US energy advantage not arbitraged for a decade: LyondellBasell

13 May 2014 15:32 Source:ICIS News

By Tom Brown

LONDON (ICIS)--The US energy price advantage derived by North America is unlikely to balance out against other regions for at least a decade, and probably longer, an executive vice president for Netherlands-registered chemicals producer LyondellBasell said on Tuesday.

The cost of production for ethane crackers in North America is currently $0.10-0.15/lb, compared to $0.40-0.60/lb for global naphtha cracking, leaving North American ethane-derived petrochemicals production competitive with Middle Eastern levels, according to executive vice president (EVP) Bob Patel.

North America could have ethane supplies of up to 2.5m bbl/day by 2020, he added.

“Our view is that [the price advantage will not balance out] in the foreseeable future,” Patel, EVP, olefins and polyolefins for Lyondell’s Europe, Asia and International (EAI) division said, speaking at a Barclay’s Americas conference in London.

Several European and Asian countries are currently examining or pursuing the development of domestic shale gas industries, but the lack of infrastructure for and experience in onshore drilling means that sector development will likely take some time, Patel added.

“America had infrastructure in place to distribute gas and natural gas liquids... in Europe this type of infrastructure [pipelines, storage capacity] does not exist. It will take time, and be very expensive,” he said.

China, which is thought to have huge reserves of shale gas, is probably at least a decade from developing those resources, due to a current focus on monetising its coal reserves, and the logistical challenges of developing infrastructure across the span of the country, according to Patel.

“You can’t underestimate the time it takes to develop infrastructure to transport gas from remote areas to somewhere you can build a cracker,” Patel said.

At present, the price spread between 1m British thermal units (MBTU) of US natural gas and a barrel of crude oil currently stands at around $15 in favour of natural gas, Patel said, adding that this delta is likely to remain in place in the near-term.

The potential presented by North American shale ethane is such that the company has increased capital expenditure levels for the purpose of developing its own operations instead of pursuing bolt-on acquisitions.

“We would consider M&A if it was strategic and accretive, but our best investment is in ourselves,” Patel said. The company launched a scheme to repurchase 10% of its outstanding shares over the next 18 months in April.

The company is pursuing a series of expansions for its US cracker operations in Texas, which Patel says will come onstream significantly earlier than the earliest forecast start-up dates for any new greenfield cracker capacity, at a point when there is likely to be sufficient oversupply of ethane, Patel said.

Ethane demand is likely to creep up as more capacity comes onstream over the next few years, but supply is likely to increase alongside that, he said.

Significant greenfield cracker capacity is expected to come onstream from the second half of 2017 onwards, but Patel warned that delays and cost over-runs – which the company has noted in its own cracker capacity expansions – could push back some of the predicted wall of ethylene capacity expected online in 2017-19.

Costs for additional cracker capacity development will peak during the 2015-17 period, along with additional potential for delays, he said.

The demand for engineering and construction work for cracker development has pushed up development prices, with some analysts predicting a shortage of available workers due to the scale of capacity being constructed concurrently.

LyondellBasell is currently ramping up ethylene production capacity at operations in La Porte, Channelview and Corpus Christi. The La Porte expansion is expected to be completed in the third quarter of 2014, Channelview in the first quarter of 2015, and Corpus Christi in the closing quarter of that year.

The expansions are – alongside some debottlenecking measures and the restart of its Channelview methanol operations – expected to add over $1.1bn of value per year to the company’s operations, he added.

By Tom Brown