Weaker oil price erodes ethane cost advantage over naphtha
Cuckoo James
28-Apr-2015
LONDON
(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
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