Shell plans for the long-term

See below for an extended interview with Shell Chemicals vice president, Ben van Beurden, who talks of the search for new feedstock sources. He raises the possiblity of using syngas from the Pearl GTL project in Qatar to make methanol and then olefins. Or perhaps the high paraffinic naphtha and ethane from the same project will be the way to go for Shell in Qatar?

Meanwhile, more investment in China looks likely. Read on……

Any real-estate agent worth his or her salt will probably tell you that there are three things that matter most about choosing a property – location, location and location.

Similarly, you could argue that feedstock, feedstock and feedstock are three biggest considerations for petrochemicals – hence, the Shell strategy to make its chemicals business fit with oil and gas exploration and its refining business.

“If we contemplate new investments in chemicals they only make sense if we can continue to build integrated positions and they rank favourably with our overall capital investment programme,” said Ben van Beurden, executive vice president of Shell Chemicals, in an interview on the sidelines of last week’s Asia Petrochemical Industry Conference (APIC) in Singapore.

“Everything we want to do in chemicals must be integrated with the rest of Shell. Capital goes first to upstream projects and so chemicals investments have to make a lot of sense and clear very high hurdles.”

These comments could easily lead to the conclusion that Shell will back away from further chemicals investment announcements until the bleak environment for the industry improves – especially given that oil and refining remain boom sectors.

An indication of just how bad chemicals have become were Shell Chemicals’ first-quarter results. Profits slumped by 58% to $201m compared with Q1 last year as a result of lower margins, higher operating costs and weaker income from equity-accounted joint ventures.

Much worse could follow unless crude-oil prices moderate and the demand outlook improves.

But van Beurden emphasised the importance of long-term planning and of not panicking when market conditions decline.

Shell seems to have all but given up on the impossible task of always bringing projects on stream at exactly the right point in the cycle.

“No matter how much data you have, no matter how clever you are, there is always a little bit of a casino effect in these investments,” he added.

“You work these investments very, very hard and over a long time to get the approvals in place and the right partnerships.

“At the time you are ready to make your investment decision, it’s kind of difficult to say ‘hey, I don’t quite like the timing anymore’.”

And so Shell is poised to announce a new world-scale styrene monomer/propylene oxide (SM/PO) project which will be integrated with either an existing refinery and/or cracker complex or could be part of a greenfield site. The announcement is expected in Q3.

Efforts to pin van Beurden down to more specifics yielded limited success.

Russia and India seem to be out as locations because of, in the case of India, poor infrastructure.

“We have looked at India many times, but this is a hard nut to crack,” said van Beurden.

China is, however, an option with an expansion at the joint venture Nanhai complex under evaluation.

“Nanhai has been running very well, very reliably, with an annual average operating rate of 95%.”

The $4.3bn cracker complex, a joint venture with CNOOC, was completed in 2005, and is centred on an 800,000 tonne/year cracker.

“We have discovered margins to do more so we are basically looking at how the whole complex can be stretched a little bit in terms of new capacity,” he added.

“Over the next few months we will be making an investment decision on debottlenecking which would include raising the capacity of the cracker to close to a 1m tonne/year. Later on, we will see whether we can carry out a major expansion.”

Shell might announce a new greenfield complex in China as “it’s a big country which will be short of petrochemicals for some time. There is plenty of scope for foreign partners to make investments.”

He conceded that local companies have oodles of cash and human resources to execute projects, but said that Shell could bring oil supply into an integrated refinery and cracker complex.

“We also have very strong technology positions. Our SM/PO technology, for instance, uses 30% less energy than traditional processes and produces low amounts of waste water.

“We also have strong benzene and polyols positions and so being in SM and PO makes strategic sense.”

Shell has licensed its coal gasification technology to 16 projects in China, but van Beurden conceded that the company would face “formidable challenges” to go a step further by taking a stake in a coal-to-chemicals project.

“These are incredibly complex projects costing many billions of dollars – more than building a refinery.

“If you want cheap coal feedstock you would be looking at remote locations and so it would be difficult to get your products to the market.

“We are also very clear that these unconventional routes to chemicals production must have a solution for the CO2s produced and must be efficient in water consumption.

“You also have to find the right partner to ensure that approvals are granted.”

Shell, as is probably the case with just about every other petrochemical major, is developing its own methanol-to-olefins (MTO) technology.

“We have made no secret of our MTO work. We have shifted out technology portfolio over the years from traditional development more towards the feedstock end.”

Van Beurden declined to comment on reports that start-up of the 1.3m tonne/year Shell cracker project in Qatar – a joint venture with Qatar Petroleum – has been pushed back to beyond 2015 from 2011-12.

A source close to the project told ICIS news in January this year that the delay was the result of a study being carried by Qatar into the stability of its giant North gas field.

The field is the world’s single-biggest non-associated natural-gas field and Qatar holds 14% of the world’s total reserves. However, concerns have grown over the stability of the North field because of the rapid rate of extraction.

He suggested that one option for Shell might to be to integrate a cracker with its Pearl gas-to-liquids (GTL) project, which is due on stream in Qatar at the end of this decade.

The project will produce 140,000 bbl/day of GTL fuels and 120,000 bbl/day per day on an oil equivalent basis of condensate, liquefied petroleum gas (LPG) and ethane.

The condensate includes high paraffinic naphtha which Beurden said “would make an excellent cracker feedstock.

“Ethane from the plant could also be used or we could take a less traditional approach. GTL facilities include huge air-separation units that generate an incredible amount of syngas and transportation fuels. We could use the syngas to produce methanol and then MTO.”

He added that Shell was also interested in production of aromatics from natural gas.
Only one such technology is in commercial use – at the SABIC Ibn Rushd complex in Yanbu, Saudi Arabia. The Cyclar process, developed by BP and UOP, converts butanes and propanes in liquefied petroleum gas (LPG) into aromatics.
Shell’s Shell Eastern Petrochemical project is on track for start-up in late 2009 or early 2010. It comprises an 800,000 tonne/year cracker, 450,000 tonne/year of propylene, 155,000 tonne/year of butadiene, 230,000 tonne/year of benzene and 750,000 tonne/year of monoethylene glycol and is being built at Pulau Bukom in Singapore. It will be integrated with Shell’s existing refinery at the same location.
Despite cost pressures resulting from island state’s construction boom, van Beurden said that the project should be within budget.
The complex will be long on both ethylene and propylene and so exports will take place, although he was unable to say what the quantities would be.
Van Beurden said that Shell or other companies might add further downstream capacities after 2010, bringing the cracker into a balanced position.
He accepted that new capacities coming on-stream over the next few years could have been better timed, but repeated: “It is very hard to get the timing of start-ups right because of the very long and complex value chains in this industry. Assessing capacity at every point down these chains is exceptionally difficult.
“Margins will be under pressure, especially for liquids crackers in Asia. This is always going to be a cyclical business.”
The current feast of new capacity might be followed by another famine, as was the case in the early part of this decade. Lack of investment led to record-high profitability in 2004-07.
“It’s a known fact that there is no longer of a glut of ethane supply in the Middle East,” he said.
“There is still advantaged feedstock, but there are not many governments chasing investors to take it off their hands.
“New-build prices are also on the rise and there is not a lot of credit around. Lack of credit is affecting non-traditional players who are unable to use equity to finance projects or lack an existing strong platform.”
But he stressed that it was too early to tell whether there would be another shortage of capacity post-2012, when some commentators expect the down cycle will end.
This is in keeping with his admission that predicting the future is a hugely difficult job, even when you are employing the best data and the best brains available.

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