The global economy is breaking free of the fetters of uncertainty that have been holding back a robust recovery, and growing consumer demand promises to keep petrochemical plants humming. In the U.S., for the first time in a decade, talk has turned to investment as feedstocks derived from natural gas shale bring down costs.
These were the messages delivered at the World Petrochemical Conference put on by IHS Chemical late last month in downtown Houston. The annual conference was held for the first time under the banner of the economics and energy consulting firm IHS after it acquired the previous host, Chemical Market Associates Inc. Association with a larger firm seems only to have accelerated the conference’s growth in recent years. Nearly 1,300 people attended, an increase of about 200 from 2011.
The larger audience was treated to higher profile presenters. Nariman Behravesh, IHS chief economist and a familiar talking head on cable news channels, delivered the economic forecast. His prognosis for the economy was upbeat. “The tone is better than it has been in a while, especially in the U.S.,” he said.
Behravesh addressed some of the worries that have made financial markets jittery. The risk of a fiscal meltdown in Europe has abated from the crisis point reached at the end of last year, he said. The Chinese government has cooled China’s overheating economy by ratchetting up interest rates, reducing the odds of a painful “hard landing” to 15 to 20%.
Additionally, Behravesh takes unflagging consumer strength as a sign that high gasoline prices aren’t likely to weigh on the U.S. economy. He noted, however, that the conflict in the Middle East over Iran’s alleged nuclear ambitions could cause a spike in oil prices and an “oil shock” to the economy.
David Hobbs, chief energy strategist at IHS, focused on the ability of market forces to unlock new sources of oil and natural gas. “One of the best solutions for high oil prices is high oil prices,” he quipped. Hobbs pointed to how high natural gas prices over the past decade led to huge advances in hydraulic fracturing to extract gas from difficult-to-tap shale formations.
Similarly, Hobbs expects high oil prices to induce more U.S. production of oil. He sees a scenario where the country produces an additional 3.5 million barrels of oil and 35 billion cu ft of natural gas per day. Daily production now is about 8.5 million bbl of oil and 80 billion cu ft of natural gas.
Mark Eramo, vice president of research and analysis at IHS Chemical, delivered more good news for petrochemical producers in his talk about global ethylene markets. “We are at the very beginning of an up cycle that will continue,” he said.
From 2008 through 2010, the global petrochemical industry suffered an onslaught of new capacity just as the economic slowdown hit. The capacity surplus hit a peak of 16 million metric tons, about 14% of demand. However, new capacity installations abated in 2011 while demand recovered. Eramo expects global ethylene demand to increase 4.3% annually, hitting 157 million metric tons by 2016. Meanwhile, capacity will rise only 3.4% annually over that period. “We see continued tightening in the ethylene market going forward,” he said.
The fortunes of the U.S. industry look particularly bright, Eramo said. For the past decade, petrochemical companies have been shutting capacity in North America while opting to invest in the Middle East and Asia. This trend has reversed. “North America is back on the map,” he said.
Indeed, Chevron Phillips Chemical, Dow Chemical, Formosa Plastics, Sasol, and Shell Chemicals have unveiled multi-billion-dollar ethylene cracker projects in the U.S. The first of their facilities is set to be completed in 2016. A host of other firms have announced major expansions at existing units that will come onstream even sooner.
Several executives from these companies were on hand for a panel discussion about the impact of shale gas on the U.S. petrochemical industry. Despite all the excitement over shale, the executives agreed, U.S. petrochemical projects will have to overcome some important hurdles.
Shell is studying construction of an ethylene cracker and derivative polyethylene and ethylene oxide units in Monaca, Pa., near Pittsburgh. Ben van Beurden, the company’s executive vice president, said all managers planning new projects must ensure they have markets and feedstocks lined up. “Not all the crackers that have been announced may be built, and certainly not in the recorded time frame,” he said.
One issue, van Beurden noted, is demand. He said the North American market for ethylene derivatives grows by about 750,000 metric tons every year, which means the region needs one new cracker every two years. Because the announced capacity is scheduled to come onstream faster than this, companies will need to cultivate export markets to soak up the excess supply, he said.
The Shell executive also noted that it isn’t a given that supplies of ethane, the natural-gas-derived feedstock required by the new crackers, will be enough to support every project.
Shell’s Monaca project addresses both demand and supply, he argued. Half of the country’s people—and the polyethylene they consume—are located within a 500-mile radius of the proposed plant. Moreover, Shell’s 2010 purchase of the Pennsylvania oil and gas exploration firm East Resources will provide relatively secure access to ethane, van Beurden said. “It is rare that you have both feedstocks and the market in the same vicinity,” he said.
James L. Gallogly, chief executive officer of LyondellBasell Industries, contrasted the current shale gas phenomenon with the boom in petrochemical building in the Middle East over the past decade. The U.S. opportunity, he said, is not quite as good.
In the Middle East, he said, large quantities of feedstocks were guaranteed by regional governments at good prices. The feedstocks came from massive geological structures that can take as long as 30 years to deplete.
Chemical makers will have less feedstock security in the U.S. because they will be supplied mostly by small natural gas developers and logistics companies rather than by large national oil companies. Prices will be set by the market, not the government. Moreover, compared with Middle Eastern oil and gas wells, U.S. shale gas wells have shorter productive lives—five to 10 years—and U.S. drilling activity is more sensitive to natural gas prices.
Although U.S. petrochemical producers have announced as much as 20 billion lb of new annual ethylene capacity, Gallogly said, that much construction isn’t likely to happen anytime soon. Companies will likely have to reconsider their plans and may have to partner with each other to move projects forward, he cautioned.
Instead of building a new cracker of its own, Gallogly said, LyondellBasell has opted for large expansions at two existing facilities in Texas. Together, these projects amount to half a cracker’s worth of capacity. Such projects, he noted, allow the company to produce additional ethylene ahead of the crush of new capacity at a relatively low cost. He also said that LyondellBasell is open to hosting a “condo” cracker built by two or more partners.
James R. Fitterling, president of energy and corporate development at Dow Chemical, cautioned that the advantages afforded by shale natural gas won’t last if industry and government bungle the opportunity. “We can’t allow unnecessary constraints on supply through outright bans or excessive restrictions on hydraulic fracturing,” he said. “Hydraulic fracturing, when done correctly, does not pose a significant risk to the environment.”
Fitterling also warned against squandering the shale gas opportunity through overconsumption. For instance, he is against liquefied natural gas exports and would rather see the U.S. export the gas in the value-added form of chemicals such as polyethylene.
Opportunities for success, Fitterling noted, can turn into pitfalls for failure. “The petrochemical industry is on the precipice of either the biggest boom or the biggest bust in modern history,” he said. “This will either be the golden age of low-cost energy security and feedstocks that power a wellspring of economic growth or a cautionary tale about shortsighted policies and bad decisions.”