Platts Petrochemicals - Building boom five things keeping us ethylene producers up at night


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Ethylene productionUS

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Platts Petrochemicals - Building boom five things keeping us ethylene producers up at night

  1. 1. Building boom: five things keeping USethylene producers up at nightBy Bernardo Fallas | April 19, 2013 12:01 AM1
  2. 2. • A popular topic of conversation among industry participants at recentpetrochemical gatherings in the US and abroad has been the looming USethylene boom.• More specifically, how real it is and what, if anything, might stop it fromhappening.• Market participants in North America want to know for obvious reasons; it willlikely affect their bottom line. Downstream market participants have the sameperspective.• Their South American counterparts are curious, as this key part to the USpetrochemical renaissance stands to make or break their business,depending on where they stand.• Same for the Europeans. The Asians, too. This comes as no surprise. Thedevelopment of shale gas in the US has injected new life to the petrochemicalsector.• The US stands to solidify superpower status in the world of plasticresins, primarily polyethylene, the most common of plastics. This is becauseif the industry plays its cards right, the country could enjoy a cost advantagesecond only to the Middle East.Market Overview2
  3. 3. • Industry insiders will tell you that this advantage stands to be realized mainlythrough the export of PE and other ethylene derivatives. Hence, the rest ofthe world is eager to see what happens next.• So far, eight companies have announced plans to build steam crackers in theUS by 2017. Most call for world-scale crackers to go with derivatives plants,and all but two would be located in the US Gulf Coast region, within easyaccess to both feedstock and export terminals.• To that end, 2013 is shaping up to be a year of big decisions for many ofthese companies looking to build or otherwise expand ethylene and polymercapacity. Billions of dollars are at stake, and time is of the essence.• With that in mind, we asked multiple sources from the petrochemical andconstruction sectors to rate the biggest challenges or risks facing thesecompanies as they decide whether to proceed with multi-billion dollarinvestments.Market Overview continued3
  4. 4. So what are the top five:4
  5. 5. • COST: This is the first deterrent for companies wanting a piece of theethylene pie. Steam crackers aren’t cheap. We are talking $1-$4 billionprojects, depending on size, capacity and derivatives plants to complementthe main asset. Thick skin and deep pockets are required to make this type ofinvestment. There is a reason why companies including LyondellBasell, amajor, mind you, have opted to grow olefin operations throughexpansions/debottlenecks.Number 5
  6. 6. • TIMING: Some may argue — rather successfully — that this is the all-encompassing, most important factor in making a decision under the currentcircumstances. Build too late, and you might miss the train to the promisedland. This is why 2013 is shaping up to a key year. Shell Chemical, forexample, has a decision to make come June regarding its land purchaseagreement in Monaca, Pennsylvania. Recently, Sasol announced it hadordered critical long-lead items for its proposed steam cracker and derivativesproject in Louisiana. To quote LyondellBasell CEO Jim Gallogly: ―The firstguys done are going to be in the best position.‖ But even an early start won’tguarantee a first-place finish.Number 46
  7. 7. • PERMITTING: With the exception of Shell and the upstart Aither, all otherethylene plant projects are slated for the US Gulf Coast, more specificallyTexas and Louisiana, two states with, shall we say, friendlier attitudes towardthe petrochemical industry. And few in the industry expect permitting at thefederal level to interfere at a time when the economy is growing at a snail’space and job creation is paramount to the ongoing recovery. (One estimate byExxonMobil has its proposed steam cracker and polyethylene plants inBaytown, Texas, providing 10,000 jobs at the peak of construction, plus anadditional 3,800 other jobs in the area. And the impact in regional economicactivity? An increase of $870 million, according to ExxonMobil.) Thosenumbers sound nice and all, but… even ExxonMobil will have to defend itsplans. Just last week, reports surfaced that at least three environmentalgroups plan to challenge the company’s application for a key air permit for itsTexas project. Other companies seeking similar projects could expect similarchallenges in the weeks and months to come. Delays in the permittingprocess could prove costly.Number 37
  8. 8. • CRAFT AVAILABILITY: Major contracting firms including Fluor and Technipagree on something: if all these projects come to be, there simply won’t beenough trained personnel to build these plants. Matthew McSorley, a groupVP at Fluor, recently told Platts that: ―If all these projects go at the same time,we could be looking at 40,000-50,000 skilled resources needed — at peak —to do all this work, just in the US Gulf Coast, and that will be in the 2014-2015timeframe.‖ Importation of craft — meaning, the need to bring foreign workersto do some of the jobs — and outsourcing through processes such asmodularization–in other words, assembling parts elsewhere, such as thePhilippines — will be necessary just to keep up, McSorley and others havesaid. Imagine being the last guy with a project and realizing a) there is nospace in the shop and b) there is a skilled-labor shortage. Again, time is of theessence.Number 28
  9. 9. • OVERBUILDING: US petrochemical industry executives will be the first to tellyou this: this is one thing they are good at doing, which is bad. Simply put, theindustry will have shot itself in the foot if it commits this sin again. They needonly to look at the numbers to realize that this is a very real threat. As thingsstand, ethylene production in the US and Canada could grow by more than 10million mt/year — or 35% of current estimated production — by 2018, if allannounced projects are realized. (Fellow NAFTA member Mexico has anethylene and derivatives project of its own in the works. Etileno XXI inVeracruz state is expected to come online as early as Q2 2015.) Derivativeexpansion announcements haven’t kept pace just yet. But even if they do,there is no way US demand will grow that rapidly to absorb this capacity, soderivate exports will be required to both balanced the domestic market andrealize any feedstock advantage (ethylene is costly to export; value-addedderivatives are the better choice). Build too many crackers/derivatives plantsat or around the same time, and you could end up flooding the market withproduct — in this case ethylene and polyethylene — which could result indepressed prices. At the same time, multiple industry reports forecast USdemand for ethane to surpass available supply as early as 2018 and throughat least 2023, accounting for some ethane rejection. The feedstock advantagecould fizzle.And the No. 1 threat/risk facing ethylene producers:9
  10. 10. • No one expects all announced projects to be realized. The consensus seemsto be that between 3-6 world-scale crackers will see the light of day. But eventhen, foreign companies including SABIC (Saudi Arabia) and Braskem (Brazil)continue to talk about investing in crackers in the US.• Which begs the question: Aren’t they a little late to the party already?• The likely answer appears to be yes. A better option for some of thesecompanies might be to look at the derivative sector, which, as stated earlier, islagging behind in terms of expansions.Conclusions10
  11. 11. See this and other news features on the Platts Blog not keep in touch with all the petrochemical news: Information11