Commentary: US project headwinds

The US petrochemical project slate is robust – just not as robust as it could have been if crude oil prices had stayed at around $90-$100/bbl. Today, with Brent oil at around $50/bbl, projects from ethylene to propylene to methanol will be delayed or cancelled. Yet that may not be too much of a negative, as the decline in oil is likely to limit the surge in US as well as global capacity.

Imagine if oil prices were still at former lofty levels. There would be many more projects, especially in the US, that would have been given the green light and started construction. The consistently fat margins from low natural gas-based feedstocks and high product prices based on crude oil would be irresistible.

Already there are six US ethane crackers under construction, with total ethylene capacity of around 8.1m tonnes/year. These will come on line in the 2017-2018 (more realistically 2018) timeframe.

Also in the works are several expansions of existing crackers which will add about 745,000 tonnes/year of ethylene capacity by 2017. Together, they account for around 32% of the existing US capacity base.

A further eight new crackers in the US are being evaluated – but with lower oil prices, and thus lower margins on ethylene, few are likely to proceed. And if they do, the timings for start-up will be moved back.

It is not just ethylene, either.

There were once nine new propane dehydrogenation (PDH) plants being planned in North America (eight in the US and one in Canada). Today Dow Chemical’s plant in Freeport, Texas, is complete and will start up later this year, while two more – by Enterprise Products and Formosa Plastics – are under construction.

Ascend Performance Materials is planning the largest PDH project, comprising 1m tonnes/year of propylene capacity, in Chocolate Bayou, Texas. We interview the head of Ascend’s private equity owner SK Capital Partners (see page 9) to discuss the progress and the thinking behind it. Expect SK Capital to team up with another equity partner in the project.

On the methanol side, two out of 12 planned new plants in the US are under construction. With propylene and methanol prices having fallen mightily in the past year, project economics become much more challenging.

And with the Fed poised to tighten in September (no decision had been made as of press time) or later this year, the financing side will pose another headwind.