification of EU energy policy and laws, which aim for lower costs. Both industry and consumers should benefit from a broad energy mix, and from efficient delivery networks and pricing mechanisms.

Currently, however, EU nations fail on most if not all of these fronts. The drive to reduce greenhouse gas emissions, which is a core strategy for the EU, works to push energy prices up.

 EU map Alamy

Alamy

Europe seeks energy policy solutions

The chemical industry suffers because it is a huge consumer of energy, despite the fact that its products can help reduce greenhouse gas emissions and are important for all sectors of industry.

Further innovation from chemical producers - particularly in collaboration with firms in other sectors and European research institutions - should lead the drive towards more energy efficient buildings, as well as better power and transport options.

But sector firms do not work in a vacuum and are starkly exposed to high and volatile energy costs, as well as better energy competitiveness of other regions.

The European industry is particularly concerned that its competitiveness and growth prospects are damaged by isolated energy and climate change policy actions at the national and supranational level.

Indeed, the sector talks a great deal about a level playing field in terms of energy policy goals, at least.

The sector is deeply concerned that its companies will continue to look elsewhere to grow and in doing so, hollow out European chemicals production.

Europe's high cost operating environment does not do primary materials manufacturers any service.

LOW CARBON AND CHEMICALS

Yet trade group Cefic and the consulting firm Ecofys have produced a study that suggests Europe can pursue and achieve low-carbon economy goals while retaining a vibrant chemicals sector with producers active upstream and down.

The long-range energy roadmap considers a series of energy scenarios for Europe and the implications for chemicals.

"Our report plots a course which delivers a low-carbon economy while keeping industry firmly docked in Europe, ensuring jobs and growth," said Cefic's executive director for energy on publication of the report at the end of April.

Cefic used the European Business Summit in Brussels in May to present the findings of the report.

The trade group explores in the study the impact of different energy policy scenarios in the 2020-2050 time frame.

The "optimum" scenario as far as the sector is concerned produces considerable climate change benefits. It depends on what Cefic calls a "level playing field based on uniform, global carbon prices and a push to meet the overall 2050 target by halving carbon emission levels".

If the playing field is not levelled, chemicals production will move outside Europe.

KEY FACTS

  • New study suggests low carbon energy and vibrant chemical industry can coexist
  • Study examines energy scenarios from 2020-2050
  • Level playing field required globally or industry will desert Europe 
For three of the four energy scenarios presented in the report, their names are self-explanatory: Isolated Europe, Continued Fragmentation and Differentiated Global Action. They suggest better greenhouse gas emission reductions for Europe but at the expense of the relocation of chemicals manufacturing.

Therein lies the chemical industry's dilemma. It can make clear arguments for retaining large parts of the sector, indeed for keeping a well-balanced production base of commodity chemicals alongside intermediates, specialties and fine chemicals, in terms of EU jobs and economic growth. But other options - generally the offshoring of manufacturing - produce better greenhouse gas reduction outcomes for Europe, although arguably greenhouse gas emissions are exported elsewhere.

"The issue is not whether the EU should aim for a sustainable, competitive economy, but how Europe gets there," said Garcia.

The report says: "In the absence of an international climate change agreement, the future of the chemical industry in Europe depends on smart policies that avoid further policy-induced energy cost burdens. Strengthening external relations with other regions, further diversifying energy supply and ensuring a well-functioning integrated energy market is essential for more globally competitive industrial energy prices in Europe."

"If [energy] prices climb, expect a vicious circle of low investment and less innovation," Garcia added. A panelist at the European Business Summit, Cefic board member Tom Crotty, said: "A policy shift towards reducing EU energy and policy costs is needed to ensure industry stays globally competitive. It's a question of whether policy will continue to be based on pushing up energy prices, or seek instead to make low-carbon energy cheaper and bring focus back to investment that ensures breakthrough products can still be made here at home."

The energy roadmap did not consider a shale gas scenario but acknowledged the potential for change and the negative impact of lower energy and feedstock prices outside Europe on producers in the region.

EUROPE LOOKING HARD AT ITS ETHANE, SHALE GAS OPTIONS

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 adapt 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.

GIVE US SHALE GAS NOW

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 Ratcliffe was quoted in the UK's Sunday Times newspaper in May 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, 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 suggest that a further 8% of European cracking capacity could be cost effectively switched to ethane - 3% of Europe's ethylene plants are currently ethane fed.

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, while relying 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.

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.


By: Nigel Davis
+44 20 8652 3214



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