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
Chemical
Weekly Issue date: 6th February 2018
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