23 August 2013 09:27 [Source: ICB]
While the US petrochemical sector is counting on years of cheap natural gas as a feedstock, there will be increasing demand draws from a number of sources: utilities, transportation, gas-to-liquids, liquefied natural gas (LNG) exports and even exports of natural gas liquids (NGLs).
On the petrochemical side, there are already plans to build seven new world-scale crackers in the US. Six would be on the US Gulf Coast, by Chevron Phillips Chemical, Dow Chemical, ExxonMobil Chemical, Sasol, Formosa Plastics and Occidental Chemical/Mexichem.
Shell is planning to build its cracker on the US east coast in Monaca, Pennsylvania, but that would start-up in 2019-2020, according to an ICIS estimate.
There are also eight propane dehydrogenation (PDH) projects planned in North America - seven in the US. Six have targeted start-up dates between 2015-2018.
These projects will use propane to produce propylene, an olefin by-product from naphtha cracking and gasoline refining that will be in short supply as the US petrochemical feedstock slate shifts to lighter gas-based feeds.
Methanol plants are also being built in or relocated to the US. Methanex plans to dismantle two of its methanol units in Chile, ship the parts to the US, and reassemble the plants in Louisiana. Two new world-scale methanol plants are also being planned by Celanese/Mitsui and US refining company Valero.
The methanol plants would use methane, or dry gas feedstock, rather than the NGLs ethane and propane.
No doubt the US chemical sector is undergoing a renaissance, based on cheap feedstock from the shale gas boom.
OTHER DEMAND DRAWS
But it is critical to remember that it is not just the chemical sector that is seeking to take advantage of cheap shale gas. It is easy to become myopic when looking at the implications for just one sector.
For utilities, the vast majority of new power plants will be based on natural gas. US regulatory restrictions and shifts in public perception will dramatically limit power plans based on coal and nuclear.
On the fertilizer side, there are at least eight new projects planned in North America - these also use natural gas feedstock, specifically methane.
Gas-to-liquids (GTL) is another potential huge draw on natural gas. Sasol is planning a massive GTL project next to its cracker in Lake Charles, Louisiana, US. GTL plants would use natural gas - methane - and convert it into diesel, gasoline or paraffins.
And use of natural gas in transportation will also pick up. Right now fuelling stations are few and far in between across the US, but that could change with the introduction of compressed natural gas (CNG) vehicles.
US automaker Ford plans to roll-out a CNG option for its best-selling F-150 truck in 2014.
In addition, natural gas as a transportation fuel continues to gain ground in municipal bus fleets, garbage trucks and even locomotives.
US-based Waste Management plans to convert all its trucks to natural gas fuel, while rail operators such as Burlington Northern Santa Fe are working with locomotive producers such as GE and Caterpillar to make natural gas a viable fuel, replacing diesel.
US LNG EXPORTS
Then you have the prospects for US LNG exports, which would primarily consist of methane, or dry gas, for use as fuel in residential and commercial buildings.
The US Department of Energy (DoE) has just approved the third LNG project to export to non-FTA countries - those that do not have a free-trade agreement with the US.
Those non-FTA countries are the critical target markets for LNG exports, and include Japan, China and all of Europe.
As LNG exports would consist of mostly methane, with the NGLs stripped out, there is an argument this could actually help increase the availability of key NGLs such as ethane and propane for petrochemical production.
But it is also important to remember that ethane and propane can be used as fuel as well. The higher value use would be for petrochemical production. But some ethane in the US is already being rejected into the pipeline system to be used as fuel because there is an oversupply for petrochemical production.
Sure ethane and propane prices can and have decoupled from overall natural gas prices - price action this year is an example. But if natural gas prices spike, that could bring those NGL prices with it, as they can always be used as fuel.
US NGL EXPORTS
Lastly, US NGLs will likely be directly exported to Europe and Asia specifically for petrochemical production. This is separate from LNG exports, which would be mostly dry gas.
Switzerland-based INEOS is already planning to import US ethane for its crackers in France and the UK by 2015, while Italy-based Versalis and Austria's Borealis are studying the option.
In China, there are at least 17 planned PDH projects to produce propylene from propane. This will require six times the current level of propane imports. Companies there are already in the process of signing supply deals with US natural gas producers.
All in all, do not count on US natural gas prices to remain at very low levels in the years to come.
It is not just the US chemical sector that will aim to take advantage of cheap gas prices. Right now US producers are enjoying a significant cost advantage. But as demand draws on gas emerge and accelerate from other sectors, expect that to be arbitraged away.
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