AFPM: LyondellBasell sees a good equilibrium

LyondellBasell is well positioned to ride through the global petrochemical cycle with opportunities for further investment alongside more robust profitability amid any downturn, said CEO Bob Patel.

The company is selectively making investments, having recently completed its 363,000 tonne/year ethylene expansion in Corpus Christi, Texas, US which it aims to ramp up fully by the end of Q2 2017, and is ready to start construction on a 500,000 tonne/year polyethylene (PE) expansion at LaPorte, Texas, for start-up in mid-2019.

“PE demand has been growing at a consistent rate of around 4-5% globally and we see that continuing. Even Europe is showing signs of growth now. Our sense is that with capacity delays and steady growth, any dip in PE operating rates would be modest – and the same for ethylene,” said Patel in an interview with ICIS.

“What distinguishes this cycle from the ones in the past is that the US will have a feedstock advantage in a downturn. Like the Middle East in the past, we’re going to run full out” Bob Patel CEO, LyondellBasell

“In China, the cancellation of many CTO (coal-to-olefins) projects that were on the books two years ago will drive a much shallower downturn, if any,” he added.

For now, LyondellBasell is focused on its LaPorte PE project, but it also plans another debottleneck of its Channelview, Texas, cracker to the tune of 250,000 tonnes/year. That project could come after the PE expansion, starting up in 2020 give or take a year, he noted.

The company is a net seller of ethylene and aims to remain so, even after its PE expansion.

“We aim for a rough 80/20 or 85/15 split between captive and merchant, as we want the opportunity to participate in the PVC 
market, which is fundamentally different than our others,” said Patel. Most of US merchant ethylene is sold into the PVC sector, he noted.

Despite widespread concerns about the wave of US ethylene and PE capacity starting up in 2017 and 2018, the CEO sees a multitude of mitigating factors that would bring the US industry into a new favourable equilibrium.

EXPORTS TO RISE TO 30%

Patel sees more US PE supply hitting the market in the second half of 2017 and into 2018, but notes that much of this new cost advantaged supply will be exported.

“Today, US exports of PE are in the high teens/20% range and a lot goes south rather than to Asia. In the future, exports could rise to 30% or higher,” said Patel.

“This fundamentally changes the way we are thinking about our future global marketing plans. We have to think about the customer in Shanghai as we do our customer in Chicago in terms of supplying them regularly,” he added.

Where in the past US PE exports have been more opportunistic, the new plan is to be a consistent supplier to customers in Asia and around the world, he said.

However, the new wave of ethylene and PE supply in the US will have an impact. Patel sees the market as balanced to tight in 2017, and “a bit more volatile” in 2018, depending on when capacity comes online and ramps up.

Beyond 2019, the CEO notes the lack of projects underway on both the PE and ethylene side. Most of the major projects were approved when oil was over $100/bbl, making the economics of producing based on cheap US shale gas feedstock and selling based on a high oil price extremely attractive.

But with oil in the $55-60/bbl range and construction costs rising, a greenfield cracker is far more challenging from a return on capital standpoint, he points out.

“We’re setting up for a period post-2019 with not much new supply at all. With demand growing at 4-5%/year, there could be very tight markets going into the next decade,” said Patel.

On the US feedstock side, there are opposing views in the investment community on whether ethane will continue to remain long with all the new crackers starting up in 2017 through 2019.

Patel expects some ethane price volatility and increased drilling activity when the crackers start up, but for a couple of key factors to help mitigate any major and prolonged fly-up in the price of the key feedstock – feedstock flexibility among crackers and a relatively rapid supply response to higher ethane prices.

The ability of many US crackers to switch to other natural gas liquids (NGLs) such as propane and butane, as well as naphtha for some, could serve to put a cap on ethane, he said.

LyondellBasell is actually switching some of its ethylene furnaces to naphtha feedstock, as the price of co-products butadiene (BD) and propylene rise. Using naphtha as a feedstock produces more of these co-products while ethane cracking produces minimal amounts.

ETHANE SUPPLY RESPONSE

Plus, any major increase in the ethane price should trigger a rapid increase in supply, he noted. “It takes a lot less time to build an NGL fractionator – 12-15 months. So if there are higher margins for ethane, we should see a pretty big supply response,” said Patel.

All in all, the CEO sees the US sector reaching “a new equilibrium, with PE exports of 30% or more, ethane feedstock above fuel value – not exorbitant but 7-10 cents/gal above fuel value, and the US retaining a feedstock advantage.” However, with oil remaining relatively low at $55-60/bbl, the advantage would not be sufficient to justify building a wave of new crackers, he said.

“What distinguishes this cycle from the ones in the past is that the US will have a feedstock advantage in a downturn. Like the Middle East in the past, we’re going to run full out,” said Patel. “Prior cycle troughs would see effective operating rates in the low 80% range – for this one, I don’t think the global market will fall below 90% and if it does, it will be short lived,” he added.

Meanwhile, LyondellBasell also expects to make a final investment decision (FID) on a new propylene oxide/tertiary butyl alcohol (PO/TBA) project in Houston, Texas with capacities of 450,000 tonnes/year of PO and 900,000 tonnes/year of TBA by Q3 2017.

If the project gets the green light, it is scheduled to start up in late 2020. LyondellBasell would either “buy or build” the propylene feedstock. It its currently a net buyer. Options include a propane dehydrogenation (PDH) project to supply the propylene.

LyondellBasell is also considering a project in polypropylene (PP) in the US where demand is growing at about 3-4%/year with higher growth globally. However, this is in the early conceptual stage, said Patel.

“We are one of the largest PP producers globally and are basic in the technology and the catalysts. But the market is coming out of several difficult years, especially in the US, and we need more visibility,” he said.