New projects may raise US ethylene capacity by 52%, PE by 47%

By Joseph Chang

NEW YORK (ICIS)–An avalanche of petrochemical and polymers capacity is coming in the US, with construction starting in 2014.

The US shale gas boom has brought a renewed competitive advantage to the sector, spurring plans for additional new crackers.

There are now plans announced for a total of 10 new ethane crackers in the US – eight on the US Gulf Coast, and two in the northeast US. This represents around 12.5m tonnes/year of ethylene capacity, according to an analysis by ICIS.

Seven projects are beyond the feasibility stage and six companies have announced capacity figures for seven crackers.

The latest three of the 10 planned new crackers have been announced across the span of three months in late 2013 to early 2014.

In January 2014, Formosa Plastics chairman Lee Chih-tsuen was quoted in the Taipei Times detailing a plan to build a new 1.2m tonne/year cracker in Louisiana. This would be in addition to its planned new cracker in Point Comfort, Texas, where it is in the process of securing permits.

US-based integrated polyvinyl chloride (PVC) producer Axiall announced in December 2013 that it would build a $3bn cracker in Louisiana with a partner yet to be announced, for start-up by 2018.

Axiall would only need a portion of the ethylene produced for PVC feedstock, and so would contribute a third of the capital required. The company is back integrated into chlorine, but not ethylene.

In November 2013, officials from Brazil-based industrial conglomerate Odebrecht and the governor of the state of West Virginia announced a proposed cracker and three polyethylene (PE) units. Capacities were not disclosed.

The complex, to be called the Ascent (Appalachian Shale Cracker Enterprise) would be built in Wood County, West Virginia. Odebrecht would be responsible for investment and financing. Brazil-based Braskem, in which Odebrecht has a 38% stake and majority voting rights, would run the facility and market the PE.

In addition to the 10 planned greenfield projects, there are also 10 expansions planned at existing crackers amounting to 1.5m tonnes of ethylene capacity.

If all 10 crackers are built and the expansions go through as planned, the US is looking at a massive 52% increase in existing ethylene capacity to over 41m tonnes/year, according to an analysis by ICIS.

For those crackers where capacity figures have not been announced – Shell, Odebrecht, Axiall – ICIS has assumed an average size of 1.25m tonnes/year.

Just taking into account the six cracker projects on the US Gulf Coast where both capacities have been outlined and the projects have advanced beyond the feasibility stage (Chevron Phillips, ExxonMobil, Dow, Sasol, Formosa Plastics – Louisiana, and Occidental/Mexichem), plus the announced expansions of existing facilities, this amounts to a 33% increase in US ethylene capacity.

FLOOD OF POLYETHYLENE
Among the US cracker projects where derivatives have been announced, the bulk of the output will go into polyethylene (PE).

Chevron Phillips Chemical, Dow Chemical, ExxonMobil, Sasol, Formosa, Shell and Odebrecht have all announced PE plants downstream of their new crackers. Additional PE capacity will be built by LyondellBasell and Sasol/INEOS.

In total, US PE capacity stands to jump by 7.1m tonnes, or 47%, to around 22.4m tonnes/year if all the crackers and downstream plants, and stand-alone expansions take place, according to an analysis by ICIS.

This figure is poised to rise further as downstream plans are announced.

This includes assumptions that half of the output of Dow and Shell’s crackers go into PE (750,000 tonnes and 625,000 tonnes, respectively), and all of Odebrecht’s cracker output (1.25m tonnes), as it has specified three PE units.

Dow, Shell and Odebrecht have stated that PE would be produced, but have not announced capacities. ICIS has assumed zero PE capacity for PVC producer Axiall, although this remains a possibility for its planned partner. ICIS has excluded Formosa’s second planned cracker in Louisiana in the PE analysis as downstream intentions have not been confirmed.

Even excluding Shell and Odebrecht, as they have not specified any project capacities, the market is looking at a 34% increase in US PE capacity.

The huge projected PE capacity numbers have already given some producers pause.

NOVA Chemicals had planned to build another 470,000 tonne/year PE plant in Sarnia, Ontario, Canada for start-up by the end of this decade, but put the project on hold in December 2013, citing an oncoming glut of US PE capacity.

NOVA is now considering Ontario, the US Gulf Coast or elsewhere in the world. An investment decision is now expected to be made before the end of 2020.

The company is already building a 454,000 tonne/year linear low density PE (LLDPE) plant in Joffre, Alberta, Canada, for start-up in 2016.

In Moore, Ontario, Canada, NOVA is debottlenecking its low density PE (LDPE) plant while also retrofitting its high density PE (HDPE) unit.

E&C RESOURCE CONSTRAINTS
The heavy petrochemical project slate, along with a slew of other industrial projects in the US, is set to constrain skilled labour and other engineering and construction (E&C) resources.

Kevin Swift, chief economist of the American Chemistry Council (ACC), projects 2016 as the peak year for capital investment, although shortages in labour and E&C resources could push this back to 2017 or 2018, he noted.

Robert Connors, analyst covering the US E&C sector for investment bank Stifel Nicolaus, also expects 2016 to be the peak year for craft labour demand at over 35,000 workers. 2017 is also projected to be a heavy demand year at around craft 28,000 labourers needed.

The Stifel Nicolaus analysis takes into account US petrochemical projects, along with liquefied natural gas (LNG) projects from 2013-2018.

“We see project cost inflation peaking in 2016-2017. Construction cost inflation for downstream petroleum processing projects has been benign since peaking in August 2008,” said Connors. “We see another peak occurring in the 2016-2017 timeframe if the ethylene and LNG export projects are to hit their 2017-2018 online dates. So for now we believe the cycle is still in the ‘sweet spot’.”

The scheduled US ethylene projects from 2013-2018 are projected to require total craft labour of 42,500 (taking into account peak labour demand by project) while LNG projects in the same period will require 43,660, according to Connors.

To put this into historical context, the 2005-2008 heavy crude upgrade cycle for US refiners required around 28,200 craft labourers, the analyst said.

Petrochemical producers have increasingly expressed concerns about resource constraints.

“It is clearly taxing the resource base to support that type of growth, whether it is looking for skilled workforce or the capacity of engineering companies, the capacity of critical equipment suppliers,” said Randy Woelfel, CEO of NOVA Chemicals in December 2013.

Ultimately, this adds up to more time and money, he said. “Work is taking longer to progress. We’re certainly seeing significant inflation in project costs.”

The US Federal Reserve, in its December 2013 Beige Book report about economic conditions, cited a similar trend.

“Refining and petrochemical contacts reported extreme difficulty finding engineers and construction laborers for current and proposed facility expansions, and noted a continued rise in wages,” said the Fed in its report.

In December 2013, Shell called off its $12.5bn gas-to-liquids (GTL) project in Louisiana because it had become too expensive.

“Despite the ample supplies of natural gas in the area, the company has taken the decision that GTL is not a viable option for Shell in North America, at this time, due to the likely development cost of such a project, uncertainties on long-term oil and gas prices and differentials, and Shell’s strict capital discipline,” the company said.

Additional reporting by Al Greenwood and Nurluqman Suratman