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ETHYLENE MARKET STRETCHED THIN Plant outages and strong demand are depleting supply and cutting inventories

Paige Marie Morse C&EN Houston

As the Gulf Coast region of the U.S. enters the hot, humid days of summer, petrochemical producers

are sweating to provide adequate sup­plies of the industry's key raw material, ethylene. Growth in the polyethylene market—which uses about half of the 52 billion lb of ethylene produced each year in the U.S.—has continued its strong pace, draining the stores of most producers. Coupled with a few un­planned outages of large production units, ethylene supplies have fallen to uncomfortably low levels.

'The market is extremely tight right now," says David C. Aldous, Shell Chemi­cals' business manager for olefins, "with fairly robust demand for all derivatives."

Despite low supplies, most produc­ers have met demand from their con­tract customers. However, little product is available on the spot market. Spot prices have risen from 10 cents per lb in January to 25 cents per lb in June.

Production units are running hard at a time when most operators would prefer to take it easy. "Ethylene units are quite a thermodynamic marvel, operating over huge temperature ranges," says Bruce Bush, manager of olefins and trading at Phillips Petroleum. "When you are run­ning the units very hard, which we are right now, hot weather puts a lot of stress on them. A lot of producers have got their fingers crossed right now."

Although no major units are experi­encing unplanned outages now, invento­ry levels are expected to remain low as several companies undertake mainte­nance shutdowns, called turnarounds, in the next few months. With little new capacity coming onstream until mid-2000, the U.S. ethylene market is not ex­pected to loosen until early next year.

The U.S. ethylene market is remark­ably compact, compared with other re­gions of the world, according to the con­sulting group ChemSystems, Tarrytown,

Commodity plastics consume majority of U.S. ethylene

a-Olefins & linear alcohols

6%

Styrene -7%

Ethylene glycol 13%

Vinyl acetate

3%

Other 7%

Polyvinyl chloride 15%

Linear low-density polyethylene

11%

1998 consumption = 52 billion lb

Source: BT Alex. Brown

N.Y. Nearly all—94%—of the capacity is along the Gulf Coast, and 75% of total pro­duction is used captively by its produc­ers. Captive producers often manage eth­ylene shortages by slowing their own downstream production. However, with commodity plastics markets recovering from their dismal price levels of 1998

(C&EN, May 24, page 11), most produc­ers would prefer to offer polyethylene or other derivatives to the market.

Ethylene inventory levels, as reported by the National Petrochemical & Refin­ers Association, fell below 1 billion lb for the fourth quarter of 1998 and the first quarter of 1999, the most recent data available, down from more than 2 billion lb in the first half of 1998.

"At current inventories, producers will need to run between 95 and

- — — — 97% of nameplate capacity for the rest of the year just to get back to comfortable levels," says Stephen J. Zin-ger, a consultant at the market research group Chemical Market Associ­ates Inc. (CMAI), Houston. "The market will be strong for the rest of the year, until it gets back to about 12 days of inventory," or about 2 billion lb.

A variety of production outages had the greatest impact on the market this spring. April was the worst time, with nearly 14% of the U.S. capacity experiencing operating problems at some point during the

month, according to CMAI. Houston-based Equistar Chemicals

experienced the largest outages, losing several days of production in both units at its 3.8 billion-lb-per-year Channelview, Texas, site (C&EN, May 24, page9).The company declared force majeure after its first outage in April (C&EN, April 19,

High-density polyethylene

24%

Low-density polyethylene

14%

Phillips produces 4.2 billion lb per year of ethylene at its Sweeny, Texas, plant

20 JULY 5, 1999 C&EN

Inventory management is critical During this busy summer season, sever­al ethylene producers are finding them­selves in a difficult position. Many pro­duction units are in need of maintenance work to run efficiently, but the market has a short supply, and any loss of pro­duction will be sorely missed. Ethylene customers are demanding the maximum levels allowed by their supply contracts, making it difficult for producers to build inventory to cover a produc- — tion outage.

At times like this, close tracking of ethylene inventories is critical for producers. Whether they want to cover a maintenance outage or to supply a spot market that offers de­lightfully high prices, producers must be sure about how much product they have available. How­ever, quantifying and recovering this gas at low inventory levels is a challenging task.

Like many other hydrocarbons, ethylene is typically stored in under­ground salt caverns. These caverns provide large, impermeable storage areas that do not crack under pres­sure and are easily accessed through single wellheads above ground. Large formations, often called salt domes, are common along the U.S. Gulf Coast, where more than 90% of U.S. ethylene is produced. Smaller, layered salt structures occur in the northern U.S.

Salt caverns are typically formed by using fresh water to dissolve the salt, followed by the removal of most of the brine to create a cavern for the gas. Un­like manufactured metal storage tanks, the exact size of the caverns is not easily determined.

"Many caverns are nonuniform in shape," says James K. Linn, manager of storage development technology at San-dia National Laboratories, Albuquerque, N.M., "because of the different dissolu­tion rates of salt impurities." The caverns also change in shape and size upon us­age, he adds, as operators add low-salt

page 18) but was able to supply its cus­tomers with reserved inventoiy and pro­duction from its other facilities and by re­ducing ethylene use at its own derivative facilities. Equistar is the largest U.S. eth­ylene and polyethylene producer, with annual capacities of 11.5 billion lb and 6.6 billion lb, respectively. A company spokesman reports that its Channelview units are operating normally now, but that inventories remain very low.

Other producers reported outages, in­cluding several days of lost production at Union Carbide's Taft, La., unit. Mobil also

brine or even fresh water to replace gas volumes at low inventory levels.

When a cavern is filled for the first time, operators carefully meter in ethyl­ene. When in operation, they rely on dif­ferences between meter readings, for gas in and out of the cavern, to deter­mine ethylene quantity. Unfortunately, small metering errors are common, ac-

Salt domes along Gulf Coast are storage sites for ethylene

Depth below surface, thousands of feet

Storage caverns Salt

cording to operators. After several years of operation that includes daily move­ment of several million pounds of ethyl­ene in and out, having a large error in in­ventory is possible. Most ethylene pro­ducers say errors on the order of 5 to 10% are typical. When inventory levels are low, such variances can affect the ability to cover the few extra days needed to complete a maintenance project

Several cavern operators use sonar equipment to get more accurate mea­surements. By determining the location of the brine layer, and considering the temperature and pressure of the cav­ern, they can calculate the total ethylene

had trouble restarting its Beaumont, Tex­as, unit after completing a 575 million-lb-per-year expansion project in March. The company reports that it has gradually in­creased the unifs production rate and is currently running at about 90% of capacity.

This tight market creates a timing challenge for producers who need to per­form maintenance work on their units. Several turnarounds have been delayed to late summer or fall, as producers strug­gle to accumulate enough inventory to cover a production shutdown. With the ever-increasing size of new units, compa-

volume. However, exact temperature and pressure readings are critical to the accuracy of these calculations because ethylene remains a gas upon storage, in contrast to most other cavern-stored hy­drocarbons that liquefy.

"Ethylene storage is a very complex undertaking," says Steven J. Seni, depu­ty assistant director of underground hy­drocarbon storage for the Railroad Com­mission of Texas. The commission over­

sees the permitting and operation of — more than 500 salt caverns in Tex­

as. About 30 are used for ethylene, and the remainder are primarily for ethane, propane, and natural gas. Typical salt domes are 100 feet in diameter and 2,000 feet high. Total ethylene storage capacity in Texas is about 1.7 billion gal.

Seni reports that some cavern operators have begun to use down-hole temperature and pressure meters to get more accurate read­ings and to record variations that occur across their caverns. The commission recommends that hy­drocarbon storage caverns be emp­tied at least every five years to en­sure accurate measurement and structural integrity.

Another issue for ethylene sup­pliers when operating at low inven­tory levels is ensuring that product quality is high. As salt caverns are emptied of ethylene, operators add brine to maintain the cavern pres­

sure and ensure that the walls do not collapse. The brine transfers carbon di­oxide—absorbed from the air when the brine is stored in retention ponds on the surface—and water vapor to the re­maining ethylene. To meet tight purity specifications, ethylene suppliers must use slower flow rates and multiple pass­es over drying beds to remove the in­creased levels of impurities.

When producers say that six days of ethylene supply is "uncomfortably low," no doubt they are referring to the challenges of recovering the small quantities of product that remain in their storage sites.

- I nies must store about 100 million lb of - ethylene to maintain supply during a typi-j cal maintenance project, a difficult feat in - a tight market. 5 After it completed a turnaround at one . of its Sweeny, Texas, units, Phillips was I unable to accumulate enough ethylene to - cover a second turnaround scheduled for . June. "Many customers started to take 1 contract maximums" this spring, Bush - says. ) BP Amoco also shifted a turnaround i project at its Chocolate Bayou, Texas, - I site from June to later in the year in or-

JULY5,1999C&EN 21

b u s i n e s s

der to ensure adequate inventory levels. The 3.3 billion-lb-per-year site is the company's only ethylene unit in the U.S.

Dow Chemical, a net buyer of ethyl­ene, was unable to delay projects at its Plaquemine, La., and Freeport, Texas, sites, says Frederick Knopp, commercial manager of light olefins. The Plaquemine project—which is currently under way and will be completed this month—will also add 200 million lb of capacity, raising the company's annual capacity to 7.8 bil­lion lb. An August turnaround is sched­uled for a Freeport unit, to be followed by an expansion project that will add 500 mil­lion lb of annual capacity early next year.

Merchant-supplier Shell will also complete a 200-million-lb expansion in the next several months, increasing an­nual capacity at its Norco, La., site to nearly 3.5 billion lb. The company had planned an expansion at its Deer Park, Texas, plant late next year (C&EN, May 4, 1998, page 17), but Aldous reports that the date has slipped to 2003.

'We decided that the market timing was not good for that project," Aldous says. As currently planned, the expan­sion will add 1.2 billion lb to the Deer Park unit.

Spot market prices for ethylene have more than doubled in the past six months, whereas contract prices have ris­en a healthy 4.5 cents per lb from January through May. June contract prices had not been settled as C&EN went to press; most producers were hoping to gain an­other 2 cents per lb, following a 2-cent-per-lb price increase in May.

"It is rare that ethylene ever moves up in those kinds of monthly incre­ments," ChemSystems' Darryl C. Au­brey notes. "It usually moves up by xk to 1 cent per lb."

Although prices are improving, rising feedstock prices mean that producers' margins are not necessarily getting bet­ter. Ethane prices, in particular, have risen significantly in the past several months as producers switched to lighter feedstocks to increase ethylene production.

'The industry has seen a real surge in the volume of ethane consumed ver­sus the volume of naphtha" for feed­stock, Phillips' Bush says, "and that has forced the price of ethane up. Producers have trended away from the economic feedstock of choice because they had commitments to supply ethylene to their customers or their own derivative plants." Ethane prices rose to 35 cents per gal earlier this spring but have re­cently settled at about 27 cents per gal.

The discussion about feedstock price and availability has become increasingly common among ethylene producers in recent years. For example, analysts tout the economic advantage of the joint-venture cracker being built by Nova Chemicals and Union Carbide in Alberta, Canada, where ethane prices are particu­larly low. Moreover, several U.S. petro­chemical producers have been lured into joint ventures with Middle Eastern pro­ducers because of the availability of light, cheap feedstocks.

This shift to lighter feedstocks is a short-term phenomenon, ChemSystems' Aubrey believes. U.S. producers will gradually decrease their use of ethane in the next several years, from 53% in 1997 to 51% in 2005, in favor of naphtha, which will increase to 18% in 2005, up from 16% in 1997. Although naphtha feedstocks produce less ethylene, they allow for pro­duction of other useful hydrocarbons, in­cluding propylene and aromatics.

Most producers do not expect today's good prices to last much beyond this year. The start-up of the 2.8 billion-lb-per-

year Alberta unit next summer plus two other Gulf Coast units in early 2001—a 1.9 billion-lb-per-year unit by a BASF-Fina joint venture and a 1.8 billion-lb-per-year Formosa Plastics unit—will boost capaci­ty substantially and push prices down. With domestic ethylene growth at about 3% per year, only one world-scale cracker is needed each year to ensure adequate supply, Aubrey comments.

The overcapacity problem will be worse globally. Annual demand growth is predicted to be 4.7% through 2005, but ca­pacity will jump by 8.5% next year to near­ly 200 billion lb. Prices will decline, Aubrey predicts, and the next industry peak will not occur until 2003, assuming companies make no changes in their cur­rent plans.

However, U.S. petrochemical produc­ers seldom stick to their initial plans. "With the life the market has shown this year," he says, "it could cause producers to accelerate some expansion plans that they would not have otherwise done if prices had stayed where they were at the beginning of the year."^

Degussa-Huls: Making a merger work

I t has been just a short time—since February—that official documents were completed, marking the merger

of the two German firms, Degussa and Hills (C&EN, Jan. 18, page 22). But in that brief time, officials from both compa­nies say that a single identity has taken over. Employees have begun to think of themselves as part of Degussa-Huls, not as representatives from the two formerly independent companies.

Of course, the details and the hard work came well before the merger it­self. But it is how that work was done and the work that has been done subse­quently that are the keys to why the merger has "taken," the executives say.

The main lesson has been to do your homework—and a lot of it—early in the game to establish a sound agreement. That is particularly noteworthy, execu­tives at the two companies note, given the chemical industry's recent whirl of announced mergers that were abruptly canceled.

"We have established our identity in just two months," says Dierk Paskert, an executive vice president for corporate development at Degussa-Huls. 'The pro­cess doesn't have to take years; it takes just a few months."

His colleague, Michael Verbeek, also

an executive vice president for corporate development, agrees with that assess­ment. "It is the feeling of the people: We belong to the new entity.'" The two com­panies each had its own traditions. De­gussa, for example, was founded some 125 years ago, but since the merger, "we talk about a team," almost as though the new company itself had existed for a long time, he adds.

The merger will elevate what had been two second-tier chemical producers into one specialty chemicals company that will be among the top 10 chemical companies worldwide. With fiscal 1998 pro forma sales of $12.1 billion, the com­pany would rank larger than such giants as Akzo Nobel and Rhone-Poulenc.

Veba, Huls's parent, said, 'We want a major company, and Huls alone is not big enough," Paskert relates. 'We start­ed looking at U.S. specialty companies first, but we couldn't justify the price to be paid." Such an acquisition, he says, would have diluted "earnings for the next decade. But then we asked our­selves, Why are we always looking across the Atlantic?' We should look at the home market, to see who could give us the same benefit."

Degussa was a very international company, Paskert points out, and had

22 JULY 5,1999 C&EN