Gas, Gas, And Perhaps Even More Gas

GlobalethylenemarginsOct2013

By John Richardson

THE global petrochemicals industry is stepping on the gas as it accelerates both capacity expansions and the restructuring of existing assets. Apologies for the pun.

In the US, of course, some 25m tonnes/year of ethylene capacity is due to be added, most of it after 2017, thanks to big volumes of cheap shale gas-derived ethane,

And this very interesting Insight article from my London-based ICIS colleague, Tom Brown, details the work that INEOS is doing to restructure two of its cracker complexes in Europe in order to take advantage of imports of low-cost US ethane.

Tom writes that:

  • INEOS’s cracker in Grangemouth, Scotland, might end up with ethylene production costs  around half the European average, once it switches to a mixture of US ethane and other feedstocks
  • The company’s Rafnes cracker in Norway will end with C2s production costs of a little over $500/tonne by 2015 compared with current levels of $950/tonne, according to INEOS. Europe’s January contract price for ethylene was €1,240/tonne, which gives you an idea of the potential improvement in earnings, assuming, of course, that oil prices don’t collapse.

Whether ethane will make sense anywhere else in Europe because of logistics costs is very much a moot point. Taking advantage of distressed supplies of naphtha might instead work better for land-locked cracker complexes (Grangemouth is situated near to the coast, on the Firth of Forth estuary, and Rafnes is on the coast).

But we think one commonality with the Grangemouth could well be more government involvement in preserving the life of other refinery-petrochemicals complexes in Europe.

Meanwhile, in Asia we know of at least one Asian petrochemicals producer that is looking to leverage its investment in US shale gas assets through shipping ethane to Asia.

And other Asian producers, lured by the marvellous margins being enjoyed by the US (see the above slide for a fairly recent example), are talking of shale gas opportunities outside the States.

“Shale gas opportunities elsewhere are making us very confident – for example, the huge reserves in Argentina and in China,” one industry source told us recently.

“All the experts keeps saying the geology is difficult in China and China lacks enough water, but the Chinese government keeps telling us ‘just watch us, we will make this work.’ We don’t want to miss out on the next big opportunities to build more gas-based crackers.”

He, meanwhile, takes a very dim view of the prospects for naphtha cracking in Asia.

“I don’t think the gas advantage will disappear because of a collapse in oil prices,” the source continued.

“I just can’t see a collapse in oil prices happening. OK, OPEC has lost some power because of higher tight oil production in the US, but it is not in the interests of anyone – OPEC or the Western oil majors – to let prices fall below $80 a barrel.

“Unless oil does fall below $50-60 a barrel, perhaps even as low as $40 a barrel, I cannot see much of a future for naphtha cracking in Asia.

“The only way for naphtha crackers in Northeast and Southeast Asia might be to follow the Japanese route – consolidate and focus increasingly on specialities.”

And, as we have said, Asian might also explore gas-based feedstock economics – whether via exports from the US and perhaps even in China, if the source’s optimism is well-placed.

We once again need to say sorry here, but we are much less sorry than we were at the beginning of this blog post as this time this is a serious issue.

Our apology on this occasion relates to the need to repeat that DEMAND remains the challenge, as much, or more so, than feedstock advantage.

Our concern continues that senior policymakers don’t seem to recognise the impact of demographics on demand. If you cannot sell your petrochemicals, it doesn’t matter how cheaply you make them.

Focusing only on Europe, as an example of how policymakers don’t appear to get it, Jack Lew, the US Treasury secretary, was quoted in the Financial Times today as chiding Germany over its failure to stimulate domestic demand. Germany, because of its export prowess, has long been criticised for exporting deflation, whilst not doing enough to get its own citizens to spend money.

Mr Lew, at least in the quotes in the FT [maybe we are doing a disservice to him because of comments made elsewhere], doesn’t mention the demographic challenge as a reason why Germany needs a whole new policy direction in order to stimulate local demand.

And, within Germany, itself we have seen few indications of the willingness to even discuss a new policy direction.

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