Crude crash may shake out less viable US projects

Author: Al Greenwood

2015/01/16

Crude crash may shake out less viable US projectsFocus article by Al Greenwood

HOUSTON (ICIS)--The sharp drop in oil prices will cause some companies to review the viability of their expansion plans in the US, with the possibility that some plants will not be built.

Several companies announced plans to expand existing plants and build new ones because of the advent of shale gas, which increased US supplies of natural gas and natural gas liquids (NGLs).

This increase gave US producers a cost advantage, since they rely on gas-based feedstock, while much of the world relies on oil-based naphtha.

The sharp decline in oil prices has eroded that price advantage, since the spread between crude and natural gas prices has narrowed substantially.

On 19 June 2014, Brent closed at $115.06/bbl and natural gas closed at $4.584/MMBtu. The spread between the two was $14.98/MMBtu.

On 15 January, Brent closed at $47.67/bbl while natural gas closed at $3.158/MMBtu. The spread had narrowed to $4.95/MMBtu.

The magnitude and speed of the decline in crude prices is significant, said Dan Lippe, president of Petral Consulting.

"It has to force everybody who is planning to invest a couple of billion dollars in ethylene and propylene capacity to at least redo their economics based on a significantly lower price environment for at least a few years," he said.

Lippe was talking in general and did not comment about any specific project

At the least, the drop will provide companies with a stress test to measure the viability of their proposed projects when oil prices are low, said Peter Fasullo, principal at En*Vantage.

"If the project doesn't work in today's price environment, then you have to be more certain about the future to proceed with the project," Fasullo said.

But reviewing a project is far from cancelling it. Since the decline in oil prices quickened in December, no company has announced plans to cancel a project in the US.

The projects themselves encompass a variety of plants.

In addition to ethane crackers and propane dehydrogenation (PDH) units, companies also proposed building polyethylene (PE) plants.

Companies also proposed terminals to export ethane and liquefied petroleum gas (LPG).

Others targeted methane-based chemicals such as methanol and gas-to-liquids (GTL) complexes using Fischer-Tropsch.

In some cases, the project will likely go forward. Others could be called off or delayed.

A company's decision will depend in part on its own long-term forecast for oil prices − and not on what oil prices will be next week or next month.

The lifespans for these projects are typically 20-30 years, so companies cannot be short-sighted, Fasullo said. By contrast, the decline in oil prices is not even a year old.

A company expecting a quick rebound in oil prices may be more willing to pursue a project versus one expecting persistently low prices.

A company's finances will also play a role. Those that rely heavily on outside financing will have their projects fall under the scrutiny of bankers and financers, Fasullo said.

Those outside sources could become more doubtful about a project because of the decline in oil prices, he said. Companies less reliant on outside money could wait out the decline and still pursue their projects.

"It depends on who you are and what your view is of the future and your staying power," Fasullo said.

The projects themselves will have varying fortunes based on what they will produce or export.

Lippe is confident that the LPG terminals will be built because of growing US supplies.

He tested LPG exports under a scenario of low oil prices. The terminals will still likely be built because there is nowhere else for the material to go.

"In the next 10 years, even taking into account significantly slower growth in crude-oil production in the US, we will have to export twice as much propane and butane as we do now," Lippe said. "So we pretty much have to build LPG export terminals."

As such, there is no reason to expect that companies will have to reconsider any of the announced LPG export terminals, he said.

For ethane terminals, the projects have progressed too far for companies to abandon them, Lippe said.

Sunoco Logistics has said it would start operations at its east coast terminal in Marcus Hook, Pennsylvania, in the middle of this year.

As of mid-2014, Enterprise Products's terminal on the Texas Gulf coast was 85% committed, and it should start up in the third quarter of 2016.

The one ethane project still pending is a possible expansion that Enterprise proposed at the end of July.

Enterprise did not immediately respond to a request for comment.

In addition to the progress already made on the ethane terminals, Lippe said that companies need to consider such projects in 20- to 30-year time frames. "It is not something they are building to take advantage of a short-term aberration in the market."

At some point in the next two to three decades, it will likely be profitable to export ethane to European and Asian crackers, Lippe said.

For ethylene plants and PDH units, some companies have already broken ground, so they cannot turn back.

Those companies, though, could benefit if others abandon their projects, Fasullo said. Those cancellations would limit the threat of an oversupplied market.

"It could be good news for people who are first movers," he said.

For gas-to-liquids projects, they would require a large gap between natural gas and crude prices since they would be competing with refineries on cost to produce fuel.

Even before the sharp drop in oil, the Energy Information Agency (EIA) was doubtful that such plants would be profitable without maximising wax production.

Lippe said companies were likely rethinking their investments in gas-to-liquids plants.

"Since there has been zero decline in the price of natural gas and a 50% decline in the price of crude oil, the economics are a lot worse than they were last year," Lippe said.

"On the other hand, this is one of those situations where you have to think beyond today," he said. "You don't build a gas-to-liquids plant based on a five-year time horizon. You build a gas-to-liquids plant based on a 25- to 30-year time horizon."

Lippe said large GTL projects may likely be delayed, although not necessarily cancelled.

Ultimately, the viability of the projects could improve if oil prices recover. However, predicting when that would happen presents a host of challenges.

"It is hard to tell how long prices will stay low," Lippe said.

Crude prices fell in part because of growing supplies caused by the development of tight oil reserves in the US.

These are unconventional reserves that depend on new technology and drilling techniques. This is the first time they have been exposed to a sharp drop in oil prices.

"We're in uncharted waters," Lippe said.

The rise of shale-oil production itself was surprising, taking place in less than a decade.

More unknowns lurk outside of the US.

If western powers reach a nuclear agreement with Iran, then embargoes against that country would likely be lifted, allowing crude from that country to hit the market, Lippe said.

The central government of Iraq has started working with the Kurdish authorities to allow the region to export oil.

The following lists some of the projects proposed in the US.

PDH

Company Capacity Site Start-up
Dow 750,000 tonnes Texas Q2 2015
Ascend 1.17m tonnes Texas Q4 2018
Formosa 658,000 tonnes Texas 2017
Enterprise 750,000 tonnes Texas Q1 2016
Williams 500,000 tonnes Alberta Q2 2016
REXtac 300,000 tonnes Texas 2016
Dow Chemical NA US 2018
Enterprise NA Texas NA

Crackers

 

Ethane terminals

Company Capacity Start-up
Enterprise 10,000 bbl/hour Q3 2016
Enterprise expansion NA
Sunoco Logistics 70,000 bbl/day pipeline mid 2015

 

LPG terminals

Terminal

Adding

Total

Startup

Enterprise Houston Ship Channel

1.5m bbl/month

9m bbl/month

Q1 2015

Enterprise Oiltanking

6-6.5m bbl/month

6m-6.5m bbl/month

end 2015

Phillips 66

4.4m bbl/month

4.4m bbl/month

mid-2016

Targa Galena Park

2.0m bbl/month

6.5m bbl/month

Q3 2014

Targa Patriot

NA

NA

NA

 

GTL

Company Site Capacity
Sasol Louisiana 100,000 bbl/day
Juniper GTL JV Louisiana 1,100 bbl/day
Pinto GTL Ohio 2,800 bbl/day

 

Crackers

Company Capacity Site Start-up Status
CP Chem 1.5m Texas 2017 Construction
ExxonMobil 1.5m Texas 2017 Construction
Dow Chemical 1.5m Texas 2017 Construction
Formosa Plastics 1.59m Texas 2017 Construction
OxyChem/Mexichem 544,000 Texas Q1 2017 Construction
Sasol 1.5m Texas Q1 2018 Imminent
Axiall/Lotte 1.0m Louisiana 2018 Permitting
Shell 1.5m Pennsylvania 2018 FEED stage
Shintech 500,000 Louisiana NA Permit filed
Odebrecht World-scale W Virginia NA Feasibility
Formosa Plastics 1.2m Louisiana NA Feasibility
Williams 1.5m Louisiana NA Feasibility