INSIGHT: Low oil slows second US-cracker wave

By Al Greenwood

HOUSTON (ICIS)–For all of the concern over the rapid decline in oil prices, it has brought two big benefits to polyolefins producers.

The decline stimulated polyolefins demand by lowering prices, said Bob Bauman, president of Polymer Consulting International.

In addition, the decline may well reduce the size of the second wave of crackers that were proposed in the US, he said.

Back when oil prices were above $100/bbl, North American chemical producers began announcing cracker expansion projects.

These producers were eager to benefit from the region’s feedstock advantage. North American crackers overwhelmingly rely on ethane and other natural gas liquids (NGLs) as a feedstock. Since the rest of the world relies mostly on naphtha, North America benefits from high oil prices.

An initial wave of cracker and polyethylene (PE) projects should come on line later this decade. A second wave would follow, although many of these projects are still being reviewed.

Bauman has warned that the new capacity will overwhelm the region, causing a significant battle for export market share.

“There will be war with low oil and gas prices. Gas will win and take over the petrochemical arena,” Bauman said during the Latin American Petrochemical Conference (APLA) in Cancun, Mexico.

“However, US producers may give away all their cost advantage to gain market share. Being a low-cost producer does not necessarily mean you will be profitable,” Bauman said at the time.

That’s why the decline in oil prices is so important, he added. Had oil remained above $100/bbl,  at least five new crackers would be built in North America in the second wave of new projects. The forecast now is down to two.  

A similar trend has already happened with propane dehydrogenation (PDH) plants, with producers withdrawing plans for new projects.

The decline in crude has also stimulated polyolefins demand by lowering prices, Bauman said.

North American sales for high-density polyethylene (HDPE) and linear low-density polyethylene (LLDPE) – the top two types of polyethylene – have risen by 6-7% year on year for the period January through October in 2015, according to the American Chemistry Council (ACC).

The ACC had full-year statistics for North American polypropylene (PP) sales. These rose by 5.3% in 2015.

Bauman said the extent of the increase in demand had surprised him. Moreover, it looks like it will continue this year.

Meanwhile, US polyolefins producers continue to make respectable margins despite the decline in crude.

In 2013, integrated US HDPE margins were at 62.19 cents/lb ($1,371/tonne), given a contract price of 83.83 cents/lb, according to ICIS.

Year to date in 2016, integrated US HDPE margins stand at 48.92 cents/lb ($1,078/tonne), given a contract price of $67.00 cents/lb.

For US PP producers, margins have expanded sharply. In 2014, US integrated contract margins for naphtha-based PP production stood at 8.95 cents/lb, given a contract price of 84.44 cents/lb.

Year to date, the margin is 30.89 cents/lb on a contract price of 65.00 cents/lb.

However, cheap oil is not benefitting every chemical market. Those chemicals used in energy production have seen demand fall. These include certain kinds of surfactants, triethylene glycol (TEG) hydrochloric acid (HCl) and epoxy resins used to coat sand particles to make proppants.

Recently, Ashland’s Industrial Specialties division reported a 75% decline in sales to the energy market for the fiscal first quarter. Ashland’s fiscal first quarter ended on 31 December 2015.

The division makes guar-, synthetic- and cellulosic-based products for several fluids used in oil production.

Weakness in oilfield chemicals had pressured a specialty-chemicals index kept by the ACC.

More generally, many people who follow the economy have noted that the decline in oil prices has not had the stimulus effect that was initially expected.

Under this thinking, the drop in oil prices would act as a tax break, and consumers would spend the money that they would save on fuel.

The rather tepid stimulus effect could reflect the significant role that the oil and gas industry plays in the US economy, said Kyle Isakower, vice president for regulatory and economic policy at the American Petroleum Institute (API).

Isakower referred to a study conducted for the API by PricewaterhouseCoopers (PwC). It looked at the oil and gas industry’s contribution to the economy, both direct, indirect and induced. Induced effects refer to household spending of income earned either directly or indirectly from the oil and gas industry.

In 2011, the oil and gas industry directly employed 2.59m people, according to the report. Total job numbers were 9.83m and accounted for 5.6% of US employment. Total jobs takes direct, indirect and induced employment into account.

The total effect on labour income was $598bn or 6.3% of the nation’s labour income in 2011, the report said. The effect on US GDP was $1,200bn or 8% of the nation’s total in 2011.

The 2011 figures were higher than those in 2009. Back then, total employment was 9.16m or 5.3%, PwC said in the earlier report. Labour income was $534bn or 6%. The total effect on GDP was $1,100bn or 7.7%.

PwC issued its two reports during the energy renaissance in the US, when horizontal drilling and hydraulic fracturing sharply increased oil and natural gas production.

“This demonstrates just how important the oil and gas industry is to the overall economy,” Isakower said. “As goes the oil and gas industry, so can go the economy itself.”

Additional reporting by Joseph Chang and Lane Kelley