Plastics, Petrochemicals, & Shale Gas: A Decade of (structural) Change
Editor’s note: Robert Bauman is the featured speaker at the Port Bureau’s Commerce Club luncheon on Wednesday, March 7, 2018. Register online at txgulf.org/events/commerce-club/.
January 2008: Industry experts agreed that the US petrochemical industry had peaked. Due to high oil and gas prices, no company would invest in a new ethylene cracker and associated products. Due to the lack of low-cost gas, companies were building terminals to import gas from lower cost countries.
January 2018: The development of shale oil and gas has resulted in a structural change of the North American oil, gas, petrochemical and plastics industries. On the oil side:
- The United States will soon become the largest oil producing country surpassing Russia and Saudi Arabia. Recent production reached 10 million barrels per day for the first time since 1970
- The United States is now exporting oil
The impact on the petrochemical sector is perhaps even more dramatic:
- The American Chemical Council estimates that there are now 317 new chemical projects as of December 2017 due to shale gas development representing approximately $185 billion in capital investments with corresponding benefits in employment and taxes (www.americanchemistry.com),
- Eight new ethylene cracker complexes have started up or are under construction, with a potential for up to six additional ethylene projects. Polyethylene will be the major product with PVC in second place. The new ethylene and polyethylene capacity will result in an increase of about 30 percent within a three-year period.
- Two on-purpose propylene plants have started up (with two additional projects announced in Western Canada).
- Middle East companies are investing in North America, reversing a thirty-year trend of US companies investing in the Middle East. NOVA (owned by Abu Dhabi Investments) recently acquired the Williams ethylene cracker and has announced a joint venture for a new ethylene polyethylene joint venture with Total and has just announced a new ethylene/polyethylene plant in Sarnia, Canada, based on gas from the Marcellus play. Kuwait (KPIC) has announced a joint venture in Alberta, Canada, with Pembina to build an on-purpose propylene/polypropylene plant. SABIC (Saudi Arabia) and ExxonMobil have announced a 1.8 million ton ethylene cracker with associated products in Corpus Christi, Texas.
- The United States is now exporting increasing quantities of natural gas, ethane, ethylene, propane and propylene to Asia, Europe and South America
The driver for these dramatic changes: technology in the form of horizontal drilling and fracturing (fracking) that was initially developed for shale oil and subsequently used for shale gas.The commercialization of shale oil and gas coincided with one of the worst economic downturns in recent history in 2008. Oil and gas prices also collapsed. In 2009, global oil prices started to recover but, due to shale gas developments, US natural gas prices remained low. While methane is the major component of shale gas, the gas also contained large amounts of ethane and propane. Ethane is used to produce ethylene. Propane can be used as a fuel or to produce propylene. Plastics are the main products produced from ethylene and propylene.
In 2014 there was another dramatic drop in oil prices which continued through 2016. US natural gas prices also dropped due to competitive pricing mechanisms but still maintained a spread (differential between oil and gas prices). This can be seen in Figure 1.
The ability to maintain this spread is extremely important. In a study prepared for the American Chemical Council, the economics of an ethane-based (gas) cracker and a naphtha-based (oil) cracker were compared at various oil and gas prices. The study showed that when the oil price was divided by the gas price, ethane-based ethylene products had a competitive advantage against naphtha-based products in the export market when the oil-to-gas ratio was above 7. Prior to the development of shale gas, US exports were marginally competitive, but with the development of shale gas, the competitive advantage was exceptional. This can be seen in Figure 2.
The extreme competitive advantage in 2011-2012 resulted in more than fifteen announced investments in new ethylene crackers along with an additional ten expansions of existing plants based on low-cost ethane. There were also seven new on-purpose propane-to-propylene plants announced based on low-cost propane.
Even with the sharp drop in oil and gas prices at the end of 2014, US ethane-based product exports still had a competitive advantage albeit not as strong as when oil prices were at $100 per barrel. However, due to escalating capital costs, labor shortages and other industry dynamics, some companies postponed or canceled their ethylene cracker and propane-propylene projects. The net result that there were still 7 new US cracker projects totaling 8.5 million tons per year, 10 smaller expansions of existing plants (US/Canada) totaling 3 million tons per year, and two propane-to-propylene projects totaling 1.5 million tons per year. The capital investments for these projects was still formidable – more than $40 billion. This became known as the “first wave” of investments.
While some companies were delaying their projects, other companies, recognizing the long-term competitive advantage of shale gas, announced new cracker projects even before any of the first wave projects were operational. This became known as the “second wave” of investments. For the purpose of this analysis, the “first wave” will be the crackers that start up in the years 2017-2019 regardless of when they were announced and the “second wave” will be the crackers starting up post-2019. Not all of the second wave crackers have approved final investment decisions. The ethylene cracker investments and the products that will be produced are listed in Table 1.
Of the 12.7 million tons per year of ethylene, it is estimated that 7.7 million tons per year (61 percent) will be used to produce polyethylene, 1.6million tons per year (12 percent) will be used to produce PVC, and 3.4 million tons per year (27 percent) will be used to produce other products such as alpha-olefins, elastomers and ethylene glycol. This is shown in Figure 3.
Alpha-olefins are used in the production of polyethylene and some of the ethylene glycol is used to produce polyethylene terephthalate (PET). The net result is that plastics will account for more than 85 percent of ethylene production.
New PVC production will not start up before mid-to-late 2019 and there is no new PET or polystyrene capacity plan. Dow and ExxonMobil started up their polyethylene capacity in the fourth quarter of 2017. The rest of the new capacity will start up in 2018-2019. The estimated annual production from these plants is shown in Figure 4.
The key issue is: where will all of this production go. Currently, the United States is a large net exporter of polyethylene. As such, the domestic demand for the new capacity will be minimal which means most, if not all, of the new capacity will have to be exported.
There are two very different outlooks for this new production:
- The positive outlook is based on the global demand growth that will require three to four million tons per year of polyethylene growth which will absorb the new capacity (US and global) within a reasonably short period
- The negative outlook is that there will be “too much, too soon” making the combined new capacity in North America and the rest of the world result in a longer-term downward pressure on prices and profit margins
With most of the new capacity starting up in 2018, the ability to export production in 2018 and 2019 will determine the profitability of the ethylene/polyethylene business for the near future.
Polyethylene is primarily exported in 25 kg bags. A forty-foot container has about 24 tons of polyethylene. For each million tons per year of polyethylene exported, about 41,000 container-loading will be needed. Roughly, a container makes about four round-trips per year which would mean that about 10,000 new forty-foot containers would be needed per million tons of exports. With almost 8 million tons per year of new polyethylene capacity, assuming an operating rate of 90 percent, about 70,000 new containers would be needed – and they would have to be transported from the plants to the export port. The port of Houston will be the major outlet for the Texas plants but other ports in the Gulf, east coast and west coast will be utilized as well.
While there are significant investments in ethylene and polyethylene in the 2017 to 2019 period, there are now new polypropylene plants currently under construction, and there will not be any substantial new PVC capacity until mid-to-late 2019. On the polypropylene side, one company, Braskem has announced that it will build a new polypropylene plant in La Porte with a target startup of 2020, and Formosa Plastics had announced that it would build an on-purpose propylene and polypropylene plant. According to published information, the project has been delayed until 2020/2021. LyondellBasell announced that it was evaluating a new PDH/polypropylene investment for 2020 and two other US companies reportedly are evaluating new polypropylene capacity. In Alberta, two companies, Inter Pipeline and Pembina/KPIC, are each planning an on-purpose propylene/polypropylene investment with a post-2020 target startup.
Historically, propylene in the United States was produced from refineries and from ethylene (steam) crackers that used naphtha and other liquid-based feedstocks. Prior to the development of shale gas, each source accounted for about fifty percent of propylene production. With the availability of low-cost ethane, many of the liquids-based crackers switched to ethane which essentially eliminated the production of propylene creating a shortage. Propylene supply was constrained and prices/margins increased. Since shale gas contained low-cost propane, and there were a number of commercially available technologies to produce propylene from propane, a number of companies announced that they would build “on-purpose” propylene plants, using propane dehydrogenation (PDH) technology which removes hydrogen from the propane to produce propylene. It is an expensive investment. The capital investment for a 450-750 KTA PDH plant is reportedly between $1.2 and $1.5 billion. There have also been some technical problems with respect to starting up and operating the process.
Currently, polypropylene operating rates are very high. With no new capacity starting up before 2020, the outlook for the business is very positive with respect to profitability. While there is a current excess of propylene, which would put downward pressure on process, the high operating rates and constrained supply would place upward pressure on prices.
Similarly, the PVC business should benefit from the lack of new capacity until mid-to-late 2019.
A final note on the demand side. US plastics demand for 2018 could be very strong due to two factors:
- The hurricanes and west coast fires resulted in a substantial loss of homes, businesses, vehicles, etc. A white paper published by Robert S. Kaplan, CEO and President of the Federal Reserve Bank of Dallas on October 17, 2017 estimated that property damage from Hurricane Harvey would be in the range of $75 – $100 billion. This included an estimated $10 – $12 billion due to vehicle damage. PVC, polypropylene and polystyrene foam applications such as appliances, automotive, carpet, insulation and pipe will be needed to rebuild and replace destroyed property. In addition, on-going disaster relief, particularly in the Caribbean, will require food packaging, water bottles, etc.
- The Trump Administration’s commitment to infrastructure would also benefit PVC and polypropylene.
- Date February 20, 2018
- Tags February 2018