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The US shale gas boom, outlook and implications for global petrochemicals To view the recording, please visit:
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Joseph Chang, Global Editor
ICIS Chemical Business
August 06, 2013
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About our speaker
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Joseph Chang
Global Editor of ICIS Chemical Business
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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
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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
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Shale gas boom now visible from space - FT
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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
Ethane52%
LPG28%
Naphtha12%
Other8%
North America steam cracker feedstock breakdown based on ethylene demand, 2012
Source: ICIS supply and demand database
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US ethane prices fall as output rises
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US contract ethylene margins hit record highs
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US spot ethylene margins hit record
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US ethane advantage vs naphtha
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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
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Global ethylene cost curve steepens
Source: American Chemistry Council
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US widens global ethylene cost advantage
Source: ICIS
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US polyethylene cost advantage
Source: ICIS
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US chemical prices track crude oil – not natural gas
R2 US IPEX, natgas = 4.0% R2 US IPEX, crude oil = 85.1%
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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
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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
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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
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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
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0
1000
2000
3000
4000
5000
6000
7000
2012 2013 2014 2015 2016 2017 2018 2019
Addi
tiona
l Cap
acity
, ‘00
0s to
nnes
/yea
r Timing of announced US ethylene expansions
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Oil/gas ratio and US announcements
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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
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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
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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
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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
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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
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US ethylene expansions in global context
US (17%)
Others (83%)
~39m tonnes of additional capacity expected globally
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Global ethylene outlook
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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
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Case study The last wave of North America cracker expansions
2000-2002
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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
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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
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The 7-year cycle myth NOVA Chemicals annual report 2000
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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
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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.”
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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
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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.
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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
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The US LNG export threat?
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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
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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
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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
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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
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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
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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
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Thank you!
Joseph Chang, Global Editor, ICIS Chemical Business
212-791-4224