Weaker oil price erodes ethane cost advantage over naphtha

Author: Cuckoo James

2015/04/28

Crude oil slump could linger like 1986’s declineLONDON (ICIS)--Declining crude oil prices have eroded but not fully destroyed the cost advantage of ethane over naphtha, according to recent industry analysis.

 The advantage of Henry Hub natural gas price over WTI crude oil futures has shrunk from approximately $15/mmbtu in July 2014 to less than $5/mmbtu, according to Paul Harnick, head of chemicals at KPMG.

“Falling crude prices have eroded but not completely removed the massive cost advantage previously enjoyed by ethane over naphtha,” Harnick said.

A new report by the consulting firm FGE (Facts Global Energy) looks at ethane outlook through to 2020 in light of recent oil price developments and forecasts that the cost advantage of US ethane exports internationally may decline to about a tenth of levels seen in 2014.

“Ethane trade economics look very different when ethane is competing against $500/tonne of naphtha than it does against $900/tonne of naphtha,” the company stated.

Ethane transportation had been widely considered too expensive, and has also required special cryogenic tankage. However, the view changed in 2014 as shipowners placed orders for large ethane ships to meet the expected trade, according to FGE

“In our view, US ethane export potential and global ethane demand proposects are certainly impacted by the recent fall in oil prices which looks to be permanent. [Oil] prices are unlikely to reach $100/barrel and above for some time,” said Iman Nasseri, a consultant at FGE.

Nonetheless, the impact on ethane is lower than on expensive liquefied natural gas (LNG) projects, said Nasseri who spoke to ICIS on behalf of the natural gas liquids (NGL) and liquefied petroleum gas (LPG) team at FGE.

“In the US, specifically, ethane will remain advantaged and continue to be used as the main feedstock,” said Nasseri.

The impact on ethane projects in Europe will be varied. “The narrowed naphtha-ethane gap makes the case harder for some projects (to cover the cost of shipping and building ethane storage). But the impact varies for projects,” Nasseri said.

Petrochemical plants that already have ethane crackers and are faced with reduced ethane supply from local or nearby sources such as INEOS would be the best candidates for US ethane, Nasseri said.

The consensus is that the petrochemicals industry views the recent fall in oil prices as a temporary phenomenon, and many are forecasting oil prices to climb to $80-90/bbl by the end of 2016, which would restore much of the lost ethane cost advantage, according to Harnick.

“We have not currently seen any pause in the planned ethane expansions in Europe. Companies are taking a long-term view whereby the current consensus in the chemical industry is that the recent fall in the oil price will be a temporary phenomenon,” Harnick said.

Naphtha remains the main petrochemical feedstock in Europe, followed by LPG. In general, steam crackers are set up to switch only 25% of their production to the usually cheaper LPG.

Nevertheless, there is huge variation as newer crackers often have more flexibility in switching between the two feedstocks, while older crackers are often unable to crack LPG.

Ethane in general yields more ethylene than naphtha or propane but hardly any propylene.

Harnick said: “Naphtha is likely to remain the main feedstock in Europe for the foreseeable future due to the lack of feedstock flexibility in the majority of the continent’s crackers. The majority of companies with the flexibility to switch to mixed or light feeds have already done so, or are in the process of switching.”

Fresh investment in cracker development in Europe would only be spurred on by changes in the approach to fracking.

“A potential game changer for Europe could be a change in attitudes to shale drilling whereby a secure supply of cheap feedstock may spur new cracker development as it has done in the US. However, we don’t currently foresee any significant progress in that area before the end of this decade,” Harnick said.

There is currently not much appetite for additional investments to create the necessary infrastructure.

“Beyond what is existing and in the pipeline, we do not see much willingness for any other large capital commitment for ethane infrastructure investment and the capability to reconfigure the overall product slate in Europe,” Nasseri said.

Focus article by Cuckoo James