INSIGHT: Plant upgrades and the economics of US shale gas in Europe

03 January 2014 17:10 Source:ICIS News

By Tom Brown.

INEOSLONDON (ICIS)--The outcome of the industrial action at INEOS’s Grangemouth petrochemicals complex in the UK was, to all intents and purposes, extremely successful for INEOS.

The breakdown of strike talks allowed the company to lock the doors of the sprawling petrochemicals and oil refining facility, take it offline and threaten to keep it closed unless employees agreed to a survival plan involving pension and salary reforms, as well as financial backing from the UK and Scottish governments.

Totally outflanked, union Unite folded, and weeks after warning that the site could close by 2017, INEOS had secured assurances of loan guarantees, government grants, wage and pension reforms and a reduction in union power at the site.

The rout was such that INEOS secured commitments it had not originally been seeking, including a three-year no strike guarantee and the removal of full-time union convenor presence at the site.

Shortly after that, Unite employee representative Stephen Deans – whose treatment by INEOS had been cited as the reason for the strike – retired from his position.

The victory leaves INEOS well-positioned to pursue its plan to develop a new gas terminal and related infrastructure to allow the import of cheaper shale gas supplies from the US, as well as reforming pension and salary levels, which the company viewed as an exorbitant holdover from the site’s BP days.

However, the episode came at a substantial public relations cost, with media focusing on the plight of workers facing redundancy, the economic impact of a closure on Scotland, and INEOS founder Jim Ratcliffe’s yacht.

This may have been the spirit behind the company inviting reporters to Grangemouth and its facility in Rafnes, Norway, a trip where the company moved to underline the practicalities of the Grangemouth battle, and to hold Rafnes up as an example of what it could become.

“In many discussions we’ve had ... with many of the newspapers, what’s been said that there’s been a little bit of brinkmanship that was played over the course of the last two to three months, but it genuinely was not,” said Calum MacLean, INEOS Petrochemicals UK chairman, on the bitter and public battle with Unite.

According to financial details released by INEOS auditors PwC, the facility had lost an average of £150m ($246m, €181m) per year over the last four years, which MacLean attributed to dwindling feedstock supplies from the North Sea.

“We benchmark all the sites around INEOS, [and] this is one of the most uncompetitive, most expensive sites in which to employ and manufacture chemicals in Europe,” said MacLean

“Over the last 10 years the quantum that we are able to extract out of the North Sea has reduced by 60%, to such an extent that the main asset here [the 700,000 tonne/year KG gas cracker] is today only running at half rates, because there is insufficient feedstock to run it at full rates,” he added.

The company had mooted a 2017 closure date for the complex in the absence of cheaper and more abundant feedstock supplies, which MacLean said was tied to the existence of various North Sea contracts signed with BP when the company acquired the asset in 2005, requiring it to keep the complex open until then.

Closure of the petrochemicals complex would not have led to the closure of the Grangemouth refinery – joint-owned by INEOS and PetroChina – but it would have further dimmed future prospects for the unit, MacLean added.

He said, “It would not have been good news. It would not have caused the refinery to close, but the refinery is also loss-making, and if the chemicals side had closed it would have had a severe detrimental effect on the commercial performance of the refinery.”

With the likely award of a £125m loan guarantee from the UK government and a £9m grant from the Scottish government, the company looks set to pursue a £300m programme of upgrades at the site.

Grangemouth's 320,000 tonne/year G4 naphtha cracker is to close in the second quarter of 2015, while downstream benzene and butadiene units were expected to have closed by the end of 2013 and the first quarter of 2015 respectively.

The company is planning to ramp up production levels at its 700,000 tonne/year natural gas liquids KG cracker, which has had one train idled since 2008. The company intends to bring production up to full run rates with feedstocks derived from US shale ethane.

“What we’ll do over the next two to three years is close down that old naphtha cracker and double the capacity of the KG cracker. So we’ll end up with the same output but with better economics, lower costs and a much lower cost raw materials because of what we’re bringing in,” MacLean said.

The design phase of a 33,000 tonne capacity ethane tank for the import of US shale gas is expected to be finished in the first quarter and could be complete by 2016 if the company moves ahead with the project, with firms TGE Engineering and Babcock International preparing competing front-end engineering and design (FEED) tenders.

INEOS is also considering an option on the construction of two gas transportation tankers by Denmark-based shipping firm Evergas to transport shale gas to the site, and is in the process of negotiating long-term contracts in the US with suppliers.

MacLean said, “The additional cost of moving in that gas from the US is far outweighed by the lower cost of the gas itself.”

Until the arrival of shale-derived ethane in Scotland, however, “this petchems business is undoubtedly going to be loss-making,” he added.

The Grangemouth restructuring is modelled on work taking place at the company’s Rafnes, Norway site, where plans to import US gas stocks are much further advanced. INEOS Olefins & Polymers UK commercial director Geir Tuft also characterised the difference between Rafnes and Grangemouth as the fact that “Rafnes has been profitable”.

The company is developing a 17,000 tonne gas tank – bringing total site storage capacity to 30,000 tonnes – expected to be completed by December 2014, when US shale ethane is slated to start arriving at the site. INEOS has three purpose built gas tankers under construction by Evergas, and has recently agreed for work to begin.

Capacity of the site’s cracker is also to be expanded by 50,000 tonnes/year to 620,000 tonnes/year by the end of 2015, and will be repositioned to crack solely ethane, instead of its current mix of ethane and propane.

While INEOS’s hope for Grangemouth is that shale ethane will reduce petrochemicals production costs to around half the European average, according to INEOS Group director Tom Crotty, Tuft forecasts that ethylene production costs at Rafnes will fall to a little over $500/tonne by 2015 from current levels of $950/tonne, not far from North American production costs. European’s January contract price for ethylene was €1,240/tonne.

“This cracker [Rafnes], once this project is done, [will be] number one or two in Europe, and at a par with a mid-range US cracker,” said Tuft.

While Rafnes is to focus entirely on petchems production from ethane, Grangemouth will continue to utilise more varied feedstocks. While this leaves the potential for a wider range of products – with naphtha-derived materials seen by some as valuable commodities in light of the mass shift to ethane – it also leaves the site more exposed to the vagaries of North Sea feedstock availability and cost.

“All of the ethylene here [Rafnes] will come from pure ethane, whereas Grangemouth will be a much more mixed feed with about half being pure ethane from shale gas and the other half being a complex mix of gases from what’s left of the North Sea, [and] from the refinery,” said Crotty.

The company has signed a 15-year agreement with Range Resources for the provision of 400,000 tonnes/year of US shale ethane for Rafnes, and is discussing other such contracts for both sites, meaning that neither site is likely to close for a while, irrespective of the continued shrinking of the European chemicals industry. INEOS CEO Jim Ratcliffe also stated recently that the company was considering a step into the UK's nascent shale gas sector.

While Grangemouth workers may lament the reforms to pension and salary packages, an upside of INEOS’s hard-fought victories is that the complex is likely to stay open for the foreseeable future if the upgrades take place.

($1 = £0.61/€0.73)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By Tom Brown