US LNG Projects Up In The Air



LNG.pngBy John Richardson

THE US petrochemicals industry is battling hard to block an explosion in liquefied natural gas (LNG) investments that they fear would result in a rise in ethane, propane and butane feedstock costs.

Andrew Liveris, CEO of Dow Chemical, raised this issue in December, but the pressure from the industry on legislators responsible for approving LNG projects now appears to have been stepped up. Peter Huntsman, CEO of Huntsman, has now joined the fray.

Overall gas markets could tighten if a substantial number of US LNG projects go ahead, thus pushing up the cost of raw materials for steam cracking, the petrochemical industry argues.

In addition, LNG exporters might find value in leaving ethane in shipments in order to increase calorific values. Some customers, such as those in Japan, have a preference for “wet” LNG, which contains a small percentage of ethane.

Petrochemical companies are very concerned about protecting margins that have soared thanks to the shale-gas dividend.

For instance, Dow Chemical has reported a $413m (€306m) decrease in purchased energy and feedstock costs in Q4 last year, compared with the same quarter in2011, thanks to the shale-gas boom.

ExxonMobil saw a 76% increase in Q4 2012 chemicals profits, largely thanks to higher margins on cheaper raw materials.

LyondellBasell’s Q4 profits were 68% higher for the same reason.

But how likely is it the US will see a flood of LNG investments that will tighten the gas market?

Some 246m tonnes/year of LNG capacity is being planned in the US, 152.8m tonnes/year of which have firm start-up dates, according to ICIS data.

Peter Voser, CEO of Shell, thinks that only around 50m tonnes/year of  LNG capacity is likely to built in the States. 

And Toledo Ohio-based Teo Consultancy, in this article in the Oil & Gas Journal, contends that the viability of many of the LNG projects is very much up in the air.

The above chart rates several of the US projects based on structural and financial advantages or disadvantages.

And the consultancy also writes: “The projected financial performance of proposed US LNG export plants supports the building and commissioning of at least a few of them. The proposed plants, however, face large risks. Potential supply-demand shifts in both the US and destination markets could result in price shifts much greater than the 10% used in this article’s sensitivity analysis.

“Competitors can also act to damage the financial viability of proposed US LNG plants by, for instance, changing their pricing approach so that US exports will no longer be attractive. The success of such defensive strategies will depend in part on growth in global demand for natural gas in comparison with growth in supply outside the US.

“The extent to which China and India shift from coal towards natural gas will play a large role in determining the future supply-demand balance. China depends on coal for about 70% of its energy requirements, and India on coal for more than 50% of its. In contrast, natural gas only meets about “4% of China’s energy requirements and 11% of India’s, according to the International Energy Agency’s 2012 World Energy Outlook.

“Neither country is likely to implement energy policies that will put economic growth at risk, making a shift away from coal towards natural gas likely only once an adequate supply of gas is economically available. Any major shift from coal towards natural gas therefore will be a reaction to, not a driver of, the supply-demand balance.

“Proposed US LNG plants also face currency-driven risks. A major appreciation of the US dollar would damage prospects for the proposed plants, especially with respect to the other major countries in the Organization for Economic Cooperation and Development (OECD). Europe’s ongoing financial crisis increases the likelihood the euro will depreciate against the US dollar.

“Japan would prefer the yen also depreciate against the dollar, given the structural challenges that country faces in light of an ageing and shrinking population (our italics and emphasis) and continued dependence on exports. By contrast, however, the US dollar will likely depreciate against the major non-OECD currencies, including the Chinese yuan, as these economies continue to develop.”

And what goes for LNG projects goes to what we fear could be a headlong rush into an excessive amount of petrochemical investments in the US: The global economic consequences an ageing and shrinking population.

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