18 June 2013 15:45 [Source: ICB]
There are both positive and negative impacts on the bio-based chemical sector from shale gas development. However, the positive aspects outweigh the negative
There has been a great deal of discussion on the impact of shale gas on bio-based commodity chemicals. While shale gas offers competitively priced feedstock for certain chemicals, it also opens up opportunities to develop bio-based chemicals. Less production of other chemicals resulting from shale gas feedstock leaves a gap for bio-based chemicals to fill. The latter are also driven by demand pull from consumer companies.
Shale gas and biomass feedstock share a number of similarities that both shape and drive the development. Both feedstocks are dispersed over vast areas, face logistics challenges and require highly capital intensive processing. However, they also provide an unrivalled opportunity to reduce oil dependence and carbon dioxide (CO2) emissions.
Interestingly, coal, one of the most conventional sources, shares many of the same characteristics with the exception of CO2 reductions. However, its impact on the global commodity chemicals market has been limited to China.
Logistics issues put both shale and bio-based feedstocks in proximity to natural resources. According to the US Energy Information Administration (EIA) and the Food and Agriculture Organization of the United Nations (FAO), the US has the second largest technically recoverable shale gas reserves identified in the world. China holds 13% of global coal reserves, and Brazil accounts for 40% of global sugarcane production.
However, this distribution of natural resources does not push for an "either-or" choice between shale gas and biomass feedstock.
Investment in both shale gas-based and bio-based commodity chemicals is just taking off. Recent investment history shows that global regions are quite differently positioned.
We have North America with significant activity in shale gas whereas Australia is only initiating activities, and in Europe the debate is only starting. Even small reserves on a global scale can have major local effects, according to a recent study by Pöyry Management Consulting.
In an EIA study of technically recoverable shale gas in 32 countries, the UK represented only 0.3% of the total resources. However, the Poyry study showed that it would be profitable to extract shale gas in the UK Lancashire area. By 2030, Lancashire shale could decrease UK natural gas import dependence by 21% and lead to savings of on average £810m/year ($1.22bn, €947m) on wholesale gas and electricity.
However, the European shale gas investments have faced strong resistance from both policymakers and environmental lobbyists.
Europe is also losing out in the number of large scale bio-based chemical plants although there have been many initiatives in pilot phase operations, strong research support and significant activities in bio-fuels.
Bio-based chemical investments are driven by raw material availability, price and cost of production, but other factors such as political and financial support play an important role when the first large-scale facility is decided.
China, Brazil, Thailand and the US are clear winners in the game. Shale gas has had and will continue to have a direct and indirect impact on bio-based chemical investments.
In the current unstable economic climate, securing financing is a challenge even for the leading chemical companies. Bio-based chemicals are easily left behind lucrative shale gas opportunities. As an example, early this year US-based Dow Chemical and Japan's Mitsui & Co announced a postponement of the second phase of their bioethylene project. Meanwhile, Dow is investing heavily in ethylene crackers in the US based on shale gas feedstock.
Neither shale gas nor bio-based chemicals are new phenomena. Shale gas and its impact on energy markets was one of the main articles in a special edition of National Geographic as early as 1981, whereas bio-based chemical development was booming during the second oil crisis in the 1970s. Both shale gas and bio-based commodity chemical development are driven by large chemical companies which plan their investments decades ahead. We believe that the recent shale gas boom will not have a major impact on the commercialization of bio-based commodity chemicals - the impact is already visible and the wheels in motion.
BIO OPPORTUNITIES FROM SHALE
The transition from naphtha to ethane crackers opens opportunities for alternative sources of C4s and higher olefins as well as aromatics. A number of large chemical companies, technology developers and research institutes have worked systematically to exploit this opportunity, both in the past and in recent months.
For instance, fearing a shortage of petrochemical derived aromatics, Netherlands-based TNO and Belgium-based VITO - both research organisations - recently opened a shared research centre Biobased Aromatics in Bergen op Zoom, Netherlands, focusing on bio-aromatic compounds originating from agro waste streams.
POSITIVE AND NEGATIVE IMPACTS
We believe shale gas will have positive effects on selected bio-based commodity chemicals and negative impacts on others (see table). It is no coincidence that the number of bio-based chemicals positively affected by shale gas exceeds the number of negatively affected commodities.
Shale gas is sure to push and keep ethylene prices down for many years to come; still bioethylene and bio-based monoethylene glycol (MEG) share the largest capacities in bio-based commodity chemicals. There have to be even more pressing drivers in the market than shale gas and costs.
Brazil-based polymers producer Braskem has a green polyethylene (PE) facility in Triunfo with with just 200,000 tonnes/year of capacity, representing a small fraction of the total PE market. The product is sold mainly to global consumer product companies for green packaging.
We argue that within the global PE market, there are end-uses where there is capability and willingness to pay a bio-based premium. As long as bio-based derivatives represent a marginal share of the global market, they will be disconnected from the shale gas impact.
One of the most important factors affecting development of bio-based commodity chemicals is market pull. Global brand owners such as US-based Coca-Cola and France-based Danone and leading retailers such as UK-based Marks & Spencer and France-based Carrefour are large end-users in the commodity chemicals value chain. They all have dedicated programs pursuing environmental sustainability throughout the supply chain.
There is also a number of bio-based chemicals that are not directly impacted by shale gas and olefin investments. In addition to shale gas and market pull for bio-based products, we have opportunities for new product properties and product differentiation, more efficient production concepts and wider feedstock base driving the development of other bio-based chemicals such as succinic acid, lactic acid, and various fatty acid derivatives.
NEW PRODUCTION CONCEPTS
New production concepts enable new operation models. In the case of 1,4-butanediol (BDO), Germany's BASF recently announced plans to build a facility based on US-based Genomatica's fermentation technology. As illustrated in the flow chart, the bio-based value chain is significantly shorter than its fossil based counterpart.
In the case of MEG, Japan-based Toyota Tsusho has taken a different approach. The bio-based value chain is in fact one step longer than the conventional route, but it offers Toyota full control of the value chain from plantations to end-use applications.
The change in the value chain has called for unconventional partnership networks. Agricultural giants such as US-based firms Cargill, ADM and Bunge have all entered the bio-based chemical business through joint ventures.
The US shale boom has fuelled unforeseen chemical investments in just a few years. It will have an irreversible impact on the chemical industry, particularly in terms of geography.
In our opinion, shale investments should not be compared with bio-based initiatives because of different scale and underlying drivers. Although both aim to reduce the impact of oil price fluctuations and seek lower cost production concepts, bio-based commodity chemicals face a market pull driven by global brand owners and leading retailers, which is non-existent in the conventional chemical value chain.
The combination of diminishing oil reserves and steadily growing markets opens a door for new entrants. In the short term, shale gas will seize this opportunity on its own while bio-based chemicals and coal-to-olefin technologies are still struggling with poor economics and logistic challenges.
Bio-based chemicals are likely to drop the prefix "bio" over time to become just another feedstock in the pool - offering reduced oil dependence, new production concepts and unique product properties.
The impact of shale gas on bio-based commodity chemicals development has already taken place. Shale gas has been a major initiator for research agendas, which now reflect on the list of bio-based chemicals under development. Which chemicals succeed on a large scale will depend more on technology advancements, availability of funding and market pull rather than developments in shale gas. Development of bio-based commodity chemicals is strongly led by large chemical companies. The research is focused on start-ups and technology providers, but in the current economic climate it is the large chemical and consumer brand giants who ultimately decide which bio-based chemicals are the first to break ground.
All top 20 chemical companies have announced being active in either biofuels or bio-based chemicals. They have incorporated shale gas impacts on biostrategies long ago. It may not be too late for others to do the same.
Katja Salmenkivi is principal, and head of chemicals and bio-based materials at Pöyry Management Consulting. Salmenkivi has over 10 years of experience in consulting and is focusing on developing the chemical practice at Pöyry. Core skills include evaluating opportunities from innovative uses of biomass via market assessments, portfolio analyses, strategy consulting and techno-economic modeling.
Henna Jääskeläinen is a consultant at Pöyry Management Consulting, focused on techno-economic feasibility studies, market assessments and industry analysis related to bio-based chemicals and materials.
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