Scottish Enterprise: Grangemouth

Tom Brown

17-Oct-2014

Securing the path ahead

After a very public and intense fight about the future of Grangemouth, investments are now underway at the site, which is attracting much customer interest

 

 Copyright: Rex features

The battle for Scotland’s Grangemouth refinery and petrochemicals hub was a flare-up in the UK business landscape large and intense enough for it to be visible beyond the financial papers and the trade press.

The altercation, involving business leaders, governments, unions, employees and the public, led to the near closure of the complex and raised questions about the future of Scotland’s key industrial location. It also highlighted the issue of how to stay competitive in western Europe in the face of growing international competition and a half-decade of sluggish economic growth.

Jim Ratcliffe, chairman of site operator INEOS, maintained that the petrochemicals complex was unproductive and unprofitable, and that without support from the UK government, to assist in the development of infrastructure to facilitate the import of ethane feedstock from North America, the site‘s long-term future was in question.

The rapid growth of the shale gas industry in the US has seen natural gas and ethane prices there plummet. This means that, even with the cost of bringing ethane across the ocean in purpose-built tankers, shale ethane has the potential to be significantly cheaper in Europe than North Sea oil-derived naphtha.

The dispute over site’s profitability became interlinked with skirmishes with Unite, the union representing Grangemouth workers. A strike over the suspension of site convenor Stevie Deans over questions raised by INEOS about his conduct at a local Falkirk by-election led to acrimonious face-offs between INEOS management and Unite representatives. These were also fuelled by public statements about the ongoing negotiations on both sides. After an all-night negotiating session collapsed in mid-October, which Unite claimed was over a request for an apology, the doors to Grangemouth were locked and the site was shut down.

For a time, the future of the petrochemicals complex – and even the long-term prospects for the Grangemouth refinery, the main connection between Scotland and the North Sea and the source of 70% of the country’s petrol station stocks – was in doubt.

At this point, the importance of the site to Scottish energy infrastructure and the country’s economy became clear. Although not publicised as much, the Scottish chemicals industry is almost as important to the country as tourism or food and drinks exports.

“Scotland… already had a successful chemicals sector. However, it did not act cohesively, or have a strong identity or a strong voice, and it wasn’t really regarded as a significant sector by the government, because it was relatively low profile,” says Sandy Dobbie, director of chemicals M&A advisory firm Cogency and chairman of Chemical Sciences Scotland. “[The Scottish chemicals sector] is second only to whisky,” he adds.

The debate over Grangemouth’s future, which had focused on ways to safeguard its viability, slid with little warning into the sudden and potentially final shuttering of the site, putting its importance at the forefront of the national consciousness.

“Grangemouth is far more important to Scotland than Ravenscraig, the old steelworks, ever was,” Dobbie says. “Ravenscraig is the totemic investment in Scotland. Grangemouth is far more important than that; it is the heart of the Scottish industrial economy, not just in terms of size and economic value but in terms of what flows from it.”

FUTURE SECURED

 

 Media at Grangemouth waiting for news

Copyright: Rex Features

In short order, the UK Treasury approved a £230m ($368m; €289m) loan guarantee for the construction of a storage terminal for imported ethane and ships – being purpose-built by Evergas – and a £9m grant from the Scottish government. The government assistance has given sufficient security for INEOS to look at expanding the site, according to Geir Tuft, business director for INEOS Olefins and Polymers (O&P) Europe.

“We’ve secured a grant, the money’s in the bank, the contract is there for the tank… now we’re doing large-scale remediation and are opening up opportunities,” he says.

Following the grant and guarantee, negotiations began for US gas supplies and pipeline capacity from Range Resources and Sunoco Logistics, among others, with the aim of supplying the site for up to 15 years.

In the light of the scope for investment in the site and the duration of the shale ethane contracts being signed, Grangemouth shifted from being run on a day-by-day basis to becoming one of the most secure petrochemicals complexes in Europe.

One of Grangemouth’s crackers, and one at another INEOS site, in Rafnes, Norway, are among just four ethylene units in Europe that do not rely on naphtha. The 320,000 tonne/year G4 naphtha cracker at Grangemouth has been closed, along with downstream benzene and butadiene production units, while the KG natural gas liquids cracker, which INEOS says has been running at roughly half capacity for the last five years, will be ramped up to its full output of 700,000 tonnes/year.

The exact savings offered by US ethane are difficult to pin down precisely, owing to the fact that naphtha crackers offer additional benefits from downstream C4 and C6 products, whereas a gas cracker is much more dependent on gasoline prices. However, the competitive advantage is clear and even companies operating less-optimised crackers are arranging imports. Borealis and SABIC have both made announcements to that effect in recent months.

At present, other than the INEOS petrochemicals facility and the refinery, co-owned by INEOS and PetroChina, the Grangemouth complex is also home to Syngenta, Versalis, Fujifilm and Cala Chem. Cheaper feedstocks may be an attraction for other companies, but this is not the main factor that may entice other businesses to set up shop at Grangemouth, according to Dobbie.

“That’s a commercial decision between companies so I don’t make too much of that at the moment. Why would INEOS sell it cheap to you if they could sell it more expensively to someone across the road?” he adds.

Security of supply and long-term assurance that the site will continue to operate is a significant draw in such an uncertain landscape.

The European petrochemicals industry is beset by competition from regions – essentially everywhere else in the world – with cheaper feedstocks and less price-intensive regulatory burdens, leading to consolidation and closures across the continent.

“[There is a] bloodbath that’s going to happen in the European refining sector, where a substantial number of production units are going to close. A lot of people might not like that, but that’s the reality,” Dobbie says.

CUSTOMER INTEREST RETURNS
In such a shifting landscape, the knowledge that a complex will be around for at least 15 years could be a strong attraction. “If I go to some of the other places in Europe, will there be the same kind of certainty? Possibly, but not everywhere, and that I think is going to be the driving force behind attracting new companies to come and establish themselves at Grangemouth,” Tuft adds.

The knowledge of a secure future for the site is already attracting customer interest, 
according to Tuft. “A customer was up until last year, including the aftermath of the immediate threat of closure, very reluctant to grow his business with us, because he said ‘I’m not sure whether you guys are around, although I have alternatives’,” says Tuft.

“They’ve now come back and effectively said: ‘We’re very happy with where you are, we see the guarantee has gone in and we’re confident you’re on the right track. Can you effectively double the business you have with us?’,” he adds.

However, the import of US ethane is expensive. And with a glut of new capacity being developed near the US Gulf coast, which could stand to mop up a lot of excess ethane extracted alongside unconventional oil and gas, it is unclear whether ethane and natural gas prices will remain as low as they are presently. That said, a replacement source could potentially be found much closer to home.

“We can see beyond the 10-15 years in which we’ve now contracted to take US gases over, and we make no secret of the opportunity that we – and the UK, and Scotland – have to capitalise on indigenous shale gas by converting that into petrochemical products,” Tuft says.

“There are 15m tonnes/year of new ethylene capacity coming on stream [in North America] in the next 10 years potentially that will change the supply demand balance,” he adds.

The UK’s nascent domestic shale gas industry came to a halt in mid-2011 after seismic activity was registered near Blackpool, but the moratorium came to an end last year, and since then the country has been arguably the most ardent cheerleader for shale in Europe, with the Department for Energy and Climate Change (DECC) announcing the establishment of an Office of Unconventional Gas and Oil (UOGO) to speed applications.

It remains unclear what proportion of the UK’s shale reserves – most recently estimated at 40 trillion cubic metres by the British Geological Survey in its June 2013 report – are technically recoverable. Europe differs sufficiently from the US in terms of land rights, regulations and the physical properties of the subsoil, and no serious extraction levels are expected in the next five to 10 years.

However, the potential is there for US imports to provide a bridge while the industry develops. INEOS has become active in that, recently acquiring a 50% stake in Scotland’s only extant shale licence, which covers a 127 square mile exploration block that includes the land around Grangemouth.

“What you’re going to get is vast amounts of methane, which goes into the grid, goes into power stations, goes into your kitchen cooker. If experience tells us anything, there will also be liquids, ethane and propane in particular. And you can clearly see that having a petrochemicals cluster that forms around Grangemouth, with the crackers, the downstream units, the export facilities, will provide added value,” says Tuft.

In a best-case scenario, Scotland, being slightly ahead of the general curve of shale gas adoption, could see the country with a competitive advantage compared with its neighbours in the UK and in the EU.

“I think there’s huge potential for shale gas and coal-bed methane in the UK. From what I’ve looked at, they say it’s real, it’s do-able, the risks are manageable, and basically, simplistically, yes we should do it. When we do it, I think we’ll surprise ourselves by how good it is and how much impact it has,” Dobbie says.

“If some of our continental counterparts don’t do it, they are really going to make a strategic own goal. There is a potential advantage for the UK if it does it and others don’t,” he adds.

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