21 March 2014 10:03 [Source: ICB]
The Methanol Economy has been revving up in the US, at least the first phase of it as described in 2006 by George Olah in the book Beyond Oil and Gas: The Methanol Economy. With so many plant announcements it seems almost like an economic mania.
Methanol appears to be as popular as ethylene when it comes to new plant projects – why so?
I would add ammonia to that as well. I think what we’re seeing is a lot of announcements in North America because of the shale gas situation. I believe derivatives that use gas as a primary feedstock are looking in the US or Canada for opportunities for a couple of reasons: security of supply for gas, the infrastructure that’s available in the US; as well as it being an OECD (Organization for Economic Co-Operation and Development) country.
“I think there’s tremendous opportunity in the US to grow the energy applications to use natural gas in the US to make value-added products”
Where else can you get low-cost gas today?
I think of places like Iraq, Iran, Nigeria, Mozambique, Myanmar, which are geographies that are a lot more risky than the US.
Certainly from our point of view, when we’ve looked to expand our business we’ve been more focused on OECD countries to grow. We’ve had some challenging experiences in some other countries over the past years. So that’s been our focus and I believe other people looking to expand their businesses, whether it be in olefins or ammonia or methanol or even GTL (gas to liquids), as Sasol is doing, are looking to the US because of the risk profile. Having said that, I think there’s a lot of risk still in trying to conclude a project in the US or Canada.
You’re a veteran in the methanol business. Does the second decade of the 21st century remind you of another period in the industry?
I think the only other time that we saw prices increase so rapidly was when methyl tertiary-butyl ether (MTBE) was introduced as an oxygenate in the US and that was in the early 1990s. And that was really the first energy application of methanol back then when methanol prices were more like 30 cents/gal and MTBE still made sense economically.
But with the recent advent of energy through biodiesel, methanol-to-olefins (MTO), and dimethyl ether (DME) onboard ships to replace bunker fuel, we’re now seeing the energy applications make up 40% of the global demand for methanol and they’re growing at double digits.
As a result, the overall growth rate for the industry is almost 8%/year for the last few years and that’s 3m-4m tonnes of new demand every year. So I believe it’s an issue of supply not being able to keep up with demand.
Many years ago most of the plants were in Europe or the US and had a long track record of operations. With the advent of plants going to more remote locations with less experienced work forces – not only in our case but in the industry’s case – we’re seeing the operating rates of these plants not as good as they were some years ago. So I believe it’s a combination of strong demand driven by energy and the performance of the industry from a production point of view not being as good as people anticipated.
You have talked publicly about obstacles facing those who want to build a methanol or any kind of petrochemical plant in the US and North America. Give us some specifics about the obstacles.
There have been a lot of announcements – not only in methanol but other products – but very little money is being spent today, so a lot of this is anticipated demand. In the methanol industry, we’re one of the few companies spending money today and as you know we’re relocating two 1m tonne/year methanol plants from Chile to Geismar (Louisiana) for the total of approximately $1.1bn and we’re well through the first one (end-2014) and making good progress on the second one (early 2016).
I think Celanese has also started to spend some money on its project in Texas where it’s recently got its permit approval. But those are the only two projects that are actually spending significant money. The rest are still at the financing phase.
If you take the long-term price forecasts on methanol, put in even $4.50/MMBtu gas escalating at 2% and you think of newbuild capital at $1,000/tonne, the returns are pretty minimal. Then you double down the risk. So I think achieving a long-term gas contract today is proving to be quite difficult for not only methanol producers but olefin and ammonia producers.
And trying to get a lump-sum turnkey EPC (engineering, procurement and construction) contract, I think you’re looking at a much higher cost than $1,000/tonne if you’re able to secure one. And then you couple that with what we see, based on our research, using consultants, even with a modest amount of these projects that have been announced going forward, due to the greying of the workforce in western countries as well as the lack of people going into those industries because there is really nothing built in the chemical industry of substance for the last 25 years.
We’re predicting to see a shortage of skilled labour pipefitters, welders, etc. McKinsey did a study and it anticipates, based on its numbers, about a 30% shortage of labour in the 2015-2016 period. Now that will be filled either through training unskilled labour or importing foreign workers. But either one of those solutions I believe leads to lower productivity. The lower productivity leads to higher costs because you’re talking about man-hours to build one of these facilities.
There is plenty of talk about the US soon becoming self-sufficient in methanol because of all these plant announcements. Is that a safe assumption at this point?
I can’t predict the future. I think based on what’s actually being done today, the US will not be self-sufficient in methanol for the foreseeable future and that’s assuming very modest growth on the demand side. I think there’s tremendous opportunity in the US to grow the energy applications to use natural gas in the US to make value-added products to displace imported oil through methanol and other products, and I think you’re going to see more and more of that.
You know, George Olah was ahead of his time, maybe he should have been called the George Orwell of the methanol industry. He laid it all out in a book many years ago and we’re starting to see what he predicted, which is high oil and low natural gas. And in that kind of environment, methanol plays a very significant role in the energy field. Not only for economic reasons, but because methanol is very clean-burning. So I think as there are more and more issues around air quality, whether they be in the US or other countries like China, that methanol is going to be chosen as a product to help clean up the air.
What about exports? We’ve recently heard of projects in the Pacific Northwest designed for exports only.
When I talk to the Chinese, when they import methanol from around the world at, let’s say, $450/tonne, they’re thinking $6/MMBtu natural gas. They’re growing a large MTO, DME, methanol fuel-blending [industry]. To import methanol to them is just BTUs – that’s how they look at it.
So if they can import BTUs through the form of methanol at $6 versus LNG at $12, then why wouldn’t they do that? So I think one of the challenges for the industry is how does the industry grow fast enough to meet this coming demand? Whether it’s methanol onboard ships to replace bunker fuel or MTO.
It takes about five years outside of China to build a new plant from the start to when you’re actually turning on the tap. Meanwhile, we’re seeing demand grow by 3m-4m tonnes/year, so there’s an obvious gap in the next five years that’s going to lead to, let’s say, displacement of the applications that can afford to pay the least for methanol.
What’s the choke point? How high do gas prices have to rise before people start getting scared and backing out of projects?
I think it’s all about risk. We’re fortunate enough to have a very strong balance sheet. We’re fortunate enough to have two idle plants in Chile to relocate at two-thirds of the newbuild capital in half the time. But we’re also looking at newbuilds in North America. The choke point is risk.
If I can’t get a lump sum EPC contract, if I can’t get a gas contract for 10 or 15 years and my payback for this project is either nine or 10 (years) then I’m less likely to proceed unless I have a price forecast in my mind for methanol that’s much higher than what the industry experts are currently thinking.
Which means that if I’m a company that’s trying to build a project and I don’t have the financial wherewithal and I need the banks, the banks are risk averse, they’re not likely to give a billion dollars to somebody unless they have lump sum EPC, customers and a gas contract.
I think in today’s environment, those are very difficult things to achieve. And that’s why you’ve seen a lot of announcements but nobody really going to FID (final investment decision) and starting to spend money.
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