15 August 2014 11:16 [Source: ICB]
It signed a 10-year agreement with US-based Antero Resources, starting in 2016 to supply 240,000 tonnes/year of ethane from the Marcellus and Utica shale formations in the northeastern US. For transport, Borealis has struck another deal for fractionation, pipeline and terminal services with Sunoco Logistics. The material will be transported by Navigator Holdings, which will build a 35,000 cubic metreethane vessel equipped with dual fuel engines.
Garrett: risk cut by sourcing ethane from US and Europe
Along with INEOS, Borealis is in the fortunate position of owning some of the most feedstock-flexible crackers in Europe, which are already set up to crack ethane, naphtha, propane and butane. Stenungsund already has LPG storage infrastructure in place to handle shipments from very large tankers.
With the relatively low costs involved for importing and processing US ethane, the two companies are the first Europe-based players to find a way of reducing their exposure to the region’s feedstock disadvantaged position. As Garrett put it: “The cracker is very flexible already so it’s a very cheap move with the potential to do it without much capital. People with 100% naphtha crackers might be scratching their heads.”
With its heavy reliance on naphtha-based ethylene production, Europe has steadily moved up the global cost curve just as US producers move in the opposite direction. For other operators in Europe, converting crackers for ethane use and constructing the necessary logistics infrastructure could prove much more expensive than INEOS and Borealis. According to ICIS analysis, 20 of Europe’s 56 crackers already have some ability to use LPG as a feedstock. These would – if the sums add up – likely be the next candidates for upgrading, especially if they are located near a coast. Pure naphtha crackers would require a lot more investment.
RISKS TO THIS STRATEGY
However, there are risks to this strategy. The economics of importing US ethane rely on there being a large differential between US and European ethane prices. With increasing consumption of US ethane expected over the next few years from the mega chemical plant construction cycle in the country (see page 19), there will be upward pressure on US ethane prices. European gas prices are heavily influenced by oil prices so what if the oil price normalises to its historic ratio against gas?
International eChem chairman, Paul Hodges, comments: “The current differential between oil and gas economics is historically most unusual and is unlikely to become permanent. The proposed withdrawal of monetary stimulus by the US Federal Reserve is already causing cracks to appear in crude oil pricing. Equally important is the decision to allow crude oil exports, via the export of lightly-processed condensate. This will add to the ‘supply glut’ highlighted by the International Energy Agency.”
Producers swapping from naphtha to ethane will also lose access to the broad portfolio of co-products such as propylene and butadiene. You can say goodbye to the diversification of products and cash flows by concentrating risk into the C2 basket.
Garrett points out that Borealis has reduced its risk by diversifying its ethane supplies through a deal it recently struck with Statoil for North Sea-based ethane. Borealis CFO Daniel Shook said Statoil had adjusted its gas contract prices after INEOS swapped to 100% US ethane. Garrett says that Borealis has negotiated floors and ceilings for its ethane supply contracts to reduce risk. It will be interesting to see if other European players follow INEOS and Borealis down this route. For them, the costs and risks are likely to be even greater.
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