The boom in natural gas shale exploration and production (E&P) is fueling "significant cost advantages" for North America's commodity chemicals producers because the costs of gas and oil-based feedstocks remain far apart, according to a report by Fitch Ratings.
The increased availability of inexpensive natural gas liquids (NGL) feedstocks is "critical" to supporting the competitive position of North American firms worldwide, the ratings agency said Friday.
"The surge in shale liquids availability has been a game-changing event for downstream chemical producers dependent on inexpensive light feedstocks," said Fitch's Mark Sadeghian, senior director in the corporate finance group.
Innovations in drilling technology, including widespread use of horizontal drilling and hydraulic fracturing, have "sharply boosted liquids supply from unconventional shales in North America, in turn pressuring prices of North American NGLs," said the report. "Upstream E&P companies, such as Marathon Oil Corp., Occidental Petroleum Corp. and ConocoPhillips, have directed more capital expenditures to onshore liquids-rich shale plays in the U.S. and Canada, paving the way for further supply growth."
Downstream producers of petrochemicals and plastics have access to low-priced NGL feedstocks, which has increased export competitiveness in ethylene, polyethylene and other derivative products, Fitch said. "European producers, in contrast, which rely on heavier crude oil-based feedstocks such as naphtha and vacuum gas oil, continue to see a feedstock cost disadvantage."
According to Fitch, ethane prices as a percentage of Brent crude oil have declined since 2008 from about 43% to 27% at current market prices. In response, several major chemical manufacturers have proposed expansions to their North American nameplate petrochemical production capacity, including ethylene cracker projects (see Shale Daily, Sept. 7; Aug. 2; April 25; March 29). In addition to planned Gulf Coast and Canadian expansions, Shell Chemical has plans on the table to build a cracker facility in West Virginia to take advantage of Marcellus Shale supplies (see Shale Daily, June 7).
"Unconventional gas resources now account for approximately 25% of North American natural gas supplies, and that share is likely to grow significantly in coming years," Fitch said. "The surge in shale gas availability has contributed to a halving of natural gas prices in the U.S. compared with three years ago, when unconventional gas exploration began to accelerate."
Even with signs of a global slowdown and reduced growth in Asian export markets, Fitch said North America's chemical producers still may benefit materially from the shale gas surge because the differential between gas and oil-based feedstocks is "likely to remain at historically wide levels over the near to medium term."