Fracking has completely changed the outlook for US natural gas supplies, as the above chart from the latest Energy Information Agency 2014 annual report shows:
- It forecasts a 56% increase in total natural gas production from 2012 to 2040
- This is largely due to growth in shale gas (green) and tight gas (brown)
- Shale gas output will double from 9.7 Tcf in 2012 to 19.8 Tcf in 2040
- Its share of total U.S. natural gas output increases from 40% in 2012 to 53% in 2040
- Tight gas production increases 73%, but its share stays relatively constant
Changes of this magnitude lead to a vast number of unexpected consequences, some good and some bad. And even good changes, involving an increase in demand, create major disruption for both producers and consumers.
A blog reader has thus suggested that the adjustment process followed by hydrochloric acid (HCl) could be a useful Case Study. The idea is to illustrate the opportunities and challenges created by this revolution in energy supply.
THE IMPACT OF FRACKING DEMAND ON HYDROCHLORIC ACID
We all carry HCl inside us, as an essential part of the gastric acid in our digestive system. It is also a core product for the chloralkali industry, and has a wide range of industrial uses. More recently, it has become a key part of the fracking process, as the FracFocus website describes:
“An acid stage, consisting of several thousand gallons of water mixed with a dilute acid such as hydrochloric or muriatic acid: This serves to clear cement debris in the wellbore and provide an open conduit for other frac fluids by dissolving carbonate minerals and opening fractures near the wellbore.”
As a result, supply/demand fundamentals for HCl are going through major change.
One key issue is that around 75% of all HCl has historically been used internally by companies for PVC and polyurethane production. Only 25% has gone onto the external market for water/swimming pool disinfection, steel pickling, food processing and other uses.
Nobody had dreamed that shale gas developments would impact HCl, so producers and consumers have been running hard to try and catch up. Price volatility has thus become a major feature of the market.
Initially prices soared, as it was impossible to create new supply overnight:
- HCl is often produced as a by-product of other chloralkali processes, with this source often known as ‘fatal’ supply
- On-purpose production can also take place by combining chlorine with hydrogen in the presence of UV light
More recently, prices collapsed by 40% between December and May, according to ICIS pricing data. But they have since rallied 40% as the US market then became very tight, as ‘fatal’ supply was reduced by outages at Bayer and DuPont, whilst BASF’s Geismar plant has been on turnaround.
A key part of the problem is that HCl logistics are relatively inefficient, as it is usually transported as a 35% concentration in water. So it can take a long time to refill supply chains, once they become empty, as an excellent report by Bill Bowen in ICIS news describes.
Further volatility is likely as the year progresses, due to the new capacity due to come online. This will increase US capacity by around 20%, with most scheduled to start-up between now and year-end.
Will this new capacity now create temporary over-supply, and more price volatility? Nobody knows. We are only at the very start of the fracking revolution. Today’s certainties can easily become irrelevant tomorrow.
What does seem certain is that we all need to learn about what can happen when long-established supply/demand fundamentals are challenged by a major new development like fracking.
The HCl market thus highlights how a company’s ability to manage today’s more volatile world is becoming critical to its current and future profitability.