Chemical Revolution Underway Sparked by Shale Gas Production
Based upon an article by Ed Crookes, The Financial Times, December 17, 2012
The international chemicals industry is undergoing its most profound upheaval for 75 years, according to Kevin Swift of the American Chemistry Council, a group funded by the chemical industry. Not since the years before the second world war, when there was a flood of discoveries including nylon, synthetic rubber, PVC plastic and polystyrene, has there been technological change with such far-reaching consequences.
Cheap feedstocks from fracking activities in the oil and gas industry are reshaping the global competitive landscape for petrochemicals. Anton Ticktin of the Valence Group, a specialist investment bank working in the chemical industry, says the US now has “a quite phenomenal advantage”. Costs are already lower in the US than in Europe, Latin America or China. In the future, they are likely to be lower even than in the Middle East.
Only three years ago, it looked as though the US bulk chemicals business was in long-term decline. Companies such as Dow Chemical saw their future in investing in the Middle East and moving downstream into more specialized products. The shale revolution has turned that round, encouraging dozens of companies to make plans to invest in new US chemicals production capacity.
The ACC, an industry group, has counted 17 separate projects, either planned or under consideration, to increase capacity in just one process: “cracking” ethane to make ethylene, the building block for plastics such as polyethylene.
US companies including Dow, ExxonMobil and CPChem – a joint venture of Chevron and Phillips 66 – have been joined by international groups including Royal Dutch Shell and LyondellBasell, both based in the Netherlands, Formosa Plastics of Taiwan, Sasol of South Africa, PTT Global and Indorama of Thailand, and Braskem of Brazil in looking at investments in ethane cracking in the US, and several have already made commitments.
If all of those proposed projects go ahead, US ethane cracking capacity could rise by up to 40 per cent by 2018. Ethylene, which accounts for 40 per cent of world trade in chemicals by volume, is a useful yardstick for the industry as a whole, according to Hassan Ahmed of Alembic, an investment research group.
About half the world’s production is based on naphtha, a light liquid hydrocarbon, with the remainder based on ethane and other gases. Because naphtha is produced from oil, its price is tied to crude. It is today about $100 a barrel, and has risen slightly over the past year.
The price of ethane in the US, by contrast, has collapsed from about 80 cents per gallon a year ago to less than 23 cents today, as new processing capacity has come on stream and US gas producers have shifted the focus of their drilling towards natural gas liquids. Andrew Liveris, chief executive of Dow, suggests ethane in the “high 30s” of cents per gallon would be a reasonable long-term price.
Still, even with ethane at 40-50 cents a gallon, ethylene will cost about $400-$500 a tonne to produce in the US, Mr Ahmed says, compared with $1,200 a tonne in Europe. European chemicals companies have been sounding the alarm about the impact of the US cost advantage on their competitive position.
They have also begun to think about US investments of their own. Bayer of Germany in June announced an agreement with Aither Chemicals of the US to look at a possible ethane cracker in West Virginia. Mr Ticktin believes the shale revolution will drive similar shifts in the chemicals industry for years to come. “We’re going to see a lot of merger and acquisition activity, a lot of investment into the US, and a lot of European companies seeking to move downstream,” he says.
Even Saudi Basic Industries Corp, the world’s largest petrochemical company, is in talks about a possible investment in the US. Although until 2006 chemicals manufacturers in Saudi Arabia were able to sign contracts for very cheap ethane, enabling them to produce ethylene for only about $200 a tonne, it appears that all of the kingdom’s production has now been committed.
In the US, environmental concerns about hydraulic fracturing may hit gas supplies, and the long-term production possible from shale reserves may be lower than the industry expects. Dow and other chemicals companies also worry that allowing increased US exports of liquefied natural gas could push up prices. A report funded by the US energy department, however, argued this month that even if LNG exports were unlimited, the rise in US gas prices would be relatively modest.
For now, the world-wide competitive advantage of the US looks secure. It won’t last forever, but the US has a significant head start. It could be 10 years, it could be 20 years. It could be longer, according to the article in The Financial Times.
Chemical boom hit by construction costs
From an article by Ed Crookes, The Financial Times, December 17, 2012
One consequence of the rising surge of investment in US petrochemical plants looks like being an increase in construction costs.
Sasol of South Africa this month announced plans to build an ethane “cracker” and a plant to produce diesel fuel from natural gas in Louisiana, at a total cost of up to $21 billion; a figure about 50 per cent higher than earlier estimates. It has not yet made a final investment decision on the plants but is already starting purchasing of costly long lead-time equipment such as metal vessels.
David Constable, Sasol’s chief executive, said: “Some of the quotes on cracking equipment are totally surprising us.” He said: “I think a few of the proposed ethane crackers may shake out and not come to fruition. We believe there is a first-mover advantage here, and we think it is very important to be in the first couple of crackers to be built.”
Andrew Liveris, chief executive of Dow Chemical, said recently that building a greenfield cracker, as Royal Dutch Shell is considering in Pennsylvania, required a “huge capital spend”: much greater than for the brownfield capacity expansions that Dow is making.
Data on petrochemical construction costs compiled by IHS Cera, the research group, show some signs of inflation: while price rises in the past 18 months have been strongest in the developing world, costs are falling in Europe but “flat to slightly up” in the US.
However, Anton Ticktin of the Valence Group, the investment bank, said he did not expect rising construction costs to jeopardise the case for chemicals companies to invest in the US. “Capital cost inflation always happens when you have an investment boom,” he said. “But that’s not the main driver of the economics. The cost advantage we are seeing in the US even now is pretty staggering.”