Shale gas impacts on the global petrochemical industry
The abundant availability of shale gas in the US has
dramatically altered the global petrochemicals landscape – changing investment
patterns, trade flows and competitiveness. The first wave of plants that use
this resource both as chemical feedstock and as a source of energy have started
coming online, and will significantly augment global capacity for basic
petrochemicals. But this is just the first wave and more is on the way.
Countries that do not have access to this low-cost feedstock are also
evaluating options to improve their competitiveness and a few have even
resorted to imports of ethane as feedstock for their ethylene crackers.
The story a decade ago
What a difference a decade or so can make! At the turn of the
century nearly everybody had written off the US chemical industry, as one
operating in a high cost, mature market showing little or no growth and
suffering due an onslaught of cheap products from the Middle East (for basic
petrochemicals) and China (for more value-added products).
Manufacturing economics in the US simply did not work, and for
several reasons. The feedstock – be it liquid fractions of petroleum refining
or conventionally produced natural gas – were too expensive, compared to that
available in some pockets of the world. The end-use markets were at best
steady, or worse on a decline – exacerbated by the global financial crises that
had its roots in the housing industry, but soon impacted consumer confidence,
and led to a dramatic collapse in construction activity. The fear then was that
large value chains of the chemical industry would migrate overseas – to Asia
where the markets were growing at a brisk pace, and, in particular to China.
The giants in the petrochemical industry in the US rightly
turned their focus outward, even as they shuttered high cost assets in their
home country. Several looked to joint ventures in the Middle East to leverage
cheap, albeit subsidised, natural gas and ethane derived from it. The mantra
was move to where the markets were; which meant China, for most. What followed
was an investment binge that neither China nor the world had ever seen, to
which local operators joined as well.
Technological and geopolitical changes
Around 2010, two developments – one technological and the other
geopolitical – changed the status quo in the petrochemical and energy
industries.
The deployment of fracking technologies – known for several
decades, but not deployed – led to the unlocking of previously inaccessible
hydrocarbon resources at extremely competitive costs. Just as significantly,
one no longer needed gargantuan oil & gas fields to obtain economies of
scale; the technology could instead be deployed to tap into modestly sized reservoirs,
with little disruption to the land above. Challenges with respect to water
availability and its treatment before disposal, and fears over pollution due
use of several chemicals to free the trapped oil or gas and get it to flow,
were found to be overstated and very much manageable.
Shale gas brought about an immediate change in the energy
situation in the US – making the country largely self-sufficient in its energy
requirements. LNG terminals that were being built to import natural gas to feed
power plants began to be reconfigured to export the same, and the US turned
from a net importer of shale gas to an exporter.
The timing could not be better for the fracking and the
petrochemicals industry. Several factors – economic, geopolitical, and
speculative – led to a run up in crude oil prices between 2009 and 2014, to a
high of upwards of $100 per barrel, rendering oil-based petrochemical
production – in any part of the world – uncompetitive vis-à-vis shale gas
derived ethane. This delta provided the rationale for a return of investments
to the US.
Shale gas based ethylene is today the cheapest ethylene on the
planet, barring that produced from subsidised natural gas in Saudi Arabia. The
advantage – running into several hundred US dollars compared to higher cost
regions in Europe or the Asia-Pacific cracking naphtha as feedstock –
translates into significantly higher margins in a market where prices are set
by the highest cost producer.
Investment binge & its economic impact
Almost all global petrochemical majors, including foreign ones
from Europe, Middle East and the Asia-Pacific lined up investments. Domestic
companies like Dow, ExxonMobil, ChevronPhillips joined the likes of SABIC,
Total and Borealis to add upward of 100-mtpa of new petrochemical capacity from
shale in the US. The span of products that will be manufactured from these
plants will include commodities such as methanol and ammonia (from methane), as
well as ethylene & propylene and their several derivatives (from the C2/C3
fractions of shale gas). Between 2016 and 2021 alone nearly 70-mtpa of new
chemical manufacturing is expected to be added in the US, with annual spends of
about $13-bn each year in that period.
At the end of 2017, four new ethane crackers were already on
stream in the US and another eight were under construction. Overall, by 2020,
about 20-mtpa of new ethylene capacity is expected to be created in the US,
using highly competitive feedstock.
According to estimates made by IHS Markit, a market research and
consultancy firm, the investment binge will have significant impact in the US
economy in terms of jobs, income, and value-addition. The consultancy expects
that jobs in energy-related chemicals will rise from 53,000 in 2012 to 319,000
by 2025. Labour income is expected to increase from $3.8-bn in 2012 to just
over $26-bn in 2025, excluding that created by a stimulated downstream sector.
The value-addition enabled by energy-related chemicals will increase from
$6.8-bn in 2012 to more than $51-bn in 2025.
Sizeable investments in associated chemicals and logistics
infrastructure is also happening. Port infrastructure, for example, is being
upgraded to deal with congestion and to accommodate the flood of material such
as polyethylene that would need to be shipped out of the country. Railroads are
also seeing opportunities to move cargoes from producing centres to ports on
the US Gulf Coast.
Finding markets overseas
The wave of new production will have to find markets both within
the country and outside. Given that demand will be unable to keep pace with new
capacity creation, exports will be needed to maintain operating rates. IHS
Markit anticipates that the US trade surplus will increase by as much as $20-bn
from this additional production. Major export markets include: Mexico and parts
of Latin America; several countries in Europe (which has long been a turf of
Middle East players); and even distant markets like China, which is expected to
have a deficit in petrochemicals for a long time to come.
Play by other companies
Companies elsewhere in the world are also eyeing shale gas
derived ethane as a way to improve their competitiveness. In Europe, INEOS, for
example, is shipping US-sourced ethane to its cracker in Grangemouth, Scotland,
earlier marked for closure due poor economics.
Here in India Reliance Industries Ltd. (RIL) has similar plans.
In April 2017, RIL announced the successful completion of its ethane import
project, including ethane receipt and handling facilities at its Dahej
manufacturing facility. The gas is now being shipped from the US Gulf Coast in
Very Large Ethane Carriers to the west coast of India, from where it will be
transported via pipelines to crackers at Hazira and Nagothane. All crackers of
the company, save the one in Jamnagar, will then be based on shale gas.
The shift in feedstock by these and several other producers
should revitalise petrochemical manufacturing in what would otherwise be high
cost production centres. The move will enable these producers to benefit – at
least to some extent – from the cheap shale gas available and recreate some of
the benefits that the US petrochemical industry is now realising in ample
measure.
Ravi Raghavan
Chwkly 06-02-2018
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