INSIGHT: US chemicals investments extracting value from shale

04 April 2014 20:59 Source:ICIS News

By Nigel DavisConstruction at CP Chem site

HOUSTON (ICIS)--Two events this week highlighted the huge bets being made on abundant and cheap US natural gas and natural gas liquids (NGLs) feedstocks.

On Wednesday, Chevron Phillips Chemical (CP Chem) became the first producer in more than a decade to break ground on a grassroots cracker in the US. The company is seeking to capitalise on a first-mover advantage with what CEO Peter Cella called a “trailblazing project”. It will cost $6bn. Companies have announced 10 new crackers on top of other expansion projects, he noted.

By Thursday, however, it was the turn of US refiner Valero to step up and say that it was not prepared, yet, to make an investment decision on a world-scale methanol project in the US. The projected start-up of that 1.6m tonne/year facility has been pushed to 2018 from 2016. The plant remains, Valero said, in “the evaluation phase”.

Ten methanol plants have been announced based on North American shale gas. Not all can, or will, be built to their original schedules. Some may not be built at all.

Speculators as well as producers in this market are playing the great game of poker.

The CP Chem cracker, rated at 1.5m tonnes/year, will be the largest in the US and truly world-scale. The CP Chem board gave final approval for the cracker in October 2013 after the company had moved swiftly to obtain the required permits for a project of this size and to sign up contractors. The engineering, procurement and construction (EPC) contract has been awarded to USGC Petrochemical Project, a venture that includes JGC (USA) and Fluor Enterprises. Chevron Phillips expects the plant to be completed in 2017.

The sheer number of new plants announced on the back of the shale revolution shows that this has to be a good move. Some petrochemical producers decided early on to expand ethylene production at existing plants, to creep capacity in what they say is a cost-effective way.

One, LyondellBasell, will add close to 839,000 tonnes of ethylene availability like this at an annual cost per pound of production of 63% of its rivals, its CEO said last year. Seven companies have announced expansion projects like this, including CP Chem at Sweeny in Texas. LyondellBasell’s three cracker expansion projects are spread out to 2015.

Those that have decided to build big, however, know that they either have to do so fast or be prepared to bear higher construction costs and the possibility that they will enter an over-supplied market. Yet, the shale revolution is better understood now, and shale gas production is expected to be sustained over a longer period than first thought. That gives chemical producers greater comfort in working to longer lead times on new ethylene production capacity.

But it is what is done with the building block chemical, whether ethylene or methanol, that is the real question. Methanol is often looked on as liquid natural gas. Compared to liquefied natural gas (LNG), it is easily and cheaply moved around the world. Ethylene has to be turned into something useful, and when produced at scale, that largely means either polyethylene (PE) or ethylene glycol.

The cracker that CP Chem is building will raise the company’s ethylene capacity by 40%. PE capacity is being increased by a similar amount.

But it is avoiding commodity grades and focusing on its metallocene and advanced dual loop bimodal technology. Two 500,000 tonne/year PE plants using these technologies are to be built – a first for the company. Ground breaking for the units is scheduled for June of this year. Product from them will be targeted at the domestic market, Cella said on Wednesday.

CP Chem currently exports about 20% of its PE output, and that is expected to be the case after the new units come on-stream. The company will also remain an ethylene supplier. The two PE units are being built at its Sweeny, Texas site.

The abundance of shale gas NGLs has also prompted the company to build a 250,000 tonne/year 1-hexene plant in Texas, and it is thinking about expanding its normal alpha olefins capacity at Cedar Bayou. Cella said that a decision on that project could be made in the second quarter.

Making such decisions is not easy, but timing may still be of the essence given the expected cost increases the industry expects as more projects come to be built.

Making the most of North America's new abundance of chemical feedstocks may prove to be a game of timing, but crucially it will be one of commitment to value.

Additional reporting by Al Greenwood

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By Nigel Davis