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The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business


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The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

  1. 1. The US shale gas boom, outlook and implications for global petrochemicals To view the recording, please visit: Joseph Chang, Global Editor ICIS Chemical Business August 06, 2013
  2. 2. About ICIS
  3. 3. ICIS Is Part of World’s Largest Information Provider
  4. 4. Consulting Prices, News, Analysis, Consulting Prices NewsAnalysis Test
  5. 5. About our speaker
  6. 6. Joseph Chang Global Editor of ICIS Chemical Business
  7. 7. Agenda • Macro and profit outlook • US shale gas boom and petrochemical feedstocks • Margin analysis • US cracker projects • US and global market implications • Past North American expansion wave 2000-2002 • LNG export threat? • Conclusions
  8. 8. 2013 macro and profit outlook • US economy – slow but steady growth, led by housing, automotive and energy • China growth rate slowing. Government policies geared towards tighter money • Europe flat to down but stabilizing • Q2 profits for US chemical companies solid but volumes flat; modestly positive outlook for 2013 • Bullish outlook on US petrochemical and polymers margins because of low-cost shale gas feedstock
  9. 9. Shale gas boom now visible from space - FT
  10. 10. Main steam cracker feedstocks • Naphtha derived from crude oil ⇒ ethylene, propylene, aromatics, C4s for butadiene (Europe, Asia) • Ethane derived from natural gas ⇒ ethylene only (Middle East, North America) • LPGs (propane, butane) derived from natural gas ⇒ mainly ethylene and propylene Ethane 52% LPG 28% Naphtha 12% Other 8% North America steam cracker feedstock breakdown based on ethylene demand, 2012 Source: ICIS supply and demand database
  11. 11. US ethane prices fall as output rises
  12. 12. US contract ethylene margins hit record highs
  13. 13. US spot ethylene margins hit record
  14. 14. US ethane advantage vs naphtha
  15. 15. US cracker output of co-products (as % of total ethylene output) • The lightening of cracker feedstocks to more gas cracking reduces availability of co-products. Ethane produces almost only ethylene! • The pricing of co-products could shift from by-product pricing towards alternative, on-purpose processes Propylene 15% 18% 21% 24% 27% 30% 2000 2005 2010 2015 2020 SOURCE: ICIS Consulting Butadiene 4% 5% 6% 7% 8% 2000 2005 2010 2015 2020 SOURCE: ICIS Consulting Benzene 4% 5% 6% 7% 8% 9% 2000 2005 2010 2015 2020 SOURCE: ICIS Consulting
  16. 16. Global ethylene cost curve steepens Source: American Chemistry Council
  17. 17. US widens global ethylene cost advantage Source: ICIS
  18. 18. US polyethylene cost advantage Source: ICIS
  19. 19. US chemical prices track crude oil – not natural gas R2 US IPEX, natgas = 4.0% R2 US IPEX, crude oil = 85.1%
  20. 20. New US ethane crackers based on shale gas Company Capacity Location Downstream Status Start-up Sasol 1.5m tonnes Lake Charles, Louisiana LDPE, LLDPE, EO, MEG Title V permit appl complete as of May 8, 2013; FID 2014 2017 OxyChem/ Mexichem 544,000 tonnes Ingleside, Texas EDC, VCM Submitted PSD appl Dec 21, 2012 Feb 2017 ExxonMobil Chemical 1.5m tonnes Baytown, Texas PE PSD draft permit as of Jun 3, 2013 Late 2016 Chevron Phillips Chemical 1.5m tonnes Cedar Bayou, Texas PE PSD permit granted Jan 17, 2013; FEED complete; FID to come 2013; Construction 2014 mid-late 2017 Dow Chemical 1.5m tonnes Freeport, Texas PE. LDPE, EPDM, elastomers, LAO EPC phase; responded to EPA on incomplete PSD permit appl mid-July 2017 Shell World-scale Monaca, Pennsylvania PE, MEG NA 2019-2020* Formosa Plastics 1.2m tonnes Point Comfort, Texas LDPE, MEG Incomplete PSD permit appl as of Apr 9, 2013 2017
  21. 21. Ethylene expansions based on shale gas * Timing uncertain due to June 13, 2013 explosion at site Company Capacity Location Start-up Williams 272,158 tonnes Geismar, Louisiana Q4 2013* INEOS 115,000 tonnes Chocolate Bayou, Texas end 2013 Westlake Chemical 113,399 tonnes Lake Charles, Louisiana 2014 Westlake Chemical 82,000 tonnes Calvert City, Kentucky Q2 2014 LyondellBasell 363,000 tonnes La Porte, Texas mid-2014 LyondellBasell 113,000 tonnes Channelview, Texas 2015 LyondellBasell 363,000 tonnes Corpus Christi, Texas Late 2015 BASF Fina Petrochemicals NA Port Arthur, Texas 2014
  22. 22. Companies considering new crackers in US Company HQ Capacity LyondellBasell Netherlands World-scale Hanwha Chemical South Korea World-scale Axiall US World-scale Indorama Ventures Thailand 1.3m tonnes SABIC Saudi Arabia World-scale Braskem Brazil World-scale PTT Global Chemical Thailand World-scale Aither Chemicals US 272,000 tonnes
  23. 23. US ethylene capacity could expand by 38%! • New crackers: 9.0m tonnes* (7) • Expansions/debottlenecks: 1.4m tonnes (8) • Total: 10.4m tonnes = 38% of US capacity • Current capacity: 27.1m tonnes/year *Assumption of world-scale cracker at 1.25m tonnes/year
  24. 24. 0 1000 2000 3000 4000 5000 6000 7000 2012 2013 2014 2015 2016 2017 2018 2019 AdditionalCapacity,‘000stonnes/yearTiming of announced US ethylene expansions
  25. 25. Oil/gas ratio and US announcements
  26. 26. North America PDH projects (on-purpose propylene from propane feedstock) Company Capacity Location Start-up Enterprise Products 750,000 tonnes Texas Q3 2015 Ascend Performance Materials 1,000,000+ tonnes Alvin, Texas Q4 2015 Dow Chemical 750,000 tonnes Freeport, Texas 2015 Williams 500,000 tonnes Alberta, Canada Q2 2016 Formosa Plastics 658,000 tonnes Point Comfort, Texas 2016 Dow Chemical NA NA 2018 Enterprise Products NA Texas NA Petrologistics NA Houston, Texas NA
  27. 27. Implications of the US shale boom • 7 new ethane crackers and derivative units in the US will solidify the US footprint in the global petrochemical market • Shift to gas-based feedstock leads to structural shortages of propylene (C3) and butadiene (C4). However, to fill the propylene gap, 8 PDH (on-purpose propylene) projects planned to use cheap propane • $72bn in new chemical investments in the US by 2020 already announced – ACC • US chemical exports to jump, especially for PE plastic. US chemical trade surplus could rise to $46bn by 2020 – from $800m in 2012 - ACC • US manufacturing renaissance – re-shoring could add $80- 120bn in economic output – Boston Consulting
  28. 28. Global reaction: Asia Petrochemical Industry Conference (APIC), Taipei, Taiwan – May 2013 • “The shale gas revolution initiated in the US… is now reshaping not only the energy industry, but global economy and geopolitics as well.” This could cause “a great deal of discomfort” to Asia’s petrochemical sector. Yoshimitsu Kobayashi, chairman of the Japanese Petrochemical Industry Association • “The supply of low-priced products that are based on coal and shale gas will become a threat to the existing petrochemical industry and will bring a significant change in its structure.” Han-Hong Ban, chairman of the Korea Petrochemical Industry Association
  29. 29. Global reaction: Middle East • “The feedstock cost advantage of Gulf petrochemical producers used to be somewhat obvious. But changes in the global economy are challenging previously held assumptions. The shale gas boom in North America promises to provide fresh impetus to petrochemical producers there.” Abdulwahab Al-Sadoun, secretary general of the GPCA, Nov 2012 • “The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MMBtu as there’s not enough ethane availability, so cracker operators will have to use more propane than ethane. This cost will be much higher than the US gas price, which is currently at $3.50-4.00/MMBtu but will be reduced to $2 once there is increased production of shale gas.” Jamal Malaikah, president and COO, National Petrochemical Industrial Co (NATPET), Apr 2013
  30. 30. Global reaction: Europe • INEOS deal to import US ethane for Europe crackers (Rafnes, Norway and potentially Grangemouth, UK) by 2015 • Versalis considering importing US ethane for Europe crackers (Brindisi, Italy and Dunkirk, France). • “There are several companies that are already offering ethane at very favourable prices from North America either from the Gulf or the Philadelphia Marcus Hook area. There are some very large operators that are starting to look for long-term contracts” – CEO Daniele Ferrari, Apr 18 2013 • Borealis investigating US ethane imports for cracker in Stenungsund, Sweden
  31. 31. US ethylene expansions in global context US (17%) Others (83%) ~39m tonnes of additional capacity expected globally
  32. 32. Global ethylene outlook
  33. 33. Global implications – changes in behavior Japan: Companies planning to shut 3 naphtha crackers • “Recent changes in the global ethylene market… such as forecasted production increases from shale gas in the United States, has resulted in an urgent need to fundamentally restructure and reform domestic petrochemical business” Mitsubishi Chemical, Feb 2013, statement withdrawing from Keiyo Ethylene JV Comperj petrochemical project in Brazil delayed indefinitely • Braskem/Petrobras project supposed to be the largest ever in Latin America • Originally planned to be naphtha-based and start up in 2012-2013 • Now will be gas-based IF Petrobras can supply at the right price Brazil’s Braskem shifting to gas-based investments • “Competing against a US polyethylene [PE] player is a challenge… Ethylene and PE is where the money is being made in the US, and here we are looking into what we might do. A PE plant and cracker is one alternative.” Fernando Musa, CEO, Braskem Americas, May 2013
  34. 34. Case study The last wave of North America cracker expansions 2000-2002
  35. 35. Last wave of North America crackers 2000-2002 • 3 world-scale crackers – NOVA/Carbide, Formosa, BASF Fina Petrochemicals – plus Dow expansion in Freeport, Texas • Followed major debottlenecks in 1997-1999 and 2 world-scale crackers in late 1997 • From 1997-2002, a 14% increase in US ethylene capacity (with NOVA/Carbide in Canada, over 20%) • Natural gas price spikes in early 2000s • US economic recession 2001-2002 • Resulted in what was called the “worst cycle downturn in history” from 2000-2002
  36. 36. Motivation: The next cycle upturn, predictably in 7 years • Sept 7, 1996, Chemical News & Intelligence • Chem Systems is looking towards a cycle of about seven years - an upturn in the year 2000 and a 'fly-up' and peak in 2002 which could even match that in the late 1980s
  37. 37. The 7-year cycle myth NOVA Chemicals annual report 2000
  38. 38. Motivation: Feedstock advantage • “US Expected to Have Advantage in Petrochemical Market” • Feb 2, 1998, Chemical Market Reporter • Another advantage: feedstock. The Exxon official states, "First, we have it. And second, the natural gas liquids such as ethane and propane allow producers to construct manufacturing plants at much lower investments than the naphtha crackers common in most of the rest of the world.“ • “NGLs expected to dominate N.A. Olefins Feedstock Arena” • Apr 6, 1998, Chemical Market Reporter • A sizable portion of feedstock demand will be met by NGL processed from the new offshore Louisiana fields. Output could rise from 289,000 barrels per day in 1995 to as much as 634,000 barrels by 2005
  39. 39. Louisiana offshore gas boom – 1996, 1997 • From the Louisiana Mid-Continent Oil and Gas Association history timeline: • 1996 — After more than a decade of depressed prices and activity, the oil and gas industry began to see a rebound. New drilling activity in the Gulf of Mexico spurred on by the development of new technology and the overall worldwide demand for oil gave a new push to Louisiana oil and gas production. • 1997 — Record-breaking lease sale in the Gulf of Mexico. Nearly $1 billion exposed as bids by companies seeking to drill in the Gulf of Mexico, proving that the Gulf of Mexico is not a “dead sea.”
  40. 40. Last wave of cracker expansions Company Project Capacity Location Start-up BASF Fina Petrochemicals New cracker 920,000 tonnes Port Arthur, Texas Feb 2002 Formosa New cracker 900,000 tonnes Point Comfort, Texas Jun 2001 Dow Chemical Expansion 318,000 tonnes Freeport, Texas Q1 2001 Union Carbide/NOVA New cracker 1.3m tonnes Joffre, Alberta, Canada Oct 2000 Mobil Expansion 272,000 tonnes Beaumont, Texas Q2 1999 Union Carbide Expansion 318,000 tonnes Taft, Louisiana Q4 1998 Exxon New cracker 680,000 tonnes Baytown, Texas Q4 1997 Westlake New cracker 816,000 tonnes Lake Charles, Louisiana Q4 1997 Chevron Chemical Expansion 318,000 tonnes Port Arthur, Texas Q3 1997
  41. 41. Olefins ‘deep depression’ • Worst of all worlds – overcapacity, surging feedstock costs, economic downturn • “Olefins business hits deep depression” • Aug 6, 2001, Chemical Market Reporter • The massive increase in domestic ethylene capacity comes during one of the roughest years for the olefins industry. Last winter, the price of natural gas, traditionally around $2/MMBtu, skyrocketed to an all-time high of $9 to $10/MMBtu, crippling margins and exports. Natural gas prices have retreated since February, but they remain high in historical terms. In addition, the US economy has been on a downward tilt all year.
  42. 42. 0 5 10 15 20 25 30 35 2013-2017 1997-2002 1989-1992 Planned US capacity expansion vs past cycles Ethylene capacity, % increase Note: 1997-2002 excludes NOVA’s cracker in Joffre, Alberta, Canada
  43. 43. The US LNG export threat?
  44. 44. Gearing up for US LNG exports • Sabine Pass LNG export terminal in Louisiana being built by Cheniere Energy Partners • 6 trains, each with 4.5m tonnes/year of liquefaction capacity for total of 27m tonnes/year • Scheduled to start deliveries in late 2015 through 2018 • 6 long-term supply contracts signed – UK, France, Spain, India, South Korea (non-FTA approval May 2011) • Freeport LNG gets approval for non-FTA exports • Conditional approval in May 2013 to export 9m tonnes/year
  45. 45. Chemical CEO comments against LNG • “Unfortunately, policy makers have been given a flawed report that overlooks vital dynamics, including a manufacturing renaissance that is already underway and much needed by this country.” – Dow CEO Andrew Liveris • “We think it very short-sighted and bad public policy to allow our nation’s natural gas advantage to be stripped and sent overseas to build a new manufacturing base that would otherwise be built here in the US.” – Huntsman CEO Peter Huntsman
  46. 46. US LNG export impact • Argument: Higher demand from LNG exports could raise overall natural gas prices and increase volatility. And higher gas prices could hurt energy intensive manufacturing sectors such as auto, steel, paper – all are customers of the chemical industry • KEY to petrochemicals: What about impact on NGLs? • LNG is typically dry gas (methane) for fuel with NGLs (ethane, propane) stripped out • More natgas production for LNG exports COULD result in more supplies of NGLs (ethane and propane) • BUT some NGLs will be exported – ex: US ethane to Europe • Can NGL prices decouple from natgas prices? They have in 2013
  47. 47. But, US exports of ethane, propane will also rise • INEOS signs deal to import US ethane to its cracker in Rafnes, Norway by 2015. Considering US ethane for cracker in Grangemouth, UK • Versalis studying US ethane imports for crackers in Brindisi, Italy, and Dunkirk, France • Borealis investigating US ethane imports for cracker in Stenungsund, Sweden • China planning to build 17 PDH (on-purpose propylene) projects. This will require 6X current propane imports. Companies already signing deals with US natural gas companies
  48. 48. US natural gas – not just for crackers! • Utilities – all new electric power plants to be gas-fired. No one is going to build coal or nuclear in the near future • Methanol plants – Methanex moving 2 plants from Chile to Louisiana; Celanese/Mitsui new 1.3m tonne/year plant in Texas • Fertilizer plants – CF Industries $3.8bn new ammonia units; OCI $1.4bn new unit; Mosaic and Agrium to come. 8 plants planned • Gas-to-liquids (GTL) – Sasol planning massive project • Transportation – ex: municipal bus fleets, garbage trucks • Demand for US ethane and propane for export to Europe, Asia
  49. 49. Conclusions • US ethylene and derivatives capacity to increase substantially through 2020, boosting global footprint. US exports of plastics to jump • US producers to enjoy cost advantage and relatively high margins until about 2017 when the flood of capacity comes on • Extremely low US natgas prices are not likely to last in the long run because of increasing demand draws on gas. Even NGLs will be exported • Multiple factors have to come in line for US market to absorb a 33-38% jump in ethylene capacity – growing global economies, low NGL prices, high oil prices, capacity closures in other regions or lack of expansions • Major US overcapacity scenario for 2017-2020 = lower prices for ethylene and derivatives
  50. 50. Thank you! Joseph Chang, Global Editor, ICIS Chemical Business 212-791-4224