Commentary: Oil roils US cracker project outlook

A multi-year period of high oil prices, combined with ultra-low natural gas liquids (NGLs) values driven by the US shale gas boom spurred an unprecedented wave of new cracker and derivatives projects in the US. But with the crude oil collapse, what happens now?

US petrochemical producers have enjoyed the benefit of high chemical prices based on high crude oil, while costs are based on cheap NGLs. This wide gap in natural gas versus oil led to record profitability. New cracker projects and expansions of existing crackers based on ethane flourished as a result.

Today there are 12 planned new cracker projects and several expansions of existing plants, representing 16.3m tonnes/year, or a 60% increase in the current US ethylene capacity base.

Among these, six have already broken ground. Six more are in the planning stages. But with the oil collapse leading to lower petrochemical prices across the board, how many projects will be delayed or cancelled?

In their long-range planning for building these crackers, companies may not have modelled in $40 oil – or if they did, a very low probability was attached.

US petrochemical prices have closely tracked crude oil, even as feedstocks are primarily based on natural gas.

Now with low oil prices, and thus low petrochemical prices a reality, companies planning multi-billion dollar cracker and derivatives projects must recalibrate.

Companies that have broken ground in the US reiterated their commitment to the projects.

Chevron Phillips Chemical said it is on track with its new ethane cracker in Cedar Bayou, Texas, along with two polyethylene (PE) units in Old Ocean, Texas, which are under construction. Completion is on track for completion in 2017, said a company official.

ExxonMobil is also on track to complete its cracker in Baytown, Texas, and two PE plants in Mont Belvieu, Texas by 2017, said a company official. “Based on our competitive advantages, we believe the project is well positioned to outperform other announced projects in North America,” said the official.

Sasol has now broken ground on its cracker in Lake Charles, Louisiana, a company official said. “Short term forecasts are not a determining factor in the development of our project assumptions, as our project life­cycles are in excess of 20 years,” the official said.

The Occidental Chemical/Mexichem cracker, which broke ground in December 2014, is “doing very well. We are on track and budget to start in Q1 2017,” said Antonio Carrillo, CEO of Mexichem.

Formosa’s cracker in Point Comfort, Texas is also under construction and scheduled for start-up in 2017, a Formosa Plastics Corp official confirmed.

For those yet to break ground, vastly lower oil and chemical prices will be taken into account in their decision-making process.

Brazil’s Odebrecht and Braskem are planning a cracker in West Virginia, US, and the project is under evaluation.

“We continue to develop the project towards a FID in 2016. The new reality in the energy market creates new scenarios that are being incorporated in our analysis,” Braskem and Odebrecht told ICIS in a joint statement.

Significantly lower oil prices change the dynamic for new projects – and not just those in the US based on NGLs from shale gas.

On 14 January, Qatar Petroleum and Shell announced the cancellation of their proposed Karaana petrochemical project in Qatar. The project was estimated to cost $6.4bn when initially planned in 2011.

High capital costs rendered the project “commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they said.

Expect more project delays and cancellations ahead.