Market Intelligence: BASF is OK on shale gas impact

02 June 2014 00:00 Source:ICIS Chemical Business

A swelling tide of cheap petrochemicals products from North America is unlikely to seriously affect the European operations of Germany-headquartered chemicals producer BASF, according to one of its executive directors.

BASF board of executive directors member Wayne Smith said that the glut of commodity chemicals to be produced from the wave of ethane cracking capacity to be installed in North America over the next few years – an estimated investment of $71bn – is not expected to impact strongly on its European operations.

“Will these new capacities in North America somehow threaten or harm BASF’s business in Europe... the answer is fortunately no,” he said, speaking in London at an investor day.

Remarks by BASF CEO Kurt Bock to the German media in February 2014 that the company’s capital expenditure in its home market was likely to fall to around a quarter of its total from around a third for the previous five years has been held up by other market players such as INEOS’ Jim Ratcliffe as an illustration of Europe’s declining competitiveness.

Wayne Smith

"Will these new capacities in North America somehow threaten or harm BASF's business in Europe... the answer is fortunately no"

Wayne Smith
BASF board of executive directors member

However, the drop in ethane feedstock costs in North America since the onset of the shale gas boom has been so precipitous and left the region in such a strong competitive position that there is little incentive to develop new capacity further down the value chain, according to Smith.

“The shale gas opportunity in North America will be captured in big commodity products in the first step of the value chain, because it doesn’t make any sense to subsidise further downstream steps in the value chain to specialties,” he said.

“You grab the advantage, grab the margin, you sell it upstream, you make a lot of money. But what you haven’t seen in North America are lots of derivative downstream specialty announcements that are connected to this,” he added.

Smith conceded that the European chemicals industry is unlikely to be left unscathed by the US capacity ramp up, as even if the amount of investment ends up being significantly less than expected, North America is unlikely to swallow all of the material produced by these new facilities.

But from BASF’s perspective, it is often a consumer rather than a merchant of many of the products, meaning the impact is not expected to be great.

Smith said, “[European players are] already being influenced, but these are polyolefins players, those that tend to not be so integrated... The PVC industry already suffers in Europe, but from BASF’s standpoint we’re not in these businesses.

“Frankly we’re a big methanol buyer in Europe, so prices coming down here would suit BASF,” he added.

BASF itself has been investing heavily in expanding its presence in the US, ramping up capacity and increasing the flexibility of its Port Arthur, Texas cracker, a joint venture with Total.

The company is also planning a 750,000 tonne/year ammonia plant in partnership with fertilizer producer Yara, and a methane-to-propylene facility, expected online by 2019.

The decision to proceed with the ammonia and propylene ventures was driven by the fact that BASF uses significant amounts of both materials internally, meaning that one of the key appeals of these projects is to reduce internal costs.

“Do we need all that ammonia [to be produced at the new plant]? The answer is no. So we set out to find a partner who can match our needs... BASF takes everything we need internally in the JV, and Yara takes everything else,” said Smith.

Similarly, no material from the methane to propylene plant is to be sold to the merchant market in the mid term once it comes on stream, according to the company.

The decision to develop those two new facilities was also driven by the market dynamics that BASF predicts will play out regarding the alkanes derived from shale gas: methane, ethane, propane, and butane.

The company, which does not expect shale ethane exports to become a significant game changer internationally, due to the cost of freezing and transporting the material, sees propane and butane as the materials most likely to creep up in value over time.

“Propane and butane are relatively easy to move around the world... these prices in our view will rise up over time. As more export capacity comes into play in North America, these will become more linked to global oil prices,” he said.

The company regards the current low costs of ethane and methane as more resilient, meaning that while the company’s methanol to propylene plant will be significantly more capital intensive to develop than a propane dehydrogenation (PDH) plant, in the long term it may prove the more affordable option.

New capacity has to be considred in light of the company’s verbund model, where everything produced needs to fit into the chain of other products produced.

“You won’t see us announce a new cracker investment in North America. We’re not going to make polyolefins, we’re not going to make ethylene glycol. This would be for us a good [return], but it would be a completely opportunistic approach. It wouldn’t tie into our value chains or our strategy,” Smith said.

According to CEO Kurt Bock, the company has yet to decide on a location for the methane to propylene plant, but it will be based on the US Gulf coast. Permit applications have been submitted for the ammonia plant, but not the methane to propylene plant at this point.

The company has not found itself immune to a common probem in installing new capacity on the US Gulf Coast, where the sheer scale of the development slate is leading to engineering costs to rocket and projects to face delays.

“That’s probably our biggest issue with regard to those investments – to avoid cost escalation, especially for construction. And we have seen costs go up quite dramatically on the US Gulf coast,” Bock said, on the sidelines of the BASF investor day.

The company is focused on avoiding serious cost escalations: “What is from our point of view very clear is that these projects need to be budget driven and not time and schedule driven,” Bock said.

“This is not about time to market. It’s nicer if you can reap the benefits earlier on, but it’s not about competing against somebody else who also tries to catch your market share – it’s really about backwards integration in terms of our point of view,” he noted.

By Tom Brown