The plunge in oil prices in recent months hasn't begun to pressure North American chemical producers to shift their feedstocks from natural gas liquids (NGL) products, according to midstream and chemical company executives.
During second quarter conference calls with financial analysts, some energy and chemical industry executives have been peppered with questions about whether they are seeing a pullback for NGL products. Crude prices have plunged over the past three months, and the International Energy Agency is forecasting that global economic problems may weigh on 2012 oil demand growth.
On Friday Goldman Sachs downgraded Dow Chemical, one of the largest petrochemical companies in the world, to "neutral" from "buy" based on "lower demand assumptions that are reducing ethylene operating rate, price and margin estimates." Goldman analysts said "ethylene stocks' relative performance is driven by forward margin expectations, in our opinion, and we now expect relatively flat ethylene chain margins."
Williams CEO Alan Armstrong was asked last Tuesday whether weaker oil prices had begun to turn petrochemical companies "away from ethane feedstocks," and if that would affect any of Williams' extensive midstream plans.
"We've got a long way to go before getting into that territory," said Armstrong. "Gas has moved down as well. We're not anywhere near to get to [switching]. We have seen where gasoil is at times pricing below ethane a little bit but it has a long ways to go. I don't really see that in $80 price for oil, $4 gas. That's still a 20:1 ratio. That's something we used to not be able to dream of. We're a long ways from when ethane was not a favored feedstock."
Williams in March agreed to invest C$311 million to expand two of its Alberta facilities to support a long-term agreement with NOVA Chemicals to produce up to 17,000 b/d of ethane and ethylene (see Shale Daily, April 25).
Williams is "still long on ethane," Armstrong said. The Canadian project "gives us some hedge on ethane pricing on ethylene margins. We are fairly confident on gas-to-crude margins remaining and we are confident that the feedstock margins are there. We're not so confident of who makes what that gets what cut of that pie. We feel like if we were derisking some of those margins, somebody else would get stuck between us and the full margin. We are taking to a number of parties on offtake agreements; there's a lot of interest in that kind of project."
If there continues to be a "weaker environment" for oil prices, Armstrong was asked, how would that affect petrochemical companies in building new steam crackers? Would it delay any decisions or lead to an "oversupply" of fractionation capacity?
"First of all, the market for all the new olefin capacity built in North America is not focused on North American markets," said Armstrong. "So the global economy is the thing to keep an eye on there and expansions around the globe are critical to that. We do think a continued downturn would have people backing up.
"We are 'first in the queue,' so to speak...but people will be checking and double checking [as to whether] we were going into another recession and there's not much doubt in my mind that would be the case. As to whether there's ample cracker capacity to build fractionation, that's a complex question. Clearly, NGLs are building up very rapidly. There is going to have to be cracking capacity to build that. But it's a little too early to call that give the near-term events we are seeing."
The petrochemical industry is unique because it consumes energy as a raw material and uses energy for fuel and power. New shale gas resources -- and ethane produced from gas liquids -- have given domestic petrochemical producers a competitive advantage over many global competitors that rely on naphtha, a more expensive, oil-based feedstock.
But the shale plays also are creating "a lot of emerging bottlenecks in a lot of different places" for pipelines, said Armstrong. "A lot of infrastructure is required in the field and we are keeping our eye on that...As that grows, and we think it will, we continue to see the need for infrastructure" in some of the oily shale plays, including the Bakken "as well as on propanes and heavies [NGLs], the petrochemical business in general. There's been a lot of shifting in light NGLs, heavy NGLs, olefins products. It's positioning us for a big shift."
The CEO said he continues "to be confident about the balance of 2011 and 2012...Williams fundamentals are sound. On NGLs, I'm very confident in the margins as they exist today partially because of how high the margins go to at the end of 1Q2011. There's plenty of room to slip down and still maintain [Williams'] guidance. I have not seen degradation in that market in the last couple of days that we might be expecting. I'm confident on 3Q2011 and the balance of the year."
Rory Miller, president of Williams midstream operations, noted that there were "a lot of announced projects" for expanding petrochemical crackers "and while not all of them are going to get built, a number of them can...Our timing is right and there's a window of opportunity ahead of the other announced projects..."
NOVA Chemicals CEO Randy G. Woelfel was asked during a conference call Thursday if he had seen "any North American pressure on ethylene prices" or "any feedstock shifting." The Calgary-based company designs and manufactures plastic resins, chemicals and end-products.
"I think it's never comforting to have the level of volatility that's out in the marketplace at the moment," said Woelfel. "But if you step back, above some of the 'emotionality' that's out there in the capital markets at the moment, the fundamentals of our business still feel pretty sound."
NOVA is conducting feasibility studies to determine whether to expand or build new ethylene crackers to take advantage of plentiful NGL production in North American shale plays and this year it has secured some major transactions to ensure it has a long-term supply of ethane.
In addition to the Williams agreement, NOVA this year has signed a memorandum of understanding (MOU) with a subsidiary of Range Resources Corp. for a ethane supplies from the Marcellus Shale for its Corunna, ON, cracker. Under another MOU Statoil Marketing and Trading Inc. also agreed to supply NOVA with ethane from the Marcellus (see Shale Daily, Aug. 2).
Through July, Woelfel said, "we have seen some pretty decent growth in North America. The August pattern is continuing to track that sort of growth expectation. We continue to feel good about North American competitiveness, despite the downward movement in oil pricing. We're still seeing oil to gas ratios that are at 20-plus and I feel the fundamentals are still sound and solid."
From NOVA's perspective, said the CEO, "we've done a lot of things in the last couple of years...since late 2008, beginning in 2009 in the crisis situation to fundamentally change NOVA's ability to weather any sort of repeat situation. Just as one example, if you look at our exposure to crude oil in the supply chain today, it's a fraction of what it was a couple of years ago, thanks to shifting the feedstock profile...We continue to believe that we'll move through this [period of stock market and oil price volatility] as an industry in a way that fundamentally feels good."
At the end of June NOVA said it would expand its proprietary polyethylene technology to serve North American markets under the "NOVA 2020" plan (see Daily GPI, June 30). The plan led to the launch of feasibility and engineering (FE) work to construct two "world-scale" polyethylene facilities in Alberta and Ontario. The FE studies are to be completed by mid-2012; expansions also are being discussed at other Canadian facilities.
Asked if he thought ethylene prices in August were likely to increase, Woelfel said, "Well, I'm never going to be in a position trying to predict anything in the marketplace...what it will do. I can suggest, and I continue to see, solid demand across the derivative chain. We are headed into a period of planned shutdowns," not only at NOVA but "we are aware of other industry shutdowns as well. Supply demand to us feels pretty snug; we'll see where that takes us in the marketplace."
The "emerging feedstock options" from the shale plays "have really opened up new and exciting opportunities for NOVA Chemicals," he said. The "ethane surplus is...enough to supply a world-class cracker unit" in Alberta and in Ontario...We've seen stronger ethane supply this year than anticipated...
"We've been suffering from a weather standpoint, but the silver lining is that with the cold winter and a brutally hot summer, we've seen improved ethane supplies. There's strong demand for natural gas."