INSIGHT: Ethylene economics driving more US investments

24 December 2013 15:00 Source:ICIS News

By Nigel Davis

LONDON (ICIS)--Some 25 cracker projects, new builds and expansions, based on advantaged shale-gas ethane have been announced in North America. Olefins and derivatives producers want to take advantage of an abundance of natural gas liquids (NGLs) from the North American shale revolution and a new era of cheap gas.

Last week, vinyls producer Axiall, which was formed in 2013 by the merger of Georgia Gulf and the commodity chemicals business of PPG, said it was thinking of building a world scale cracker and derivatives plant in Louisiana with a yet-to-be-announced partner.

Ethylene derivatives players in North America are in a race with some sort of backward integration into shale-advantaged ethylene the ultimate prize. In North America now the production of chlorine and caustic soda is more cost effective because of cheaper electricity.

“As part of Axiall’s long-term growth strategy, we believe it is important we have further integration with cost-based economics on 50 percent of our current annual ethylene requirements,” Axiall CEO Paul Carrico said when the company’s ethylene ambitions were made public.

“While we are still considering a number of options and potential partners for the project, and we have not yet received final investment approval from our Board of Directors, we have narrowed our siting choices to Louisiana. We are excited about the prospect of expanding our footprint in the state of Louisiana and continuing to invest in its talented workforce,” he added.

There will be ethylene and derivatives portions of this $3bn project, so more news to come. But the Axiall statement shows how important it has become for certain companies to demonstrate to shareholders and competitors that they do not intend to stand still while the world moves around them.

And moving it is in North America as the current excess of ethane drives ethylene costs down for olefins producers and integrated derivatives makers. More players want a piece of the action.

Carrico has been spending time in the past few months explaining to investors the strategic outlook for one of the newest commodity chemical players in the US.

Commodity chemical companies like Axiall need to maintain their investment profile in an increasingly competitive global market environment and make big bets.

Vinyls producers in the US currently are a happy breed who see a potentially positive future and an advantaged feedstock and cost position brought about by shale.

US chlor-alkali production costs currently are the second lowest in the world after those in the Middle East. And capacity utilisation in North America is expected to improve against the backdrop of modest demand growth and, sometime in 2014 and 2015, the expected withdrawal of sector giant Dow Chemical from the business.

Producing more vinyl in a domestic market that is not likely to grow that well may not immediately seem like a good thing, but US vinyls exports have increased strongly since ethane became so much cheaper.

The investment plans and the shifting chlor-alkali and vinyls landscape are linked inextricably to shale.

Ethane is expected to remain in abundance for a few years, at least until around 2017, when the first of the new wave of major cracker projects come on-stream.

Ethane costs currently are low and have become disconnected from oil and from prices generally in the petrochemical markets.

Some adjustment back towards the historical 6:1 to 9:1 energy equivalent ratio between the WTI oil price and the Henry Hub benchmark natural gas price – and hence, relatively, the ethane price in the US – might be expected. The ratio now is a remarkable 20:1 to 25:1.

The oil price could fall, as some commentators predict. Natural gas prices in North America could rise, particularly if more LNG exports are approved.

Ethane exports are not widely expected but more ethane could be shipped out of North America along with LNG and, potentially, become a deep sea source for cracker operators outside the region.

It is a question of when and how the adjustment back to historical price ratios plays out.

Big investment decisions are never made easily but commodity chemical players have to make them nevertheless.

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By Nigel Davis