29 November 2013 09:35 [Source: ICB]
A new strategy is needed to restore the country’s competitive chemical feedstock position
The US chemical industry has created a feedstock cost advantage from shale developments comparable to that already enjoyed by the Middle East. By 2017, 10m tonnes per annum of incremental ethylene capacity (a 38% increase versus today) will create US exports of petrochemicals that will weigh hard upon the European petrochemical industry.
The Grangemouth refinery is one of four European crackers designed to consume material quantities of ethane
The European situation is currently best epitomised by the current malaise at the INEOS Grangemouth petrochemical and refining site. Though the agreement to save the site is good news, the future of the site and the few others like it in the UK, remains far from certain. INEOS has taken the bold step to import cost-advantaged ethane from the US into its Norwegian cracker. Given a major investment plan, it envisages the possibility of doing the same at Grangemouth.
Other UK cracker and European operators may be expected to take similar steps to source low-cost feedstock or risk closure. If the UK is to retain a critical mass of a chemicals industry, along with its associated employment and skills, it is incumbent upon the industry and the government to consider the following:
Creating an environment of greater collaboration between stakeholders (North Sea feedstock suppliers, infrastructure owners, petrochemical manufacturers) to create better integrated and more optimal solutions;
If and where the UK provides direct loan guarantees, grants or indirect assistance (legislation, tax).
There are three major ethylene production sites in the UK; ExxonMobil/Shell Mossmorran, SABIC Wilton and INEOS Grangemouth. Crackers at the latter two sites are integrated into on-site derivatives. Sites in the North West and Humberside also depend upon supply from these crackers. The deterioration of the UK petrochemical industry has been illustrated by events at most of the sites:
The 2009 closure of ethylene oxide and downstream derivatives was the most recent step in dismantling the previously highly integrated Wilton complex. SABIC has recently announced a further 100 job losses at the site as a result of its restructuring;
INEOS recently announced the closure of vinyl acetate production at Hull – fed by Grangemouth ethylene.
INEOS has finally gained agreement to a restructuring plan for Grangemouth, including a major new investment. Without this plan, the site would have closed.
UK HAS ADVANTAGES
The UK industry has seen better days but it has an endowment of assets that could – if supported – continue to have a future. Specifically, the UK is unique in Europe in having two (Mossmorran and Grangemouth) of the four European crackers designed to consume material quantities of ethane. Grangemouth and Wilton are also capable of consuming material quantities of locally supplied propane, butane (collectively termed ‘LPG’) and condensate. It is likely that the Wilton cracker could consume ethane with relatively limited modifications to the current design.
The historical UK feedstock advantage is needed to overcome the relatively longer distances to markets in mainland Europe. However, over time this feedstock advantage has eroded: for example, in the past 10 years, supply of advantaged ethane to the Grangemouth site has reduced by 60% as a result of the decline of North Sea feedstocks transported via the BP Forties Pipeline System (FPS). BP sold the Grangemouth site to INEOS in 2006.
In stark contrast, ExxonMobil and Shell secured the future of the Mossmorran site well into the next decade through a major investment in 2007 to supplement declining North Sea ethane supplies with new feedstocks from the Norwegian sector.
Has the North Sea integration advantage been exhausted, or is there is more to play for? Is the UK strategically best placed to exploit excess US petrochemical feedstocks because of its unique asset base? The answer to these questions is not immediately clear. Significant issues need consideration:
Though physically connected to the Teesside Gas Processing Plant for LPG supply, the Wilton cracker has no physical connection to the adjacent CATS (Central Area Transmission System) terminal; furthermore, these two gas terminals do not currently separate ethane;
Ethane is exported from the ConocoPhillips Teesside crude processing plant to Scandinavia rather than being exploited as a cracker feedstock in the UK;
FPS now has significant capacity to transport incremental natural gas liquids (NGLs; ethane, propane, butane) to a feedstock depleted Grangemouth. These molecules may currently be lost to the national gas transmission grid in the third-party St Fergus terminals, but could help secure a long-term future for Grangemouth;
There is limited inter-connection between feedstock pipeline and storage infrastructure of the three main cracker sites, though re-purposing of existing product pipelines could facilitate this. Even if considering these issues led to real opportunities, execution appears hindered by the fact that the potential stakeholders involved are from separate companies with conflicting priorities and may be constrained from acting due to competition law. The Mossmorran success is a good illustration of how integrated priorities - in this case due to shared upstream and downstream ownership - can lead to a positive outcome.
In the absence of a future from North Sea feedstocks, it remains for the UK to seek to exploit ethane and other feedstocks from the US. INEOS recently announced a plan to invest in ethane import facilities, along with modifications to its Grangemouth cracker assets. Such investments remain prodigiously expensive – INEOS has indicated a cost of £300-350m.
It is of no surprise therefore that INEOS sought government support in terms of a debt guarantee and grants – other players may follow. The INEOS action raises significant wider issues that the UK chemical industry and the UK government should be compelled to address. The threat to European industry could be turned into a significant opportunity for the UK if all parties work together, but this raises several questions:
The UK Industry stands at cross-roads and to sustain long-term employment and skills, the industry and the government need to collectively implement a set of clear actions to create an environment more conducive to collaboration and investment.
David Jones is the founder and managing director of Industrial Commercial Ventures, an independent consultancy providing advice to the petrochemical, oil refining and biofuels industries. He can be reached at firstname.lastname@example.org.
George Smith is the chairman of Hurst Park UK. George is an independent consultant serving the oil, gas and chemicals industry. He can be reached at email@example.com.
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