INSIGHT: Feedstock reality sinking in for Asia; Can China CTO compete?

23 May 2014 15:54  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--When “innovation” is highlighted as the major focus for a petrochemical producing region, it’s often code for lack of a feedstock advantage. After all, if you’re sitting high up on the global production cost curve, what else can you focus on?

Rarely do you hear calls for the need for innovation in the US anymore, where shale gas has completely changed the economics of petrochemical production. Rather, it is about the need for skilled labour to build and operate new complexes.

Now the call for innovation has shifted to Asia and Europe where high-cost oil-based naphtha feedstock is the primary feedstock for ethylene and derivatives production.

This theme was evident among speakers and delegates at the Asia Petrochemical Industry Conference (APIC), held in Pattaya, Thailand in mid-May.

Directly tied to the need for innovation is a growing recognition that the global energy and feedstock situation has changed – just about permanently. Indeed, the official theme at APIC was “Transformation, a map redrawn”.

“Asia’s investment model based on naphtha economics is unlikely to be competitive in this new world,” said Peter Sykes, president of Asia Pacific at Dow Chemical, in a keynote speech at APIC.

“The global energy landscape has changed. There is no going back,” he added.

Developing domestic sources of energy and feedstock can take many years, so for now, innovation will be key to success, he noted.

“We in Asia must use our scientific and demographic foundation to grow. We need new strategic partnerships with companies, governments and academia to gain more understanding of local markets,” Sykes said. “If Asia Pacific wants to do more, the key is innovation. The human talent in Asia with scientists and researchers can solve the region and world’s greatest challenges.”

“Inevitably, the [Asia] petrochemical industry will be forced to face fierce competition with shale gas and coal-based products, which will bring down the profits of our industry as well as the competitiveness of [our] petrochemical products in the export market,” said Han-Hong Bang, chairman of the Korea Petrochemical Industry Association (KPIA).

Preston Chen, chairman of the Petrochemical Industry Association of Taiwan (PIAT), noted that the production cost of ethylene is around $350/tonne based on shale gas and $1,500 tonne based on naphtha.

What’s needed is a shift towards products with a “clear advantage over commodities”, a transformation that must be fuelled by technology and investment in local hubs “that can easily secure raw materials and make inroads into overseas markets”, the KPIA’s Bang added.

Yoshimitsu Kobayashi, chairman of the Japan Petrochemical Industry Association (JPIA) also cited the need for “game changing innovations” that shift the axis to C4 chemicals such as butadiene (BD), as well as aromatics – two product areas not addressed by shale gas-based petrochemical production.

On the commodity petrochemicals front, the only potentially cost competitive feedstock option appears to be captive coal in China.

Coal-to-olefins (CTO) technology is readily available for license from firms such as UOP, as well as in-house with China’s Sinopec and the Dalian Institute of Chemicals and Physics.

“China would be quite correct in saying this is their right – to develop coal chemicals technology. There is no question that the use of coal for chemicals will increase,” said Noor Jivraj, group manager at Jacobs Consultancy.

So where would China captive coal-to-olefins production sit on the global ethylene cost curve? Somewhere between North America ethane and Europe and Asia naphtha-based production, but closer to North America ethane, according to Ee Foong Ewe, vice president of business development and consulting in Asia for ICIS Consulting.

Jacobs Consultancy’s Jivraj also sees China’s coal-based economics falling between advantaged gas (US, Middle East) and naphtha.

While there is no question China will develop CTO production, there is a question of how much capacity will be built.

Incremental ethylene capacity additions from China captive CTO and MTO (methanol to olefins, using imported methanol on the East coast) projects could amount to around 300,000 tonnes/year in 2014 and just over 1m tonnes/year in 2015, while propylene capacity from these projects could increase by almost 600,000 tonnes/year in 2014 and 1.3m tonnes/year in 2015, Ewe noted.

Current capacity in China from CTO/MTO is 785,000 tonnes/year of ethylene and 1.92m tonnes/year of propylene, he said.

Plans have been announced for between 7m-10m tonnes/year of new olefins capacity from CTO/MTO in China, according to reports.

By comparison, in the US, the planned new ethane crackers and expansions of existing facilities would amount to a total of 13.9m tonnes/year of ethylene capacity by around 2020, according to an ICIS analysis.

Constraints for CTO in China include a high level of water intensity, as well as a more serious focus on the environment by the government, which could make project approvals more difficult.

Aside from China developing CTO, other Asia petrochemical producers are exploring the option of importing US ethane for local ethylene and derivatives production. In Europe, INEOS has already signed agreements to import US ethane and others are considering the same.

For Asia producers, this would offer a significant cost advantage versus naphtha-based production, even if US natural gas prices rose to $7/MMBtu, one major producer told ICIS at APIC.

Lastly, why not build capacity where the feedstock is advantaged? Thailand-based Indorama Ventures Ltd (IVL) is in discussion with potential partners to build a new cracker in the US.

“We are in principle interested in a US cracker and in discussion with potential partners. We produce EO/EG (ethylene oxide/ethylene glycol) in the US and can be a good partner for a new cracker as we are looking for off take,” said Aloke Lohia, CEO of IVL in an interview with ICIS at APIC.

However, this is becoming a crowded field, with 11 planned new ethane crackers in the US along with eight expansions of existing facilities, according to an ICIS analysis.

The latest is Japan-based Shintech’s planned 500,000 tonne/year cracker on the US Gulf Coast.

While the global feedstock landscape appears to have changed permanently, it’s important to remember that it is technology that launched the US shale gas production boom and caused the shift in cost economics, Dow’s Sykes pointed out. And it will be technology that redraws the map in the future.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Joseph Chang
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