ICIS Chemical Business | Editor’s comment

ICIS Chemical Business and The Chemists' Club are launching a new unique global chemical industry award.

The ICIS Kavaler Award, sponsored by The Chemists' Club, will recognize one CEO or senior executive for outstanding achievement and excellence each year.

The key distinguishing feature of this award is that the winner is selected by his/her peers - the executives selected in the previous ICIS Top 40 Power Players listing, a global rundown of the people making the greatest impact on the chemical industry.

"We are very pleased and excited to join with The Chemists' Club in organizing this unique award and event," said Joseph Chang, global editor of ICIS Chemical Business. "We know of no other award in the chemical industry given on the basis of a senior executive peer vote."

"The Chemists' Club is pleased to honor Arthur Kavaler, a great journalist and former Club member by recognizing outstanding achievements by industry leaders," said Roland Stefandl, president of The Chemists' Club.

We will invite each of the ICIS Top 40 Power Players for 2012 to vote for three individuals in the ballot, based on newsworthy achievement in one or more of the following categories:

* profitability/shareholder value (EBITDA growth, stock price, dividend);
* mergers and acquisitions (deals or integration);
* projects/capital investment; and
* innovation - technology, product, business process with an impact on industry and society.

We will send out the letters and ballots in early April, and the deadline for the ballot entry will be May 1, 2013.

We plan to present the ICIS Kavaler Award, sponsored by The Chemists' Club, to the winner at a black tie dinner in New York City in late October or early November, on a date to be announced.

BACKGROUND
The award is a revival of the Kavaler Award, which was presented by Chemical Market Reporter to leading chemical CEOs from 1990 to 1999, including Jon Huntsman Sr, founder, chairman and CEO of Huntsman, and Frank Popoff, chairman and CEO of Dow Chemical.

Arthur Kavaler, who served for 46 years as reporter, editor and eventually publisher and editor-in-chief of Chemical Market Reporter - one of the three publications incorporated into ICIS Chemical Business - passed away at the age of 91 on January 18, 2012.
Kavaler, a probing reporter and an editor with unwavering conviction, had a major impact on chemical industry journalism.

Just how far up the global ethylene cost curve will Middle East crackers go? One Wall Street analyst sees dramatic cost escalation for producers in Saudi Arabia, Qatar and Iran as ethane supplies dry up and feedstock costs rise, especially for mixed feed crackers that use ethane as well as liquefied petroleum gas (LPG) - propane and butane.

It's certainly worth watching as US producers move down the cost curve on the shale gas boom and resulting low ethane prices. All the new crackers being built in the US are based on ethane, while Middle East projects are largely mixed feed.

While Middle East ethane crackers still enjoy the lowest costs in the world with a 46% cost advantage relative to US ethane crackers, Middle East mixed feed crackers have a 24% cost disadvantage to US ethane crackers, according to Hassan Ahmed, analyst at Alembic Global Advisors.

"NGL [natural gas liquids] production in Saudi Arabia has remained relatively flat over the last few years while ethylene capacity has increased considerably," said Ahmed. "Saudi Arabia has been running short of NGLs since 2009 and not surprisingly is considering heavier feeds like naphtha for further chemical expansions."

Saudi Aramco's $20bn (€15bn) Sadara joint venture with US-based Dow Chemical in Al-Jubail will be based on 70% naphtha feedstock, with ethane, propane and butane comprising the rest.

The second phase of Saudi Aramco and Japan-based Sumitomo Chemical's Petro Rabigh project will involve additional ethane but also use 3m tonnes/year of naphtha as feedstock.

In Qatar, in early 2005, the government placed a 5-year moratorium on additional development projects in its offshore North Field, the largest non-associated gas field in the world, noted Ahmed. And then in December 2009, an official at state-owned Qatar Petroleum said a decision on new North Field developments would not be taken until 2014, essentially extending the moratorium.

Analysing raw material cost data from the state fertilizer company QAFCO from 2004 up until 2009 when it stopped releasing certain details from its financial statements, Ahmed concludes that natural gas prices charged to the chemical industry in Qatar may have risen from $1.25/MMBtu in 2004, to around $3.00/MMBtu in 2009.

In Iran, aside from the global trade sanctions led by the US, which is severely limiting its petrochemical and derivative exports, a plan approved by the Iranian parliament in October 2009 and started in December 2010 will eventually set natural gas prices to market prices, noted the analyst.

"Industrial projects, including the petrochemical projects, now have to pay around $2/MMBtu for natural gas for the first year of the reform plan, which is considerably higher than the past price of $0.53/MMbtu in early 2010," said Ahmed.

Looking ahead, Iran plans to increase gas prices to 65% of the average export gas price within 10 years, suggesting gas prices of $5.20-6.50/MMBtu, the analyst added.

Ultimately, all these changing cost factors are worth another look when considering the Middle East's position on the global ethylene cost curve.

For US producers, Ahmed sees a peak in the commodity chemical cycle by 2015-2016 amd a capacity vacuum, and one higher and longer drawn out than in past cycles.

The amplitude of the peak will be higher for US producers, as they are further down the cost curve. Plus, the cost curve has become steeper than in previous years, he added.

As you look over the impressive list of planned projects for North American liquefied natural gas (LNG) exports, you can see a parallel in the heavy project slate for planned new world scale crackers in the US. Both are being driven by the US shale gas boom. Yet there is the potential for one to threaten the other.

Unlimited US LNG exports could create volatility in natural gas and natural gas liquids (NGLs) prices, contends US-based Dow Chemical.

While LNG exports for fuel would consist primarily of dry gas where, in the process, NGLs are stripped out, LNG containing ethane and propane could be shipped out as well, according to the company.

"It is not a given that NGLs will always be stripped out prior to shipping," says Kevin Kolevar, vice president of government affairs and public policy at Dow.

"For example, Japan has specs for wet gas concentrate in LNG. And to what extent would other countries look to use wet gas? We have not heard assurances from the oil and gas community that they would strip out the NGLs."

This is an important aspect for the chemical sector - one that will continue to be explored. There's an argument that LNG exports could actually increase NGL supplies, precisely because the NGLs are stripped out.

Dow contends that it supports LNG exports but is concerned that an unchecked level of exports could drive up prices and volatility in gas and NGLs. "The fact that so much capacity is being planned to come on in a compressed timeframe causes concern," said Kolevar.

"It is all about predictability. In the late 1990s, we saw tremendous volatility in natural gas prices, which deterred investment in the chemical sector," he added.

Dow estimates that over a 10-year timeframe, the US could export up to 5-6bn cubic feet/day (bcf) of natural gas through LNG without disrupting the market if that capacity comes on in a linear fashion.

That would amount to 38-46m tonnes/year of LNG. Yet, there is a total of 199.5m tonnes/year of LNG export capacity being planned in the US, according to an ICIS analysis. And of that amount, 128.6m tonnes/year of capacity are associated with projects with defined completion dates between 2015 and 2018.

There is virtually no chance this comes on in a disciplined, linear fashion - neither will the wave of new world scale ethane crackers. It's simply not the nature of capital intensive businesses.

Of course not all of the planned capacity will be built. And even for those projects that do start up, LNG shipments will not always be at full capacity. This will all depend on market conditions and competitive dynamics at home and abroad.

But US chemical companies are concerned. Already four companies have joined the advocacy group America's Energy Advantage, which is against unfettered LNG exports.

It's important to remember that the chemical industry is not the only group seeking to take advantage of cheap US natural gas prices.

Along with LNG projects, other major draws on natural gas will come from utilities in the form of gas-fired power plants, as well as fertilizer projects.

Meanwhile, the US petrochemical sector is planning seven new world-scale crackers and expansions of existing facilities for a total of 10.2m tonnes/year of additional ethylene capacity. This represents a whopping 38% of existing US capacity.

And speaking of parallels between the rash of planned US crackers and LNG export facilities, one LNG export project website struck a common theme - "thousands of jobs and billions of dollars invested".

All the planned new US ethane crackers and expansions, debottlenecks and conversions of existing crackers will need lots of the natural gas liquid (NGL) feedstock. And companies are already racing to boost NGL fractionation capacity and build out pipelines to bring gas from the major shale gas formations to petrochemical facilities.

US natural gas processor Enterprise Products Partners is leading the way with three new 75,000 bbl/day NGL fractionators at its Mont Belvieu, Texas hub - one will come on in the fourth quarter of 2012, and two in the fourth quarter of 2013.

Meanwhile, a Chesapeake Energy-led partnership is building a 90,000 bbl/day NGL fractionator in Harrison County, Ohio, to come on in the second quarter of 2013, to process gas from the Utica Shale. It is part of a $900m (€676m) investment in natural gas infrastructure. Others building or upgrading NGL fractionators include Dominion, Williams and Chevron Phillips Chemical.

And pipeline projects abound to bring NGLs to the US Gulf Coast as well as Sarnia, Canada - two major petrochemical hubs.

In the coming weeks, we'll attempt to document the infrastructure build-out and determine whether it will be enough to feed the petrochemical beast.

The spotlight on petrochemical investment in the Americas has shone on the US shale gas boom and the resulting rash of planned new ethane crackers that could increase US ethylene capacity by about 32% by 2017-2018. But Latin America's game-changer could be Brazil's pre-salt oil and gas bounty, as well as shale gas formations in Argentina.

Naphtha crackers today are not competitive with their ethane counterparts - a fact acknowleged by Isabel Figueiredo, director of Brazil-based petrochemical producer Braskem, who spoke at the 6th EBDQUIM conference in Praia do Forte, Brazil, hosted by Brazilian association of chemical and petrochemical distributors Associquim in mid-March.

Braskem is already preparing to build a 1.05m tonne/year ethane cracker in Mexico through Braskem Idesa, its 60:40 joint venture with Mexico's Grupo Idesa. The project, with associated polyethylene (PE) units, is expected to be complete by mid-2015.

Its next big undertaking will be Comperj - the long-anticipated project with state oil firm Petrobras, which is expected to be the largest ever in Latin America. Braskem will define the scope of Comperj in 2012.

The ultimate success of Comperj will be tied to Petrobras's development of its giant offshore oil and gas reserves, which lie underneath a massive layer of salt. This could contain up to 10bn barrels of oil equivalent.

Petrobras plans to invest a total of $225bn (€171bn) during the 2011-2015 period. This could significantly boost natural gas production, providing cheap ethane feedstock for petrochemicals.

Meanwhile, Argentina will start to develop its large shale gas reserves. In February, its largest energy company, YPF, raised its estimate for shale oil and gas reserves from less than 1bn bbl to 22.8bn bbl.

YPF, majority-owned by Spain's Repsol, is under heavy government pressure to develop its oil and gas reserves, as falling production has led to greater imports. Natural gas shortages in 2010 resulting from a cold winter led to severely curtailed production at petrochemical operations in Bahia Blanca. In neighboring Chile, where Methanex has four methanol units, the Canada-based producer is relocating a unit to Louisiana, US, because a lack of natural gas supply has meant only one plant is in operation.

However, development of shale gas in Argentina and the pre-salt oil and gas reserves off the coast of Brazil could go a long way to making Latin America more competitive in petrochemicals.