The announcement, in March, of a new worldscale cracker in the US shows that the appetite for these huge petrochemical projects remains undiminished. Despite the risks to international trade posed by the Trump administration, Total, Borealis and NOVA Chemical believe they will find a market for 1m tonnes/year of ethylene plus derivatives. They also believe that shale gas-based production will retain its cost advantage over the longer term. This is in the face of concerns that the ethane supply/demand balance may push future feedstock prices up significantly.
We can expect further announcements this year to add to this next wave of investments based on US shale gas. Driving this decision-making process, particularly by the integrated oil majors, is the profitability of refining and petrochemicals investments compared with oil and gas investment.
Research by consultancy Accenture suggests that return on sales for petrochemicals investments (around 8%) is now twice that of refining and three times greater than the oil and gas sector. As the graph shows, oil and gas profitability has collapsed in tandem with the oil price decline whilst refining and particularly, petrochemicals, have blossomed.
Despite this oil companies are still sitting on significant levels of cash of around $25bn. With petrochemicals a more attractive option in a low oil price environment, we can expect to see more capital allocated to chemicals and refining.
CAPITAL SWITCHES TO CHEMICALS
Indeed this is already happening. Look at the recent trip in March to Asia by Saudi King Salman bin Abdul Aziz Al-Saud. During the visit in Malaysia, Saudi Aramco signed a deal to take a 50% stake in PETRONAS’s Refinery and Petrochemical Integrated Development (RAPID) project in Johor.
The investment was valued at $7bn, according to media reports, and will boost Saudi Aramco’s global refining capacity to 8m-10m bbl/day by 2030 from over 5m bbl/day currently, and grow its chemicals production capacity to 34m tonnes from 12m tonnes over the same period. The company also signed deals in China to develop oil-to-chemicals technology amongst others.
Accenture also points out that oil companies shift capital to more economically appealing areas during times of low oil prices.
“It would not be surprising, therefore, to see more projects in refining and petrochemicals announced in the near term, particularly for North America,” says Paul Bjacek, research lead for Accenture Chemicals and Natural Resources.
However, greater investment in US petrochemicals will put greater pressure – and likely raised costs – on the infrastructure required for construction as well as logistics capabilities for the eventual sale and distribution of the production.
The chemical industry has limited buying power and visibility in many of these crucial segments because it accounts for a small proportion of these total markets. For example, Accenture points out that in Texas the industry accounts for less than 10% of the market in truck transport, construction and manufacturing labour. Even for the water sector chemicals accounts for less than 20% of the market.
“Therefore, the industry needs to work particularly hard in getting the attention of these entities to help ensure that appropriate investments (in infrastructure, equipment, packaging capacity, storage yards, etc.) and policies are put in place to accommodate the new, massive levels of capacity,” says Bjacek.
Construction contractors in Texas, for example, are having trouble filling positions. A 2017 survey by The Associated General Contractors of America showed that 59% of the sector is struggling to fill craft worker positions with 68% expecting this problem to worsen.
With the North American chemicals boom likely to continue, it is important for the companies involved to reduce their risks by broadening their horizons beyond core activities into all the areas which make it happen. Better communication and understanding with all the sectors serving the chemicals sector should help reduce the inevitable disruption the continuing boom time will bring.
Read Paul Bjacek’s blog post “Outperformance in petrochemicals adds urgency to staying ahead of disruption in the extended ecosystem” https://www.accenture.com/us-en/blogs/blogs-outperformance-petrochemicals-disruption-chemicals-ecosystem?xml:namespace>