Special report: European chemical sites – Oil price fall is double edged

Sean Milmo

23-Feb-2015

European chemical sites have in recent years been strengthening their position at the core of the region’s chemical industry by building up an effective and comprehensive infrastructure for energy and feedstock supplies supported by efficient technical and other backup services.

Many of these facilities, based on renewables and low-carbon alternatives to fossil derivatives, have been planned in the expectation of permanently high oil prices.

After the dramatic fall in oil prices in the second half of last year doubts have been raised about the sustainability of this policy.

Unsure about future trends in costs, investors in chemical sites have been holding back on decisions to put funds into new projects, particularly in the construction of expanded or new production capacity.

“The low oil price has created a lot of uncertainty, which is affecting decisions on investments,” explains Stan Higgins, chief executive of the Teesside-based North East of England Process Industry Cluster (NEPIC), the majority of whose members are chemical producers.

Port of Antwerp Rex Features

Rex Features

Port of Antwerp is adding wind power to its fossil fuel energy capability

“Investors want to have a better idea of what they will be paying for their feedstocks and what prices they will be able to charge for their own products,” he says.

A key question for chemical companies considering investment plans is at what level oil prices will settle, given that they have plummeted by around 50%, and how long they will take to settle.

“Then we will have the stability which should get investment going again,” Higgins comments. “On Teesside we were doing pretty well with inward investment until the oil price started to drop.”

$70/BBL IN A COUPLE OF YEARS

Many energy experts have been predicting that oil prices will gradually creep up, probably over a period of 2-3 years, from a low of around $50/bbl to around $60-70/bbl. This would be a level welcomed by the majority of chemical companies, particularly commodity producers which in Europe are mostly located in chemicals sites or clusters.

“Even if it stays around $70/bbl, that would be good news for chemical producers,” says Sietse Wiersma, president of the European Chemical Sites Promotion Platform (ECSPP), whose members include the region’s major chemical sites as well as chemical producers. “It is also high enough to keep US shale oil and gas production profitable, which all helps to maintain downward pressure on feedstock costs.

“Feedstock prices will continue to be lower than they have been for several years, which can only encourage investment in Europe’s chemical sites,” he continues. “Investment has been a little bit lower last year, especially foreign direct investment, which should grow again.”

However, even with oil at $60-70/bbl, the commercial attraction of projects in renewables, feedstocks from unconventional carbon sources and biomaterials could suffer.

Rex Features

Rex Features

Teesside is aiming to set up Europe’s first carbon-capture-equipped industrial zone

“The oil price drop has not been a good omen for bio-based chemicals,” warns Wiersma. “They will be even less competitive against conventional chemicals.”

Now chemical site managers could face the dilemma of how much they should adapt to a low oil price over the medium term by modifying their long-term objective of creating locations dependant on energy and feedstocks from a variety of renewables and fossil sources.

This mix is seen as a necessary basis for sites to move up the value chain into specialty products. The aim in some of the larger sites and clusters is to integrate energy and raw material supplies at one end of the value chain with the production of high margin products at the other, often backed by local R&D facilities.

In a few locations the structures of a circular economy are being established to enable cradle-to-cradle processes to operate which convert waste streams into new products. But these integration schemes are being supported by long-term investments, much of which come from public rather than private funds.

The Port of Rotterdam, whose chemicals cluster accounts for 20% of the Netherlands chemical industry, has been spending large sums on its Maasvlakte 2 scheme for the reclamation of land. This includes 300 hectares for chemicals-related activities using algae-based bio-fuels and ethanol made from organic waste.

After 3-4 years of large investments in the scheme, capital expenditures by the Rotterdam Port Authority have begun to drop sharply. Last year total investment fell by 23% to €203m ($232m) to a level prior to the Maasvlakte construction.

On Teesside, the location of the UK’s largest chemicals cluster, large amounts of public funds are being injected to help transform the area into a predominantly low-carbon operation.

The UK government has just allocated a total of £104m (€140m) for expenditure on infrastructure, logistics and advanced manufacturing, as well as low-carbon projects, between 2015 and 2012. In addition Teesside will benefit from the setting-up in 2016 of a £160m venture capital fund for the North East of England, which is being mainly financed by the European Regional Development Fund (ERDF).

Despite the availability of cheaper oil, chemical sites are likely to be able to continue their policies of energy integration based on renewables and fossil fuels because governments see them as being consistent with their climate change commitments.

Furthermore, being on the whole centres of energy-intensive industrial activities, chemical sites are regarded as needing to have more control of the cost and availability of their energy sources. Local energy supplies can also help reduce reliance on imported oil and gas, particularly from regions of international tension.

“There are broad political reasons for putting public money into local energy schemes,” says Higgins. “They can help a country achieve more energy security. They can give an area many years of economic benefits which could not necessarily be achieved through market forces.”

With the assistance of government money, Teesside is pioneering the application of processes for the capture and sequestration (CCS) of CO2 emitted during the manufacture of steel and chemicals like industrial gases, polyethylene terephthalate (PET) and fertilizers. The aim is to set up Europe’s first CCS-equipped industrial zone.

“The effect of a successful CCS network in Teesside would be a game changer for Tees Valley, the region (of North East England) and the UK economy,” says Stephen Catchpole, managing director of Tees Valley Unlimited, a public-private local development partnership.

Teesside is also, with government help, at the forefront of the development of technologies for the conversion of municipal and other solid waste into electricity, fuels and feedstocks.

‘MOST INNOVATIVE IN THE WORLD’

Air Products started construction last year at Stockton on Tees of a second 50MW advanced plasma gasification plant for using waste initially for electricity generation. The company claims the two units are “the most innovative renewable energy projects in the world”, which could be used possibly in the longer term for production of biofuels and chemical feedstocks, as well as electricity.

After the first plant has come on-stream this year and the second in 2016, they will each process over 350,000 tonnes/year of waste which would otherwise go into landfill. The UK government has contracted to purchase the electricity from the second plant for a 20-year period.

Stan Higgins


“On Teesside we were doing pretty well with inward investment until the oil price started to drop”

Stan Higgins
Chief executive, NEPIC

At the chemicals and refinery complex at Leuna in central Germany, the country’s Federal Ministry of Education and Research (BMBF) is helping to fund the development of a process for gasifying local reserves of lignite to provide energy and make a range of chemical materials, including urea, ammonia, acetic acid, aliphatic and aromatic hydrocarbons and waxes. A large scale plant is due to be brought on-stream at the site before 2020 by an alliance of mining, chemical and engineering companies and two local universities.

At Rotterdam’s Maasvlakte site, a CCS plant is due to start capturing 1.1m tonnes/year of CO2 from a new adjacent power plant for storage in a depleted gas field under the North Sea.

The scheme, called Rotterdam Capture and Storage Demonstration Project (ROAD) and run by a joint venture of E.ON Benelux and GDF SUEZ Energie Nederland, will be one of the first projects to create a large-scale integrated chain of CO2 capture, transport and storage. It is being co-financed by the European Commission, the Dutch government and the Global CCS Institute, headquartered in Melbourne, Australia, which is mainly industry run but has over 30 governments among its membership.

At a time of public sector austerity, some European government have been curbing funds to help the development of technologies for renewables and other alternative energy and feedstock sources.

The Antwerp Port Authority, which runs the largest integrated petrochemicals cluster in Europe, has had to shelve a project for a 150-300MW power station to be fuelled by biomass after the Flemish regional government placed limits on the biomass-to-energy capacities it would subsidise.

As part of its policy of having a combination of renewables and fossil-derived energy and feedstocks, the authority is nonetheless pressing ahead with plans for a farm of 50 wind turbines on its left bank with a total capacity of around 150MW. It is also aiming to add another 18 wind turbines to an existing 12 on its right bank.

The wind turbine expansion is being funded by a consortium including the authority, local municipalities and other organisations.

“The lower oil price will make wind turbines and other renewables less competitive against fossil energy but we’re not going to slow down our investments in sustainable alternatives,” says Annik Dierkx, the port authority’s spokeswoman.

SUPPLY CHAINS STRENGTHEN

While chemical sites continue to initiate energy and feedstock integration projects, they are stepping up their efforts to form and strengthen supply chains which integrate their activities more closely with those of their hinterlands and their local regions.

Ports with chemical clusters are increasingly seeing themselves as playing a crucial role within supply chains, both as ports and chemicals production and trading hubs. They are in strong positions to bolster the competitiveness of supply chains extending through their hinterlands and regions and even beyond Europe.

Both Rotterdam and Antwerp port authorities have, for example, been forging closer links between both themselves and other chemical and industrial sites within their hinterlands and in regions of Germany and France. Both have also set up ties with ports and industrial regions outside Europe.

Antwerp last year reinforced its collaboration with Houston in Texas, US, through a memorandum of understanding (MoU) which aims to exploits more the two locations’ large petrochemical clusters.

A similar relationship-strengthening MoU was signed last year between Antwerp and Shanghai, China, which were first twinned in 1985. One objective of the new agreement is the greater exchange of business information about their respective hinterlands.

Innovation is another major objective behind integration and partnership strategies being pursued by chemical clusters.

“Existing sectors in Rotterdam like the chemicals sector need to make major strides in the area of innovation if they intend to strengthen their international competitive advantage,” says the Rotterdam Port Authority in its latest progress report on its Port Vision 2020.

“(What is required) is) the development and implementation of targeted research agendas in partnership with knowledge institutions,” the authority says.

Chemelot, a chemicals park in south Netherlands adjacent to DSM’s main Geleen site, is expanding its R&D campus with the aim of doubling its number of employees to 2,300 and quadrupling its students, mainly from local universities, to around 1,000 by 2023.

The campus aims to become a leading place in Europe for research in bio-based and biomedical materials. Last year it set up a research institute for these materials — Chemelot Institute for Science and Technology (InSciTe) — to bring together scientists, businesses and government bodies in the development of new chemical building blocks from biomass.

DSM opened in November last year a new R&D centre for high-quality materials with a staff of 400 people. It is thought to be the largest research centre of its kind in the world.

The campus also nurtures new companies, which can have access to start-up finance, including a new €40m venture capital fund set up by DSM and the local province of Limburg. Isobionics, a new company based on the campus making natural ingredients, has among its shareholders DSM and Limburg provincial funds.

Many European chemical sites are deeply committed to a strategy of energy and feedstocks integration backed by partnerships with knowledge institutions and innovation funds. They will be hoping that this policy does not over the next few years become seriously disrupted by upheavals in the crude oil market.

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