Market outlook: Another wave of US crackers

18 May 2017 17:14 Source:ICIS Chemical Business

Companies are talking now about another wave of new crackers being built in the US, as a resurgence in oil production could provide the new plants with the necessary feedstock.

Dow Chemical hinted about adding incremental capacity during its Q1 earnings conference call last month and on 11 May mapped out its plans for an additional $4bn in capital investment over the next five years largely related to shale gas and oil-based economics.

Among the planned investments, Dow said it will lift capacity of its new cracker in Freeport, Texas, to 2m tonnes/year, making that facility the largest ethylene plant in the world, and build a new 600,000 tonne/year polyethylene plant on the US Gulf Coast. It will debottleneck existing PE facilities, mainly in the US to add a further 350,000 tonnes/year of polymer capability and build a “world-scale” polyolefins plant in Europe (see side bar story).

Midstream company Enterprise Products also talked about new cracker capacity in a conference call, saying this subsequent wave would represent 250,000-300,000 bbl/day of ethane demand. Under Enterprise’s ethane demand forecasts, a 3.3bn lb/year (1.5m tonne/year) cracker would consume 90,000 bbl/day of ethane.

ExxonMobil Baytown expansion

ExxonMobil and SABIC may build a cracker and other downstream units in Corpus Christi

LyondellBasell’s CEO Bob Patel also talked about another wave of ethylene capacity, although this would be much smaller than the previous waves. The next wave would likely number two or three crackers, Patel said. Moreover, this would still lag behind the natural global demand growth of four to five crackers.

Patel did not specify which companies will build crackers.

However, ExxonMobil and SABIC picked a site in Corpus Christi, Texas, where it may build a cracker and other downstream units.

NOVA Chemicals is also creating a joint venture with Borealis and Total to build a 1m tonne/year cracker in Port Arthur, Texas.

New crackers will require ethane, and the talk of new projects contrasts with earlier concerns about availability of the feedstock.

Since almost all of the new crackers are being built along the Gulf Coast, the concern is that the region will become short of ethane once all of the new ethylene plants start production.

As a result, the Gulf Coast would have to import ethane from farther away in the US. That extra distance would add costs to these crackers’ feedstock, cutting into margin.

US producers need to preserve their margins because they expect to export a large portion of their ethylene derivatives. The amount of new capacity is simply too much for the US market to absorb on its own. Higher feedstock costs would come on top of those for shipping ethylene derivatives overseas.

The fact that producers are considering new capacity – even if it’s a few extra crackers – demonstrates conviction about the ethane supply, Patel said during the conference call. The basis of this conviction is the resilience of US crude production, even with prices below $55/bbl.

To illustrate that resilience, Enterprise compared two of its forecasts. The first is from April 2014, and it estimates oil and condensate production based on a price of $85/bbl. The second forecast is from January 2017, and it is based on a price of $55/bbl.

By 2022, the two forecasts intersect. By then, US oil and condensate production is about 12m bbl/day. In subsequent years, oil production under the $55/bbl actually exceeds the $85/bbl forecast.

SURGE IN PRODUCTION

“Is $55/bbl the new $85/bbl?” Enterprise asks in the chart.

This is important for the new crackers because oil wells also produce associated gas, which is rich in ethane and other natural gas liquids (NGLs).

The surge in oil production is happening in basins close to Gulf Coast, in the Permian, Woodford and Eagle Ford, Patel said. These are also served by pipelines and other infrastructure that can bring the NGLs to the Gulf Coast.

“We are seeing more supply from the Permian and from the Eagle Ford, and we expect that should be ample to supply the new crackers going forward,” Patel said.

The increase in the Permian by itself is remarkable. Another chart from Enterprise Products shows its forecast for oil production in the Permian as well as the pipeline capacity that could ship it out of the region.

To handle increased production in the Permian, Enterprise Products is expanding natural-gas processing capacity in the region. It plans to build a 300m cubic feet/day (300mcf/day) processing plant, which will start up by Q2 2018.

The plant, named Orla, follows two others in the region, the South Eddy plant and the Delaware Basin plant. In addition, Enterprise plans to build the Shin Oak pipeline, which will ship NGLs from the Permian basin to the hub in Mont Belvieu, Texas.

Again, Enterprise is pursuing these projects even in the current low-oil environment.

Of course, oil production is not the main source of the ethane in the US. That remains natural gas, and Enterprise Products expects that the US will have ample amounts of natural gas for a considerable amount of time. It expects natural gas production to reach 94 billion cubic feet/day (bcf/day) in 2022, up from its current estimate of 72 bcf/day.

Overall, Enterprise expects US ethane production to reach 2.76m bbl/day, up 46% from its current estimate of 1.89m bbl/day.

Still, ample ethane supplies will not be enough to ensure the viability of any new cracker. In the end, the spread between ethane and naphtha prices needs to be wide enough to ensure that US producers will maintain its cost advantage.

Growing ethane supplies do not erase the fact that the Gulf Coast is adding an enormous amount of ethylene capacity in the next two years. That will cause a spike in demand. Enterprise’s forecasts show that companies in the western US will stop leaving ethane in the gas stream, a process known as ethane rejection. The Gulf Coast may need to rely on high-cost ethane to meet new demand.

And while US oil production has remained resilient at low oil prices, that does not erase the fact that oil prices are low. They have fallen back to below $50/bbl. Crude has lost the price gains it made since OPEC and non-OPEC countries reached an agreement to cut production.

The two parties will meet later this month to decide on whether to extend the production cut. Any extension may bring oil supplies back in line with demand – or it can provide a self-defeating stimulus for more oil production in the US.

DOW UNVEILS PLANS TO INVEST $4BN OF NEW CAPACITY OVER FIVE YEARS

DOW CHEMICAL is to invest in an expansion to its recently completed Texas cracker and develop flagship new polyethylene and polyolefin capacities in the US and Europe as part of a five-year investment campaign, the US-headquartered chemicals firm said on 11 May.

The raft of new growth capital expenditure is expected to cost around $4bn, with the bulk of investments intended to capitalise on the competitive advantage offered by the proliferation of cheap US feedstocks, according to Dow CEO Andrew Liveris.

Dow is to ramp up capacity at its new TX-9 ethylene cracker in Freeport, Texas, to 2m tonnes/year, making it the largest unit in the world. The company completed construction of the unit in late March this year with a nameplate capacity of 1.5m tonnes/year.

The company is also planning construction of a 600,000 tonne/year polyethylene (PE) unit on the US Gulf Coast, and a 450,000 tonne/year polyolefins facility in Europe.

A series of investments to strengthen its polyurethanes value chain is also planned, with an eye to increasing specialty polyols growth, as well as a series of debottlenecking projects across its asset base to free up an additional 350,000 tonnes/year of PE capacity.

The majority of additional PE capacity will be in North America, Dow added.

The company is to license technology developed by subsidiary Univation to develop a new catalyst unit, as well exploring additional investments to enhance feedstock flexibility in the US, the company added.

The new units are expected to begin coming on stream in 2020, and bring Dow’s US growth investments to $12bn over a 10-year period.

“Manufacturing plays a vital role in driving economic growth and prosperity across virtually all sectors of society,” Liveris said.

“The positive investment environment in the US chemical and materials sector, driven by competitive feedstocks and a skilled workforce, is a driver for Dow to further invest in the US,” he added.

Dow’s Midland, US, headquarters also stand to benefit from an additional $500m investment to allow greater synergies from the integration of subsidiary Dow Corning’s manufacturing operations with those of its parent, and the development of a new innovation centre in the city.

Liveris had hinted at additional investments late last month at an investor day, stating that the company may pursue some incremental investments following major projects like the construction of the TX-9 cracker.

The company may also be eyeing opportunities to drive the growth of performance chemicals at US neighbour DuPont once the anticipated merger closes later this year, according to CFO Jim Fitterling.

“As soon as we can close on the Dow/DuPont deal, we’ll want to bring them in on that discussion and understand how we can bolt on some growth capacity for DuPont performance materials,” Fitterling said in April.

By Al Greenwood