Will Europe's petrochemical industry follow
the fate of oil refining?
Nandita Lal, January 2014

© 2013 Platts, McGraw Hil...
7 to 10 new world scale steam crackers
planned
• The fate of European petrochemicals is likely to follow that of the oil
r...
Stay connected to the markets

3
Doom and gloom in the European refining
sector
• Those price dynamics are unlikely to change for the foreseeable
future an...
Excess capacity
• According to the International Energy Agency, in the last five years
alone, 15 refineries in Europe repr...
High closure risk category
•

That figure is likely to grow and the writing is on the wall for more high-cost plants.

•

...
Make sense of the issues and opportunities
created by shale gas in North America

7
See the light
•

For plants that stay open, driving down variable costs will be key.

•

That involves either importing mo...
Buying time
•

But while few participants disagree with the notion many more plants will need to close, the timeline is un...
© 2013 Platts, McGraw Hill Financial. All rights reserved.

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Will europe's petrochemical industry follow the fate of oil refining jan 2014

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The fate of European petrochemicals is likely to follow that of the oil refining industry -- years of plant closures and shutdowns triggered by the resurgence of the US energy and manufacturing sector driven by the supplies shale oil and gas.

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Will europe's petrochemical industry follow the fate of oil refining jan 2014

  1. 1. Will Europe's petrochemical industry follow the fate of oil refining? Nandita Lal, January 2014 © 2013 Platts, McGraw Hill Financial. All rights reserved.
  2. 2. 7 to 10 new world scale steam crackers planned • The fate of European petrochemicals is likely to follow that of the oil refining industry -- years of plant closures and shutdowns triggered by the resurgence of the US energy and manufacturing sector driven by the supplies shale oil and gas. • According to Platts analysis, 7 to 10 new world scale steam crackers are due to come online in the US over the next seven years, a marked turnaround for an industry that was in decline just a decade ago. • But that was before the shale gas boom hammered prices of ethane, the main petrochemical feedstock in the US, down to 25 cents/gal ($185.50/mt) compared to 77 cents/gal in 2011. • Over the same time frame, the price of European petrochemical feedstocks, typically naphtha, was relatively stable at $900-930/mt CIF NWE. • 2
  3. 3. Stay connected to the markets 3
  4. 4. Doom and gloom in the European refining sector • Those price dynamics are unlikely to change for the foreseeable future and it spells bad news for Europe's petrochemical plants, which should look to the refining sector for a taste of things to come, analysts say. • "Refining was the first derivative industry to be transformed by the US shale revolution, as US refiners just had to crank up their utilization rates. • Petrochemicals are the next on the list. It will take time to build the capacity to capitalize on the cheap inputs, but this is underway and later this decade the doom and gloom in the European refining sector will spread to petchems and beyond," Seth Kleinman, head of energy research at Citi, said. • 4
  5. 5. Excess capacity • According to the International Energy Agency, in the last five years alone, 15 refineries in Europe representing 1.7 million b/d of capacity, or 8%, have closed in the wake of the shale gas bonanza. • The shale gas pinch in the European industry has already been felt to a certain extent. According to figures from the Association of Petrochemicals Producers in Europe (APPE), in the period 2008-12, crackers representing about 1 million mt/year of capacity, or 3.7% have closed in Western Europe. • 2013 saw the trend continue. Versalis shut one of its two lines in Priolo, Italy with a capacity of 300,000 mt/year. And Ineos is set to shut its G4 340,000 mt/year cracker in Grangemouth, Scotland in 2015 -- the cracker is one of two at the site. Total is set to shut its 330,000 mt/year Carling cracker in France in 2013. 5
  6. 6. High closure risk category • That figure is likely to grow and the writing is on the wall for more high-cost plants. • "There exists a common industry belief that there is still 10% of steam cracker overcapacity in Europe that needs to be addressed. There are still around five or six steam cracker units which fall into a high closure risk category," according to Platts senior analyst Hetain Mistry. • Struggling with thin margins, petrochemical plant operators have started to drive down their fixed costs, starting with wages. • In October, employees at Ineos' Grangemouth plant were forced to take unilateral changes to pay conditions or face losing their jobs. • And in mid-December, attempts by Total's French refinery employees to force higher wages failed with workers trudging back to work within two weeks. 6
  7. 7. Make sense of the issues and opportunities created by shale gas in North America 7
  8. 8. See the light • For plants that stay open, driving down variable costs will be key. • That involves either importing molecules from the US or investing in technology that will allow them to use more of the lighter feedstocks available in Europe, such as ethane, propane and butane. • Repsol in Tarragona, Spain in spring 2013 used its turnaround time to increase the 700,000 mt/year cracker's ability to crack propane while other operators have said they were cracking "as much as 60% propane" during summer, far higher than previous years. • Cracker operators switch to using propane when prices fall to 10% below naphtha -- a price dynamic evident in the European summer when demand for C3 for heating slumps. • According to Platts data, during April to September propane was at a 12.5% discount to naphtha in 2013, compared to 9% in the same time frame the previous year. • Meanwhile, both Borealis and Ineos have said they plan on bringing in cheap US ethane to continue operations. • Borealis said in May 2013 that it is exploring options for importing ethane from the US for its two European crackers in Finland and Sweden, while Ineos has said it will build facilities to import and store gas at a terminal in Rafnes, Norway by 2014 and in Grangemouth by 2015. • "There have been a lot of talk that polyethylene would flow into Europe from the US. It doesn't have to be in form of PE, molecules can come as ethane or ethylene," Borealis said. • "Ineos is close to completing a tank and terminal at its Rafnes plant in Norway which will mean it will be the first place in Europe to import shale gases from the US and receive the competitive advantage of shale economics," Ineos said. 8
  9. 9. Buying time • But while few participants disagree with the notion many more plants will need to close, the timeline is uncertain. • Rising demand for plastics, particularly polyethylene, from a swelling middle class in Latin America may soak up some of the expected increase in US exports, but an analysis by Platts published in November predicts some will still head to Europe. • But unlike the shale oil boom, which was felt by refining margins relatively quickly, it may take a while longer for the true impact to be felt. • While crude can be transported on rail cars and fed into the refining process relatively easily, gas is more difficult to transport, store and use as a feedstock in petrochemical plants. • "Shale oil is easy for US refineries to assimilate into the crude oil feed and delivery from the source can be handled by rail in absence of pipelines. Shale gas as a petrochemical feedstock is another tale," Joe Pilaro, head of US consultancy Brae Partners, said. • In the meantime, Europe's chemical industry is hoping for a shale gas revolution of its own, or at least a free-trade agreement that will allow it to cash in on the US'. • Later this year the European Commission will publish a framework on how best to extract some of the estimated 16 Tcm of shale gas held in sub strata in the UK, Poland, Germany, France, Denmark, Sweden, Austria, Hungary and Romania. • Warning of job losses, the EU's petchem industry lobby group Cefic has urged the EU not to hinder its development. • But exploiting Europe's shale reserves and any new trade deal will come too late for some petrochemical plants, with the main lobby group for fracking -- Shale Gas Europe -- estimating it could take up to nine years to develop a commercial well. All the while the US is expanding. 9 • "Time and money is all it takes to fully revive the US petrochemical industry this time around," Brae Partners' Pilaro said.
  10. 10. © 2013 Platts, McGraw Hill Financial. All rights reserved. 10

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