Japan: The shale effect

28 October 2013 00:00  [Source: ICB]

The shale gas revolution continues to grow, but there are mixed blessings for Japanese petrochemical companies

The emergence of US shale gas as an important part of global feedstock supplies is reshaping the world’s 
petrochemical industry. As with all such fundamental changes, the implications are mixed, providing opportunities for some and serious challenges for others.

The approval of US LNG shipments to South Korea have some wondering if Japan will be next in line

Rex Features

In this respect, Japan is no different to any of its counterparts and is facing advantages and disadvantages as it confronts the new feedstock realities of the next decade. Chemical producers face increased competition in some areas, but will be able to benefit directly from the low-cost feedstocks in others. Japanese engineering and contracting companies are aiming to benefit from the surge in investment in infrastructure and new plant that has been spawned by the US shale gas revolution.

Most attention to date in Japan has focused on the impact on its naphtha-based petrochemicals as increasing volumes of more cost-competitive shale gas-based petrochemicals become available from the US. Major ethane cracker projects based on shale gas are planned in the US Gulf by Dow Chemical, ExxonMobil Chemical, Chevron Phillips Chemical, Formosa Plastics Corp (FPC), Sasol and Occidental Chemical, and feasibility studies are underway by Thailand’s PTT, South Korea’s Hanwha Chemical, Saudi Arabia’s Saudi Basic Industries Corp (SABIC), LyondellBasell and Indonesia’s Indorama.

If all these projects are completed, the world’s ethylene capacity will be expanded by 20m tonnes/year by around 2020. The result is expected to be an influx of low-cost polyethylene (PE) from the US to Asia, starting from 2017, which will increase the pressure on 
petrochemical manufacturers in Japan to shift to high value-added products if they are to be able to compete.

However, the implications in sectors other than olefins may benefit rather than threaten the Japanese industry. For example, US methanol production is increasingly making use of the low-cost shale gas, in the process displacing its longstanding natural gas supplier 
Trinidad and Tobago. As a consequence, gas 
producers in Trinidad and Tobago have formed strategic alliances with Mitsubishi Gas Chemical (MGC) and Mitsubishi Corp to add value to their natural gas through investment in derivatives downstream of methanol such as dimethyl ether (DME).

Other Japanese companies are investing 
directly in the US to benefit from the availability of low-cost shale gas-based feedstocks.

Mitsui & Co decided in 2010 to set up a chlor-alkali joint venture with Dow Chemical and a 50:50 joint venture with Idemitsu Kosan to produce and distribute 330,000 tonnes/year of alpha-olefins. It also has a yen (Y) 80bn ($800m; €600m) project with 
Celanese to produce 1.3m tonnes/year of 
petrochemicals from natural gas due on stream in mid-2015.

Shin-Etsu Chemical plans to expand its US polyvinyl chloride (PVC) production. Mitsubishi Rayon is considering a methyl methacrylate (MMA) investment in the US. Kuraray is building a polyvinyl alcohol (Poval) resin plant, with startup scheduled for 
September 2014.

For Japan’s engineering industry, the US shale gas revolution represents a great business opportunity. Projects are being developed to export natural gas produced in the US and Canada to Asia to meet growing energy requirements in the region. At the same time, there is a surge in the number of projects in the US for infrastructure including liquefaction and transportation of gas as well as petrochemical facilities.

The turnaround has been dramatic. In the 10 years to 2010, the US built facilities to re-gasify 100bn cubic metres of liquefied natural gas (LNG) imported mainly from the Middle East. However, in 2011, its LNG imports crashed to only 20bn cubic metres as shale gas production was ramped up. Import bases have ceased operations and are now being converted into export terminals.

Natural gas is now being shipped to Europe. Last year, the US government approved the export of natural gas to South Korea, a move seen as heralding similar exports to Japan and other countries with which the US has not concluded free trade agreements (FTAs). Canada too is now building up infrastructure to enable it to sell natural gas overseas. Until now, it has sent almost all its natural gas by pipeline to the US.

This boom in engineering investment could be a great boost for Japan’s engineering companies if they can seize the opportunity. They benefited from the plant construction boom in the Middle East in the early 2000s, but have struggled to compete with South Korean and Chinese competitors since the 2008 economic and financial crisis. However, the business of handling LNG at ultra-low temperatures of -162°C and high pressure is a key strength for Japanese engineering companies and could give them an important advantage over these rivals in the North American LNG business.

Japanese manufacturers of plant equipment have already started to build up their operations in North America. Yokogawa Electric, the world No. 4 in the manufacture of instrumentation and control equipment, won an order in March for a control system for an LNG export base in Sabine Pass, Louisiana, the first to be approved by the US government for export of LNG to countries without an FTA with the US. In April it concluded a contract with KBR of the US for cooperation in the sale of fertilizer plants.

The needs of shale gas drillers could be good news for Japanese engineering companies

Rex Features

Mitsubishi Heavy Industries set up a local company for sales and after-sales services for compressors in Houston, Texas, in October 2012 after winning an order in the previous April from Sasol for an ethylene compressor train for a large-scale ethane cracker. Ebara, a world-scale pump maker, has strengthened its US subsidiary handling compressors. Robust sales of pumps and compressors in North America last year boosted the group’s overseas sales to more than half of the total.

IHI Corp has a strong track record in construction of LNG tanks. In July last year it established a local engineering subsidiary when it took over the US operations of Kvaerner Americas for 
engineering, procurement and construction (EPC). In April, it received an order from US gas producer Dominion for EPC services for the Cove Point LNG terminal and embarked on the construction of an LNG plant. In July it won an order for basic design of a gas-to-liquid plant.

Plant engineering companies are also 
targeting shale gas-related businesses. JGC Corp joined a shale gas development project in August last year when its joint venture company with Inpex Corp acquired a 40% interest in a gas mining lot in British Columbia owned by Nexen of Canada, itself now owned by China’s CNOOC. Together with KBR, JGC Corp also received an informal order this May for basic and detailed designs of a construction project for a large-scale LNG plant, which is being implemented in Malaysia under the leadership of a joint venture formed mainly by state-owned energy giant Petronas. This project is linked to the acquisition by Petronas of Canadian LNG producer Progress.

Toyo Engineering received an order from Nippon Gohsei in March for the construction of production facilities for ethylene-vinyl alcohol copolymer in Texas, US. In addition, it won an order in May from Sasol for the basic design for a 450,000 tonnes/year plant for linear low-density polyethylene (LLDPE).

US shale gas is not the only significant factor affecting the future of petrochemicals feedstocks. The development of China’s coal chemical industry is also expected to have a fundamental effect.

The focus in China is on coal-to-olefin (CTO) and methanol-to-olefin (MTO) projects using abundant coal resources, most of which are located in inland provinces such as Inner Mongolia Autonomous Region and Ningxia Hui Autonomous Region, where national projects have been completed to produce olefins from coal feedstock.

In addition, Shenghua Ningxia Coal Industry Group is set to launch China’s second CTO plant in Yinchuan, the capital of Ningxia Hui Autonomous Region.

The Chinese government has prioritised the new material industry in its 12th Five-Year Plan (2011–2015), and this includes development of coal as a petrochemical feedstock.

In line with this policy, government research institutes are stepping up efforts to develop CTO and MTO technologies.

“Although their impact on the Asian market is yet to be seen, it’s expected to be significant once they are in commercial operation,” says an executive of a Japanese chemical company.

Author: Junko Ishii Yohei Tada

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