INSIGHT: Shale gas and the Netherlands’ chemicals clusters

31 October 2013 17:00  [Source: ICIS news]

By Tom Brown

LONDON (ICIS)--The advent of shale gas in the Netherlands remains a long way off.  Although the Dutch government has been more open to the idea of shale exploration than many of its European cousins, further test drilling has been postponed for 18 months from September.

In a letter to the Netherlands’ House of Representatives on 18 September, Economic Affairs Minister Henk Kamp stated that the postponement is linked to a nationwide study being carried out on the potential impact of shale gas extraction in the Netherlands.

“Some possible locations for test drilling for shale gas have been identified by companies applying for a license. But I want to be able to evaluate all sites in the Netherlands where drilling is possible,” Kamp said.

“Attention can then be focused on those locations that are known to be promising, and how their environmental risks can best be managed,” he added.

The survey puts any progress for shale exploration in the Netherlands on ice for the time being. No applications for drilling licenses are to be processed before the survey is concluded, and companies with licenses already granted prohibited from further exploration until the same deadline.

The freeze leaves the Netherlands’ shale gas industry effectively unable to develop before March 2015.

With the most optimistic estimates of the development of a shale gas industry in the UK – which has been far more rapacious in its pursuit of cheaper gas supplies – envisaging an eight-year timeframe,  it means that the earliest the Netherlands could see commercial-scale shale extraction is likely to be years after that.

In the meantime, the competitiveness of the Dutch chemicals sector – which but produces 14% of the world’s benzene – is under threat, according to trade body Vereniging van de Nederlandse Chemische Industrie (VNCI).

The Netherlands-based association sees the development of US shale as significant enough that it has commissioned analyst Deloitte to produce an addendum to its long-term outlook and vision for the sector, published in 2012.

Entitled The shale gas revolution and its impact on the chemical industry in the Netherlands, the report focuses on one of the four possible future scenarios examined in the original document: abundant energy. The abundant energy scenario assumes a world with access to plentiful energy reserves, with a focus on natural gas, solar and geothermal energy.

The advent of commercial-scale shale gas extraction bolsters the assumption of readily-available cheap energy, VNCI says, but the global benefits of this are likely to be unevenly spread. The surge of capacity expansions and new facilities under development in the US are likely to exacerbate the fall in competitiveness of the Netherland’s chemical sector, according to VNCI.

“[cheaper gas prices and capacity expansions in the US] negatively impacts the competitive position of the Netherlands and the European chemical industry [in] the short and long run,” the group said.

According to VNCI, the Netherlands petrochemicals industry will feel the impact of the US shale boom most keenly in the ethylene, ammonia, chlorine and caustic soda chains, with the potential to impact on nearly half of the revenue generated  by the sector.

The country’s chemical industry remains competitive due to the clustering of manufacturing units in the Antwerp Rotterdam Ruhr Rhine Area (ARRRA), but the erosion of core production chains could have a ripple effect leading to the gradual disintegration of the sector’s vertical integration.

“These effects may create a disincentive for global players to invest in plant upkeep and innovation. This could trigger a vicious circle of lower investments, higher costs and lower returns. Over time, ripple effects may occur that will even impact those activities initially deemed safe,” the group said.

The Netherlands chemical industry represents 7% of global fluor polymers production, 8% of polyfenyline-ester resins, 3% of ethylene and 2% of polypropylene, the association added.

VNCI said that it holds out hope that European producer margins could be maintained if Middle Eastern and Chinese companies pursue “restrained” capacity expansion. However, some Middle Eastern players are publicly mulling investment in US crackers and others are pursuing shale opportunities in their home countries.

Another partial rescue could be if the price ratio between European naphtha feedstocks and US ethane feedstocks narrows.

US feedstocks also offer potential benefits for European producers as imports, but VNCI concedes that there is likely to be a price gap of at least $4/MBTU (million British thermal units), once liquefaction, transportation and regasification costs are factored in.

“Relief might come from a number of mitigating factors, but these are not certain and may take years to materialise,” VNCI said.

According to the trade body, tighter plant integration, flexibility to use a range of feedstocks, innovation and a clear regulatory framework are key to ensuring the long-tem competitiveness of the Dutch chemicals industry, but these are long-term goals that will do little to mitigate the current situation, when the spot price of US natural gas remains below $4/MBTU.

“Most of the industry strategies will only materialise [in] the long term, they need to be supported by short term policies that allow the industry to weather the storm,” VNCI said.

The group is calling for the Dutch government to utilise policy investments aimed at heading off a potential downward spiral of under-investment from taking place, including subsidies and tax credits.

“[Policy instruments] could range from subsidies and allowing additional tax write-offs for investments (in cluster integration and for bio-based and recycling plants) to a transition away from current gas supply contract prices,” the company said.

The call for government intervention in supporting the beleaguered European chemicals industry is reminiscent of – albeit gentler than – INEOS' rhetoric when it called for grants and loan guarantees to develop a shale ethane import terminal at its Grangemouth, UK, petrochemicals complex.

While INEOS’s rationale was that the site is insufficiently competitive to justify committing the level of investment required without some assistance, VNCI is arguing that Netherlands’ chemical sector will become uncompetitive without support.

But while the closure of Grangemouth could have had a huge impact on the UK economy and on the European chemicals industry, overcapacity in some parts of the industry are such that even the closure of a petrochemicals complex the size of Grangemouth would not necessarily be enough to raise operating rates to more profitable levels for some bulk chemicals.

With overcapacity a prevailing issue in the industry and US feedstock costs still holding at historic lows, tax incentives and subsidies may not be sufficient to prevent further closures in the Netherlands and Europe as a whole while producers wait for price gaps to lessen.

By: Tom Brown
+44 208 652 3214

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