Petchem Shale CEN March 5

8/2/2019 Petchem Shale CEN March 5

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10W WW.CEN-ONLINE.ORG MARCH 5, 2012

COVER STORY

SHALE IS FORCING North Americanpetrochemical executives to unlearn muchof what they thought they knew about theirindustry. And given that they are near thebeginning of what is likely to be a long,prosperous period, they are more thanhappy to change their outlook.

Experiences early in the previous decadetaught the regions executives that their

reliance on raw materials derived fromnatural gas to make ethylene put them at acost disadvantage to the many other areasof the world that use petroleum-derivednaphtha. Now ethane is so cheap that onlythe Middle East can produce ethylene morecost-effectively than North America can.And while petrochemical companies inother regions, notably Europe, are strug-gling to turn a profit, North American firmsare raking in substantial returns.

Executives are learning to invest in

North America again. A decade ago, ex-ecutives thought that the investment ofcapital in domestic petrochemical plantswould be limited mostly to maintenance.But since last spring, five companiesChevron Phillips Chemical, Dow Chemi-cal, Formosa Plastics, Sasol, and ShellChemicalshave disclosed plans for newmulti-billion-dollar complexes making

ethylene and derivatives such as ethyleneoxide and polyethylene. Theres a goodpossibility that more companies will un-veil such plans in 2012.

Beyond large projects, nearly everyproducer of ethylene or derivatives is con-templating expansions to take advantageof low raw material costs. Shale is alsobeginning to underpin chemical deals. Forexample, the rosy North American outlookwas important to Indoramas $795 millionpurchase of an ethylene glycol plant in

Clear Lake, Texas, from Old World Indus-tries last month.

Chemical executives can be forgiven forhaving to get up to speed in short order.Until 2005, shale depositswhich lie be-neath a wide swath of the countrywerean eccentric source of natural gas. Thatwas about the time that exploration com-panies perfected horizontal drilling and

hydraulic fracturing techniques to liberategas that was tightly locked into shale. Shalehas since become the source of more thanone-quarter of the natural gas produced inthe U.S.

The new output has driven U.S. naturalgas prices below $3.00 per million Btu forthe first time in more than a decade. Atmore than $100 per barrel, oil is more thanfive times as expensive as natural gas on anenergy content basis.

The main feedstock for North American

PETROCHEMICALSThe SHALE BOOM is in full swing for the North Americanpetrochemical industry, and producers think it will last

ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU

REBIRTH

LyondellBasell isplanning a newmetathesis unitto produce morepropylene at itsChannelview,Texas, complex.

LYONDELLBASELL


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11WW W.CEN-ONLINE.ORG MARCH 5, 2012

petrochemical facilities is natural gas liq-uids, a mixture of ethane, propane, butane,and other hydrocarbons that is extractedfrom natural gas and then usually sepa-rated into its components. The remainingdry natural gas, primarily methane, isthen piped to the industrial and homeheating market. Cheap natural gas liquidsput U.S. producers at a big advantage overEuropean and Asian chemical producersthat primarily use petroleum-derived feed-stocks such as naphtha.

This advantage of natural gas liquidsover naphtha is enormous. According toCarlo Barrasa, director of natural gas liq-uids and cracker economics at the consult-ing group IHS Chemical, the cash cost ofmaking ethylene from ethane is 18 centsper lb. The cash cost of using light naph-tha as a feedstock, in contrast, is about

46.5 cents per lb. Ethylene sells for about68.5 cents per lb, IHS says.

ETHYLENE CRACKERS normally havesome latitude to change feedstock slates toreact to changing market conditions. In re-cent years, they have been cracking as muchethane as they possibly can. Many crackersoriginally set up to take in heavier feed-stocks such as naphtha have been retrofittedto allow them to crack more ethane. Dow,LyondellBasell Industries, Nova Chemicals,and Shell have undertaken such initiatives.

In 2004, Barrasa notes, only about 45%

of U.S. ethylene production was based onethane. Today, that figure stands at about70%. That just speaks to the fact that thecost advantage is so great, he says.

Cracking ethane instead of heavierfeedstocks does mean that ethylene plantsarent making as much propylene, butadi-ene, and aromatics as they used to. Thosecracker coproducts are in short supply andare becoming increasingly costly.

Although cheap shale gas is now thedominant driver of the U.S. petrochemicalindustry, the global financial turmoil is stillmaking itself known. In particular, the pos-

sibility of a Greek debt default last summercaused uncertainty in financial marketsand economic slowing.

North American producers felt the im-pact through some slippage in prices andvolumes at a time when ethane costs weretemporarily spiking. In the second half ofthe year we saw things slow down a littlebit, says Grant Thomson, president of ole-fins and feedstocks at Nova. The secondhalf of the year was still pretty good, but itwasnt as good as the first half.

According to John Stekla, director ofolefins studies at IHS Chemical, U.S. pro-duction of ethylene increased 2.0% in 2011,including a large buildup of inventories atthe end of the year. However, exports ofderivatives fell by 10%, Stekla says, as sup-pliers kept product at home to serve localcustomers. Overall, the net effect was a0.4% increase in derivative demand for U.S.

producersnot bad considering the U.S.doesnt have a lot of spare ethylene capacity

Profitability is now bouncing back. BrianAmes, Dows vice president of olefins,aromatics, and alternatives, says pricesreached a low point in December. Sincethen, he has observed continual improve-ment as sales volumes crept back up andfeedstock costs plummeted.

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Stekla notes that profit margins for eth-ylene on the spot market are now the high-est they have been since 1988. Spot priceshave been extremely high, even thoughdemand is relatively tepid, he says.

Observers expect the growth in NorthAmerican output to be similar this yearto what it was in 2011. Novas Thomsonexpects North American output of polyeth-ylene, the largest-volume ethylene deriva-tive, to rise 1.52.0%.

Although North American companieshave been enjoying good profits for sometime, the rest of the world is still near thetrough of the petrochemical businesscycle. In North America, the industrysnameplate operating ratethe percentageof overall ethylene capacity that is up andrunningstands at about 90%, accordingto IHSs Stekla. The global average, in con-

trast, is about 87%.If you look at the global industry op-

erating rate in 2011, were pretty much inthe trough, Dows Ames says. Yet with itshigher relative profitability, the U.S. indus-try looks to be further along in the upswingof the business cycle.

Trough conditions are particularly evi-dent in Europe, which must contend witha relatively high cost structure, economicwoes over sovereign debt, and proximityto plants that opened in the Middle East in2009 and 2010. According to IHS, WesternEuropean operating rates are about 84%.

During a conference call with analystslast month, LyondellBasell Chief ExecutiveOfficer James L. Gallogly disclosed that hiscompanys European olefins output fell by13% during the fourth quarter while profitmargins slipped to nearly break-even levels.

We continue to aggressively pursuerestructuring in this region, he told in-vestors, noting that the company plans toclose two small polypropylene productionlines in Wesseling, Germany. Similarly,Ineos is evaluating the future of the smallerof its two ethylene crackers in Grange-

mouth, Scotland.Gerd Lbbert, executive vice president

of polyolefins at Austrian petrochemicalmaker Borealis, acknowledges that the s it-uation in Europe is dire. Profitability haseroded in line with demand and has beenbelow sustainable levels, he says. Lbbert

adds that the benefits European crackersenjoy from producing lucrative coproducts

such as propylene dont sufficiently offsetthe increasing European disadvantage ver-sus gas-based production in the U.S. andMiddle East.

EUROPES WOES are a 180-degree changefrom a decade ago, when U.S. executivesthought that the disadvantages they facedversus naphtha-cracking counterparts inEurope and Asia would last forever. Nowthey believe that their relative advantage,if it isnt permanent, will at least endure anumber of years. The reason for their opti-mism is a so-called virtuous cycle that will

secure a reliable supply of feedstocks.Low natural gas prices have caused gas

exploration companies to cut back on drill-ing. That might seem like bad news. How-ever, high oil prices ensure that natural gasliquids sell at a healthy premium above natural gas, although at enough of a discount tooil to make them economical chemical rawmaterials. IHSs Barrasa says drillers cancharge as much as $11 per million Btu morefor natural gas liquids than for natural gas.

The composition of hydrocarbon re-sources varies considerably from region toregion. Exploration companies preferen-

tially develop wells in places that will yielda large amount of natural gas liquids ratherthan in locations with mainly dry gas.

In a presentation at Decembers GulfPetrochemicals & Chemicals Associationmeeting in Dubai, Chevron Phillips Chemical CEO Peter L. Cella outlined the eco-nomics at play that promise to yield ethanefor the petrochemical industry.

To earn a 10% return on the cost of capi-tal for a new dry gas well, a driller needs natural gas prices of $2.00 to $5.00 per million

COVER STORY

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Batteries

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ElectrochemicalAnalysis

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2007 08 09 10 11

Price index (first quarter of 2007 = 1.0)

0.0

0.5

1.0

1.5

2.0

2.5

Ethane

Oil

Natural gas

SOURCES: Energy Information Administration (oiland gas), Oil Price Information Service (ethane)

COMPETITIVENESSU.S. natural

gas and ethane prices have tumbled

relative to oil prices.


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Btu, he noted. However, for wells focusedon natural gas liquids, the 10% return priceneeded for the natural gas production is ac-tually zero because the driller earns its en-tire return on the liquids production, whichtends to be priced off crude oil, Cella said.

THIS IS THE REASON why the gas com-panies that are pulling back on natural gasdrilling are also reassuring investors thatthey are increasing exploration for naturalgas liquids, Barrasa observes. The onlything that can meaningfully affect the drill-ing for gas liquids is if we get a sharp cor-rection in oil prices, he says.

It really shows how much things havechanged, where exploration companiesactually talk about going after liquids andalmost treating the gas as the coproduct,Novas Thomson says. It wasnt long ago

that they just went after the natural gas andthe liquids were just by-products that youwanted to get rid of.

Ethane oversupply is hitting the marketfrom all this drilling. According to IHS, theU.S. will see more than 400,000 bbl per dayof new ethane supply by 2020, a more than40% increase from todays levels. Since thebeginning of the year, ethane prices havedropped from 84 cents per gal to 54 cents,Barrasa says.

With its success tied to petrochemicalmakers that buy natural gas liquids, thegas industry needs chemical companies to

build more capacity. Given their own mo-tivation to boost profits, chemical produc-ers are willing to oblige. But it takes threeor four years to build an ethylene cracker.Thus, the market will see only incrementalcapacity additions until 2016.

These projects will cap an enormousspate of capacity additions. North Ameri-can firms will add about 8.4 million metrictons per year of new ethylene capacity by2017, IHSs Stekla says, a 35% expansion ofthe regions output.

Of the companies that announced newethylene crackers over the past year, Chev-

ron Phillips was the first out of the gate withan announcement last spring. It intends tobuild a 1.5 million-metric-ton ethylene crack-er at its Cedar Bayou facility in Baytown,Texas, and downstream polyethylene plants.

Dow was the second company with acracker announcement. Its planned GulfCoast unit is part of a comprehensive planto integrate downstream ethylene deriva-tives into shale-based feedstocks. Theinitiative involves restarting a cracker inHahnville, La., that the company idled in

2009 plus upgrades to other crackers.Propylene is an important part of Dows

plan. The company recently inked a licens-ing agreement with Honeywells UOPengineering unit for a propane dehydroge-nation unit that would add 750,000 tons ofpropylene capacity in Texas by 2015. Dowplans a second propylene unit that woulduse its own technology.

Ames points out that Dows acrylic,propylene oxide, and epoxy operations arelarge consumers of propylene. But withthe propylene supply becoming tighter,the cost of buying propylene relative to thecost of buying propane and converting itinto propylene is such that we are bet ter ofbuying propane, he says.

Dow isnt alone. Eastman Chemicals

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COVER STORY

oxo chemicals business has a large ap-petite for propylene. When asked duringa recent conference call whether the firmwill restart a cracker at its Longview, Texas,complex, CEO James P. Rogers mentionedthat the company is instead consideringan olefins conversion unit, which likelyrefers to a metathesis unit that makespropylene from ethylene via a butyleneintermediate. Similarly, LyondellBasellis building another metathesis unit at itsChannelview, Texas, complex.

Sasol is studying a cracker at its LakeCharles, La., complex that would have up to1.4 million metric tons of capacity. A spokes-man says the company is in discussions witha potential partner for the project. If webuild an ethylene cracker, there will be somederivatives that will be Sasol only, and somepartner derivatives, the spokesman says.

Shell is also planning a cracker, but un-like the other projects, its plant is plannedfor the Northeast to tap into the MarcellusShale, a geological formation extendingfrom New York state through West Virginia.The company hasnt yet selected a site forthe project.

Formosa Plastics isthe latest firm to an-nounce a new ethylenecracker. Last week, thecompany disclosedplans to build an800,000-metric-ton-per-year ethylene crack-er at its Point Comfort,Texas, site. The $1.7 bil-lion project, to be com-pleted in 2016, will alsoinclude a low-densitypolyethylene plant anda 600,000-metric-tonpropane dehydrogena-tion unit.

Occidental Petro-leum hashinted that itis considering building

an ethylene plant. LastJune, the firm signeda transport agreement with pipeline firmDCP Midstream so it can ship natural gasliquids from the Eagle Ford Shale basin inTexas to a proposed gas processing plantin Ingleside, Texas, where Oxy makes vinyl

chloride. At the time, the companysaid the processing plant would al-low it to explore various optionsfor the future supply of ethylene atthe plant.

Beyond those that have been an-nounced, one or two more crackers

could be proposed for the U.S., IHSs Steklasays. One could be a second project in theNortheast to take advantage of the Mar-cellus Shale. There might also be anothercracker on the Gulf Coast, although he notethat even with the flood of ethane due to hitthe market, an additional cracker in the re-gion might run into feedstock constraints.

MANY FIRMS that arent building newcrackers are expanding existing facilities toleverage the shale boom. Nova is perhaps

the most ambitious of these companies. Ithas inked agreements to bring ethane fromthe Marcellus Shale up to its complex in Corunna, Ontario, and from oil fields in NorthDakota to its plants in Joffre, Alberta. Thecompany is also conducting studies, due focompletion later this year, about expandingthe Corunna cracker and perhaps buildingpolyethylene plants in Corunna and Joffre.

When all the new capacity hits the mar-ket around 2017, the U.S. could very well seea downturn in the petrochemical businesscycle. Yet Novas Thomson notes that theNorth American industry seems to have

missed the current petrochemical troughentirely, a phenomenon that has causedhim to doubt what he long thought he knew

The longer Im in the industry, the lessI believe in the cycle, he says. When Ifirst came into the industry in the late 80s,everybody talked about how its a seven-year cycle, and were going to have twogood years, and everybody is going to buildcapacity, and well have five bad years. I justdont believe that anymore. Shale gas, hesays, has turned all of that upside down.

OLDWORLD

INDUSTRIES

STORAGE Indorama isbuying an ethylene glycolplant from Old WorldIndustries in Texas totake advantage of shale.


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FORMOSA PLANS U.S. CRACKERFormosa Plastics has become the fifth company in less than a year to an-nounce its intention to build a new ethylene cracker complex in the U.S.The company has unveiled plans for a $1.7 billion investment that will in-

clude an 800,000-metric-ton-per-year cracker at its chemical complex inPoint Comfort, Texas. Formosa will also build a propane dehydrogenationplant with 600,000 metric tons of capacity and a 300,000-metric-tonlow-density polyethylene plant as part of the project, which it hopes tocomplete in 2016. Chevron Phillips Chemical, Dow Chemical, Sasol, andShell Chemical are also considering new crackers as part of a wave ofinvestment spurred by low-cost feedstocks derived from shale-sourcednatural gas liquids (see page 10). Formosa completed an ethylene crackeras well as downstream polyethylene and polypropylene plants, in 2001 aspart of a previous expansion wave.AHT

BERKSHIRE MAY SEEKMORE ACQUISITIONS

Berkshire Hathaway is considering morechemical acquisitions following its purchaseof specialty chemical maker Lubrizol lastSeptember. Lubrizol will have many op-portunities for bolt-on acquisitions in thespecialty chemical field, Berkshire Chair-man Warren E. Buffett wrote in his annualletter to shareholders. He pointed out thatLubrizol has acquired three firms, for a totalof $493 million, since Berkshire took over:thermoplastic polyurethanes maker Mer-quinsa, botanical extracts supplier ActiveOrganics, and grease formulator Chemtool.Buffett also asserted his confidence in Lu-brizol CEO James L. Hambrick, calling hima disciplined buyer and a superb operator.Buffett notes that he is eager to expand

[Hambricks] managerial domain.AHT

GENOMATICA TAKES ITS1,4-BUTANEDIOL TO ASIA

Mitsubishi Chemical and Genomatica areplanning a joint operation in Asia that willproduce 1,4-butanediol (BDO) from sugarusing Genomaticas process technology.Mitsubishi has paid Genomatica $3.5 millionup front while the companies work towardcompleting a definitive agreement. Mitsubishi made an equity investment in Genomat-

SYMRISE EXPANDSFRAGRANCE BUSINESS

Flavor and fragrance maker Symrise hasmade two acquisitions and formed a part-nership. The German company purchasedthe Brazilian business of the fragrance firmBelmay. Symrise says it will next pool all itsBrazilian development activities in a newcenter of expertise in Cotia, Brazil. In theU.S., Symrise acquired Trilogy Fragrances, aNew Jersey-based developer of natural andorganic fragrances. And it formed a partnership with Swedens Indevex Biotech, whichproduces a nutrient complex sold to thehealth-food and weight-loss markets.MM

PLANT EXPLOSION KILLS

AT LEAST 16 IN CHINA

A Feb. 28 explosion at an agrochemicalsand explosives plant near Shijiazhuang, innorthern China, killed at least 16 peopleand injured more than 40. The blast oc-curred at Kaer Chemical. According to Shi-jiazhuang officials, the plant produced am-monium sulfate fertilizer, the rocket fuelguanidine nitrate, and the explosive nitro-guanidine. Both the city of Shijiazhuangand the government of Hebei provinceposted reports about the accident on theirwebsites. The governments say the cause of

the blast is unknown. Officials have vowedto audit safety measures at industrial sitesthroughout the province and crack downon companies that cut corners.JFT

LANXESS INVESTSIN SOUTH AFRICA

Lanxess plans to spend $54 million to builda carbon dioxide concentrator at its New-castle, South Africa, site. The facility will

SOLVAY COMMERCIALIZESNEW ROUTE TO

EPICHLOROHYDRIN

Solvays Thai affiliate has commissioned aplant in Map Ta Phut, Thailand, that makesthe epoxy raw material epichlorohydrin

from vegetable-oil-derived glycerin ratherthan petrochemical-derived propylene. The100,000-metric-ton-per-year facility was built at a cost of $160

million, Solvay says. The Belgian companycontinues to pursue a similar epichloro-hydrin project in Taixing, China.MM

MITSUI, SABIC LINKFOR POLYURETHANES

Saudi Basic Industries Corp. (SABIC) will li-cense from Mitsui Chemicals technology formaking the polyurethane raw materials tolu-ene diisocyanate (TDI) and methylene di-

BUSINESS CONCENTRATES

capture exhaust CO2 from the sites steam

generators and use it to convert sodiummonochromate into the leather-tanningagent sodium dichromate. The concentra-tor will replace CO2 that the company nowbuys from outside suppliers. Lanxess saysthe concentrator, set to open in the secondhalf of 2013, will allow future expansion ofsodium dichromate capacity, now set at70,000 metric tons per year.MSR

Solvays newepichlorohydrinplant inThailand.

SOLVAY

phenyl diisocyanate (MDI). SABIC plans to

build isocyanates facilities in Al Jubail, SaudiArabia, by 2016. The two companies havefurther agreed to consider a strategic alli-ance in polyurethanes. SABIC lacks polyure-thane manufacturing know-how, whereasMitsui faces rising costs and a shrinking mar-ket in Japan. In the future, Mitsui hopes tosupply most of its MDI and TDI needs froma lower cost base in Saudi Arabia. Currentlythe Japanese firm produces TDI in Japan andMDI in Japan and South Korea.JFT

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Petchem Shale CEN March 5