US Energy Supply: Morning In America



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Source: ICIS Chemical Business

 

By John Richardson

SEVEN grassroots crackers are now being planned in the US, along with numerous ethylene derivatives facilities (see the above table).

The mood at last month’s the 38th American Fuel & Petrochemical Manufacturers (AFPM) International Petrochemical meeting (IPC) in San Antonio, Texas, was incredibly buoyant on record current margins for ethylene derivatives and the prospect of sustained strong profitability.

To quote Ronald Reagan, it might seem as if it is once again “Morning in America“, as abundant domestic energy supply could also prompt a wider manufacturing recovery.

Returning to petrochemicals, a UK-based chemicals company, in dismissing claims to the contrary, said: “The ethane and propane supply is there in abundance and the economics will work to get it out of the ground. I am convinced.”

Such is the confidence that overseas companies are queuing up to get in on the US feedstock act, as my ICIS colleague Joseph Chang reports.

For instance:

*Japan-based Idemitsu and Mitsui Chemicals have already signed an ethylene offtake agreement with US-based Dow Chemical as Dow builds its 1.5m tonne/year cracker in Freeport, Texas, by 2017.

*Idemitsu and Mitsui will build a linear alpha olefins (LAO) plant and take ethylene from Dow’s new cracker. In turn, Dow will buy some of the LAO for use in its performance plastics business.

* South Africa-based Sasol is building a $5bn-7bn (€3.9bn-5.5bn) cracker complex in Lake Charles, Louisiana, next to its existing operations. Downstream from its 1.5m tonne/year cracker, the company just announced plans to build a 420,000 tonne/year low density polyethylene (LDPE) plant by late 2016.

The implications of the US shale-gas boom are also extending beyond the shores of the US, as another of my ICIS colleagues, Will Beacham, points out in this article.

He writes: The 15-year deal by INEOS to export ethane from the US east coast to Europe is the possible start of a global market for ethane, believes Booz and Company principal Jayant Gotpagar.

“Switching from naphtha to ethane based cracker capacity is not a big investment – most North American players have already switched. There was no incentive to do this in Europe but now INEOS has started something worth watching,” he says.

Corrigan believes it makes sense for European chemical companies like INEOS to make long term commitments in terms of converting existing capacity to ethane along with a long term supply deals and ships to make it work. Europe does not possess a fleet of trans-Atlantic ships for NGLs but they could evolve. However that cost of shipping will give a structural advantage to anyone in the US making chemicals from US ethane.

“The only way to overcome that [structural disadvantage] for Europe and other regions is to develop indigenous supplies of wet gas. It looks like the US advantage should hold up for some time,” saysBooz & Company vice president, Andy Steinhubl.

However for Europeans – looking at naphtha compared to US ethane – there is still a great deal of cost advantage to moving US ethane across to Europe to feed their crackers. INEOS will have a competitive advantage to others in Europe, he adds.

Gotpagar believes importing US ethane could be a good defence strategy for European chemicals players against the Middle East. Whilst it won’t be very competitive against either of those continents, it could move them further down the cost curve.

“If you believe that we’ll continue to be in a world of oil scarcity with surging gas supplies then you’d certainly want to consider it as a European manufacturer – to take a bet on that spread,” says Corrigan.

Gotpagar adds a note of caution, however.

European chemicals companies will need to examine their growth strategies before making these moves: “The only wrinkle I would add is that the move from naphtha to ethane means there are less intermediates such as butadiene and propylene.

“European players are gearing more towards specialised polymers. It may not make sense to switch to ethane if you’re trying to develop your portfolio of high spec propylene-based polymers.”

As an Indian aromatics trader told the blog, “One wonders how Asian petrochemical companies, which are based on naphtha, are going to compete.”

Hence, there is also talk about US ethane being moved all the way to Asia.

But still we worry that investment manias, such as the great US railways mania, have a somewhat chequered history, and this has the feel of an investment mania where euphoria and crowd pyschology can impair judgement.

The crucial issue here is demand. Keep your fingers crossed and hope doesn’t seem to be the best of strategies. 

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