The U.S. shale gas and natural gas liquids (NGL) revolution has launched 136 domestic chemical industry projects worth a combined $91.2 billion, with 54% of that investment coming from foreign entities, according to the American Chemistry Council’s (ACC) late December tally. The unprecedented growth is far from over, industry experts say.
“These are projects that have been announced since maybe 2011…The initial projects were more or less restarts and de-bottlenecking. We’re now into some capacity additions and new sites; somebody’s adding another furnace. But we’re also seeing the beginnings of a wave of projects that are greenfield in nature,” ACC’s Kevin Swift, chief economist, told NGI.
The domestic chemical industry’s conversion from heavier feedstocks — naphtha and gas oil, mainly — is about 90% complete, Swift said, adding that the primary light feedstock is ethane but also propane and butane. That doesn’t mean the shale revolution sweeping the chemical industry is anywhere near over.
Some projects in the ACC tally in the end might not be built. But when it’s all said and done, Swift said, shale-sourced fuel and feedstock will have inspired 150-175 chemical industry projects in the United States. What many in the energy industry call the most significant development in 50 years is the biggest thing to hit the chemical industry in 80 years, Swift said. The 1930s, despite the Great Depression, was when most of our modern plastics were developed.
Chemical industry interests for a while were skeptics of the shale gas bounty. Some, such as The Dow Chemical Co. have been vocal opponents of exporting liquefied U.S. gas (see Daily GPI, March 12). However, ACC, whose members export billions of dollars worth of product, embraces an open markets policy for LNG as well as ethane and propane, ACC’s Owen Kean, senior director of energy policy, said.
“Our position is we do not favor restrictions on hydrocarbon exports…The view is that our industry is one of the top export industries in the country, if not the top export industry in the country. Because of favorably priced natural gas and natural gas liquids feedstocks, we are poised to see an explosion of chemical exports in the years to come…”
The U.S. industry has gone from a chemicals trade deficit to a surplus, which this year is expected to be about $2.8 billion and reach nearly $30 billion by 2018 on the back of nearly $300 billion in total exports, according to Swift.
The United States’ increasing competitiveness in the chemicals sector and growing waves of exports are being felt abroad. Analysts at consultancy Stratley AG earlier this year prepared a report for the Gulf Petrochemicals and Chemicals Association, which represents industry members in the Arabian Gulf.
Stratley said the “shale gas advantage” is pinching a number of production sites, particularly in Europe, where declining margins are expected to force the shutdown of older crackers and basic chemicals capacities in the medium term. Members of the Cooperation Council for the Arab States of the Gulf — also known as the Gulf Cooperation Council (GCC) — are expected to feel the shale gale, too.
“In the light of cheap ethane in the U.S. as well as more naphtha-based ethylene in GCC countries, the cost advantage of these countries’ derivatives will shrink significantly compared to the U.S.,” Stratley’s report said. “U.S. shale developments have triggered new technology developments (e.g., on-purpose dehydrogenation of propane) as well as investments in additives and co-monomers capacities, which further strengthen the U.S. ethylene downstream position compared to GCC countries.”
According to the analysts, the effect of cheap shale gas on GCC chemical interests will be far less than what is expected in Europe. Despite the “shale-age market equilibrium,” GCC players will still enjoy a cost advantage “…albeit with much less margin differential to the U.S.,” Stratley said.
Meanwhile back in the United States, chemical producers are bullish on the staying power of cheap ethane.
“We believe that this ethane feedstock cost advantage over heavier feedstock-based ethylene will continue,” Westlake Chemical Corp. CEO Albert Chao said during a recent third quarter earnings conference call. He cited the continuing development of natural gas pipeline and fractionation capacity, which he said will bring more ethane into the market faster than the North American chemical industry can consume it.
“Continued industry investments in infrastructure to produce, fractionate and deliver these NGLs to the Gulf Coast will help sustain this cost advantage position,” he said, adding that Westlake is evaluating another ethylene expansion at its Lake Charles, LA, facility in 2015.
During his company’s third quarter earnings call, BASF Chairman Kurt Bock talked up BASF’s growing feed flexibility with refinements to its Port Arthur, TX, cracker. Because its Port Arthur cracker is among the most recently built, the company has followed its peers in the migration to lighter feedstocks, En*Vantage Inc. consultant Peter Fasullo told NGI. “They have the newest cracker…It was based on naphtha.” The plant could have been converted sooner, but the pipeline infrastructure to support a conversion was lacking, Fasullo said.
“Everybody is becoming more dependent upon ethane over time,” he said. “A lot of the expansions that they’re doing to existing plants are to crack more ethane, and the new world-scale plants that are being planned are strictly ethane.”
That demand can’t arrive soon enough for those who are long ethane and would prefer to be less so. “We’ll get more balance on ethane supplies by 2017 when the new world-scale crackers come up,” Fasullo said. “It will take that long.”
But exports will help, too.
A Range Resources Corp. subsidiary has a 15-year ethane sales agreement with INEOS Europe AG for delivery of ethane at Sunoco Logistics Partners LP Marcus Hook facility near Philadelphia for shipment to Europe (see Shale Daily, Sept. 28, 2012). And Enterprise Products Partners has been talking up adding ethane export capability to its liquefied petroleum gas export capacity on the Gulf Coast (see Shale Daily, Nov. 1, 2013).
However, the export market for ethane is not nearly as robust as it is for liquefied natural gas (LNG) or propane. LNG and propane are traded in a liquid market around the world, and shippers have a choice of destinations. Not many places around the world can accept ethane deliveries, Fasullo said.
“The rest of the world doesn’t have the midstream infrastructure to handle and transport and store ethane like we do here,” he said. “If you and I decide to build an ethane terminal, it has to be in partnership with a foreign ethylene player because that foreign ethylene player has to commit to us…If you build the terminal, I’ll come and pick up the cargo, and I’ll have the ability to offload those cargoes at my location.” This is the case with the Range-INEOS deal.
Fasullo said Asian and European petrochemical interests are looking at U.S. ethane, but these buyers are used to living in a naphtha world. Enterprise COO Jim Teague has said the company has been in talks with parties about ethane, but “other parts of the world” don’t understand exactly what goes on at the U.S. NGL hub of Mont Belvieu, TX.
“The foreign ethylene companies have to find a way to contract for that ethane,” Fasullo said. “What I’m hearing is they don’t want to buy it on a Belvieu-related basis. They want to buy it on a naphtha-related basis.”
Contrary to the thinking of some who fear that exports will cause price spikes, the ability to send commodity abroad is a relief valve for the market and can support prices that would otherwise crash, ultimately leading to supply constraints, Fasullo said.
“We’re exporting more and more propane than we have ever before, and yet our prices aren’t going sky high,” he said. “If we didn’t have propane exports, propane prices would have collapsed. It really would have damaged the midstream sector over the last year or so.”
LyondellBasel CEO James Gallogly was asked during his company’s third quarter earnings call whether ethane export would gather pace and become a trend. His response was that “a limited amount of ethane” would end up getting shipped abroad. “I don’t think there’s going to be a lot of ethane [price] pressure, although I have historically said that propane costs should come up as more export facilities are available.” Longer term, Gallogly said, ethane is expected by LyondellBasel to trade “around parity” with natural gas based on heating value.
Chemical industry interests now have an expectation of natural gas and NGL supply security and stability in the United States going forward, according to Fasullo. “They all feel very comfortable that the shale plays will support very long-term projects,” he said.
“We’ve seen evidence that the United States is becoming the new Middle East — but with a lot more stability — and we have very low-cost hydrocarbons…We’ve never seen this kind of growth all along the energy value chain, from the wellhead to the petrochemical plants.”
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