21 March 2014 10:03 [Source: ICB]
The US is about to kick off an unprecedented wave of petrochemical projects, ranging from ethylene and derivatives, to on-purpose propylene and methanol – all on the back of the shale gas boom. US ethylene capacity could increase by as much as 51% by 2020 to over 41m tonnes/year, if all the planned new crackers are built.
There are now plans announced for a total of 10 new ethane crackers in the US – eight on the US Gulf Coast, and two in the northeast US. This represents around 12.2m tonnes/year of ethylene capacity. Seven projects are beyond the feasibility stage and seven groups have announced capacity figures for their eight crackers.
Construction engineers will be in short supply once plant building begins
In January 2014, Formosa Plastics chairman Lee Chih-tsuen was quoted in the Taipei Times detailing a plan to build a new 1.2m tonne/year cracker in Louisiana following a meeting between Formosa executives and Louisiana governor Bobby Jindal. This would be in addition to its planned new cracker in Point Comfort, Texas, where it is in the process of securing permits.
Formosa confirmed the plan, but noted the Louisiana cracker is still under discussion. “There are still some studies and research we need to do before we reach a decision,” a company source said.
US-based integrated polyvinyl chloride (PVC) producer Axiall announced in December 2013 that it would build a $3bn (€2.18bn) cracker in Louisiana for start-up by 2018. In February 2014, it announced that South Korea-based Lotte Chemical would be its 50:50 joint venture partner on the 1m tonne/year cracker.
The companies expect to award a front-end engineering design (FEED) contract in the first quarter of 2014. Downstream, Lotte will undertake a FEED study for a wholly-owned monoethylene glycol (MEG) plant adjacent to the cracker. This plant would start up in 2018.
“As part of Axiall’s long-term growth strategy, we believe it is important we have further integration with cost-based economics on 50% of our annual ethylene requirements,” said Axiall CEO Paul Carrico on announcing the partnership. For PVC production, Axiall is currently back integrated into chlorine, but not ethylene.
The US cracker would be the first ever built by a South Korean company. “We are pleased to enter this partnership with Axiall to develop a world-scale ethane cracker fed by US shale gas,” said Soo Young Huh, CEO of Lotte Chemical. “This investment will build on Lotte Chemical’s global ethylene construction and operating capabilities and increase our manufacturing presence in the North American market.”
In November 2013, officials from Brazil-based industrial conglomerate Odebrecht and the governor of the state of West Virginia announced a proposed cracker and three polyethylene (PE) units. Capacities were not disclosed.
The complex, to be called Ascent (Appalachian Shale Cracker Enterprise) would be built in Wood County, West Virginia. Odebrecht would be responsible for investment and financing. Brazil-based Braskem, in which Odebrecht has a 38% stake and majority voting rights, would run the facility and market the PE.
In addition to the 10 planned Greenfield projects, there are also 10 expansions planned at existing crackers amounting to 1.5m tonnes of ethylene capacity – equivalent to one large world-scale cracker.
However, it is of course questionable if all the projects will eventually get built, so let us do some additional analysis.
Just taking into account the seven cracker projects on the US Gulf Coast where both capacities have been outlined and the projects have advanced beyond the feasibility stage (Chevron Phillips, ExxonMobil, Dow, Sasol, Formosa Plastics – Louisiana, Occidental/Mexichem, Axiall/Lotte), plus the announced expansions of existing facilities, this amounts to a 37% increase in US ethylene capacity.
However, it is not just cracker projects in the works. The US shale gas boom is giving rise to a host of other chemical projects, including those in methanol, fertilizer, polymers, chlor-alkali and further downstream.
Total investment in US chemical projects linked to shale gas reached $100.2bn spanning 148 projects from 2011 to February 2014, according to the American Chemistry Council (ACC). These include new projects as well as expansions, some of which have been completed. This could lead to additional chemical output of $81bn/year for the chemical industry by 2023, the trade group noted.
Its is not just US companies that are spearheading the advance. Foreign-based companies are actively participating.
“The US is truly experiencing a new wave of investment in chemicals, with more than half of the investment planned in dollar volume representing foreign direct investment,” said Swift. “These have mostly been in bulk petrochemicals, fertilizers and resins. But there will be more announced downstream.”
Much of the downstream investment in the US will go into boosting the production of polymers. US plastics exports are expected to jump from 10-12% of total production a decade ago, and 20-21% today, to about 35% by 2023, according to Swift.
EXTENDING GLOBAL COMPETITIVENESS
The US stands to be even more competitive in ethylene and derivatives production in the coming years as the Middle East shifts to using heavier feeds, he noted.
Nowhere is the US cost advantage more apparent than in the segment financial results of LyondellBasell – the only publicly traded company with separate segments for its US and international olefins and derivatives businesses.
In 2013, LyondellBasell’s Olefins & Polyolefins (O&P) – Americas segment posted record earnings before interest, tax, depreciation and amortisation (EBITDA) of $3.57bn on sales of $13.09bn, for an enviable EBITDA margin of 27.3% – on par with the highest margin specialty chemicals businesses.
In contrast, its O&P – Europe, Asia and International segment, which had higher sales of $14.69bn in 2013, generated EBITDA of just $839m. Its EBITDA margin was 5.7%.
“The US natural gas liquids advantage continues to evolve in a very positive way and we are executing our growth projects rapidly to take advantage of these market opportunities. We believe olefins in North America will continue to benefit from strong margins created by cost-advantaged NGLs,” said Lyondell-Basell CEO Jim Gallogly.
Among the US cracker projects where derivatives have been announced, the bulk of the output will go into polyethylene (PE). In total, US PE capacity stands to jump by 7.1m tonnes, or 47%, to around 22.4m tonnes/year if all the crackers and downstream plants as well as standalone expansions take place. This figure is poised to rise further as downstream plans are announced. This includes assumptions that half of the output of Dow and Shell’s crackers go into PE (750,000 tonnes and 625,000 tonnes, respectively), and all of Odebrecht’s cracker output (assumed at 1.25m tonnes), as it has specified three PE units.
The huge projected PE capacity numbers are giving some producers pause. NOVA Chemicals had planned to build another 470,000 tonne/year PE plant in Sarnia, Ontario, Canada for start-up by the end of this decade, but put the project on hold in December 2013, citing an oncoming glut of US PE capacity.
NOVA is now considering building a new PE plant in Ontario, the US Gulf Coast or elsewhere in the world. An investment decision is now expected to be made before the end of 2020.
PDH TO BOOST PROPYLENE
Aside from the cracker projects and downstream PE, the US shale gas boom has facilitated plans for eight new propane dehydrogenation (PDH) plants in the US to produce on-purpose propylene that are slated to come on line in 2015-2018.
Propane is another NGL, along with ethane and butane, and has been in abundant supply. However, the US already exports propane for fuel and these exports are expected to rise further as China ramps up its own PDH plants. New PDH plants in the US are planned by Dow (2), Enterprise Products, Ascend Performance Materials, Formosa Plastics, REXtac and PetroLogistics, the last of which operates the sole PDH plant in the US. Another new PDH plant by Williams Companies is slated for Alberta, Canada. The shift to cracking ethane rather than naphtha at existing US facilities – a trend that has accelerated with several cracker conversions – has resulted in less production of co-product propylene from crackers.
Further downstream, there are few plans for new polypropylene (PP) projects in the US. The only one is REXtac’s planned 270,000 tonne/year PP facility downstream from its Odessa, Texas, PDH plant scheduled for start-up by mid-2016.
Methanol is undergoing a huge revival in the US after production shut down in late 2003-2005 because of a lack of cost competitiveness stemming from high natural gas prices.
In North America, the first restart of an idled methanol plant was by Methanex at Medicine Hat in Alberta, Canada, in April 2011. The first restart in the US was by OCI in Beaumont, Texas, in July 2012. That was followed by LyondellBasell’s restart of its Channelview, Texas, plant in December 2013.
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Today, there are plans for 10 new world-scale methanol facilities in the US, set to come on line from the end of 2014 through 2018. Most recently in late January, a joint venture between BP and a Chinese government agency announced plans to build two 1.6m tonne/year methanol plants in the northwest US – one in Clatskanie, Oregon, and the other in Kalama, Washington. The venture, call Northwest Innovation Works, would export all methanol produced to the Dalian Xizhong Island Petrochemical Park in China, for methanol-to-olefins (MTO) and plastics and rubber production.
The heavy petrochemical project slate, along with a slew of other industrial projects in the US, is set to constrain skilled labour and other engineering and construction (E&C) resources.
The ACC’s Swift projects 2016 as the peak year for capital investment, although shortages in labour and E&C resources could push this back to 2017 or 2018, he noted.
Robert Connors, analyst covering the US E&C sector for investment bank Stifel Nicolaus, also expects 2016 to be the peak year for craft labour demand at over 35,000 workers, while 2017 is also projected to be a heavy demand year at around craft 28,000 labourers needed.
“We see project cost inflation peaking in 2016-2017. Construction cost inflation for downstream petroleum processing projects has been benign since peaking in August 2008,” said Connors. “We see another peak occurring in the 2016-2017 timeframe if the ethylene and LNG export projects are to hit their 2017-2018 online dates. So for now we believe the cycle is still in the ‘sweet spot’.”
The slated US ethylene projects in 2013-2018 are projected to require total craft labour of 42,500 (across different years) while LNG projects in the same period will require 43,660, according to Connors.
To put this into historical context, the 2005-2008 heavy crude upgrade cycle for US refiners required around 28,200 craft labourers, the analyst said.
Petrochemical producers have increasingly expressed concerns about resource constraints. In late January, Methanex CEO John Floren said costs reaching as high as $1,000/tonne for new projects will make it hard to get a decent return on investment. “I think we’re going to be in a very difficult environment for newbuild projects,” Floren said.
“It is clearly taxing the resource base to support that type of growth, whether it is looking for skilled workforce or the capacity of engineering companies, and the capacity of critical equipment suppliers,” said Randy Woelfel, CEO of NOVA Chemicals in December 2013. “Ultimately, this adds up to more time and money. We’re certainly seeing significant inflation in project costs.”
The US Federal Reserve, in its December 2013 Beige Book report about economic conditions, cited a similar trend. “Refining and petrochemical contacts reported extreme difficulty finding engineers and construction labourers for current and proposed facility expansions, and noted a continued rise in wages,” said the Fed in its report.
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