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Uncertainty clouds China’s dream of making ethylene from ethane

Cheap feedstock from the US tempts chemical makers, but several hurdles stand in the way

by Hepeng Jia
February 16, 2020 | A version of this story appeared in Volume 98, Issue 7

A photo of a ship being loaded at Enterprise Products Partners' terminal near Houston.
Credit: American Shipping Bureau
Enterprise Products Partners' terminal near Houston is the largest US exporter of ethane.

With the trade war between the US and China seemingly in a truce since October, Chinese chemical executives are again thinking enthusiastically about using American ethane to produce ethylene. In the Chinese stock market, shares of Zhejiang Satellite Petrochemical, the forerunner of the country’s ethane-to-ethylene ambitions, rose steadily to a 3-month high on Jan. 22, after which alarm over the novel coronaviruspushed down most stocks in China.

In August 2019, Satellite received approval from Jiangsu Province’s government for its plan to build a $4 billion ethane-based petrochemical plant in Lianyungang. And although the company has not obtained approval from the National Development and Reform Commission (NDRC), an economic planning agency in China whose approval is often a must for megaprojects, several investment banks have recommended its stock, using catchy phrases like “C3 leader cracks C2 industry chain” in their analysis reports.

Satellite is China’s largest producer of acrylic acid, a three-carbon chemical it makes from naphtha and propane for applications such as paints, adhesives, and superabsorbent polymers. Acrylic acid is a major commodity, but the two-carbon molecule ethylene is the world’s highest-volume petrochemical.

China’s ethylene is produced primarily from naphtha, a long-chain hydrocarbon obtained from refining petroleum. But ethane has great appeal as an ethylene raw material. “The reaction path to use ethane to produce ethylene is much shorter, the yield higher, and the production cost lower,” says Feng Ruijiang, a petrochemical engineering professor at Liaoning Shihua University.

The ethylene plant that Satellite is constructing in Lianyungang will have 1.3 million metric tons (t) per year of capacity, and the firm envisions a second phase that will double output. In August, Singapore’s SP Chemicals started up a 650,000 t ethylene plant in Taixing in Jiangsu Province that partly processes US ethane.

Satellite and SP are not the only players seeking to use low-cost US ethane to make ethylene. Thanks to the booming shale gas industry, US exports of ethane have increased from nearly nothing in 2013 to 5.3 million t in 2018, almost five times the 2018 exports of Norway, the only other country to export ethane. While the rest of the ethane extracted in the US is mostly consumed domestically to make ethylene, a large amount is left in natural gas, which is used as fuel that sells for a lower price.

Gas expansion
US ethane exports have been rising, but little is going to China.

Source: US Energy Information Administration.
a Through November.

A bar chart and pie chart of ethane export information.

The lure of this untapped ethane has prompted several Chinese petrochemical players to advance ethane-to-ethylene projects. However, the unstable China-US relationship, limited capacity to export ethane from the US, and hesitation by Chinese policy makers to rely too much on the US all threaten to dampen their ambitions.

China has the world’s highest ethylene demand as well as the highest ethylene price because it must import most of the raw material needed to produce the crucial chemical. The consulting firm Wood Mackenzie projected in December that by 2024, China’s ethylene output will reach 52 million t per year, more than 20% of the world’s total.

“This amount has not taken into consideration the possibly added capacity of ethylene from ethane,” says Kelly Cui, a senior Beijing-based analyst with Wood Mackenzie.

The earliest ethane-to-ethylene announcement came from Nanshan Group, based in the eastern Chinese province of Shandong. In November 2017, during President Donald J. Trump’s visit to China, Nanshan and American Ethane Company (AEC) signed a 20-year ethane export deal valued at $20 billion. AEC had stated earlier plans to build an ethane export terminal near Houston.

So far, Houston-based AEC, which is backed by Russian billionaires, has been the most prominent US player to pursue the Chinese market. In addition to Nanshan, it signed deals with Guanghui Group and Ganergy Heavy Industry Group to supply each with 2.6 million t of ethane annually.

AEC’s export terminal is still on the drawing board, however. Today, a terminal operated by the energy service firm Enterprise Products Partners is the main US exporter of ethane. Opened in 2016 in Morgan’s Point near Houston, the terminal has the capacity to export roughly 5 million t of ethane per year. Energy Transfer also exports ethane out of Marcus Hook, Pennsylvania.

China’s ethane-to-ethylene rush is driven by more than just profits. “State-owned conglomerates such as Sinopec and CNPC [China National Petroleum Corporation] control naphtha-based ethylene production due to their monopoly on petroleum extraction and imports,” says Ye Yingmin, head of the Beijing-based consulting firm Chem1. “Some leading mid- and lower-stream chemical players, mostly privately owned, are eager to shake off the control by exploring refineries based on alternative feedstocks such as ethane.”

Investors need to be cautious in advancing their ethylene projects.
Kelly Cui, senior analyst, Wood Mackenzie

Despite the eagerness in China for ethane-to-ethylene projects, risks remain for the ambitious undertaking. Li Yujing, a senior engineer with the China Petroleum and Chemical Industry Federation, warned in an article published in China Petroleum News in early 2018 that the opening of several ethane-based ethylene facilities being built in the US could soak up the current ethane oversupply.

Because of limited shipment capacity, by 2021 the US will be able to export no more than 7.3 million t of ethane per year, Li projected. Long-term commitments to supply Canada, Europe, and other East Asian countries could consume almost all this, leaving only a tiny portion for China, he warned.

Satellite didn’t respond to requests for comment. But after Li’s article was published, both Satellite and AEC announced big orders for very large ethane carriers (VLECs), ships that are needed to move the gas from the US to China. In addition, Satellite announced a joint venture with Energy Transfer to build an ethane export terminal in Houston. Enterprise also plans to expand a pipeline to move ethane from Appalachia to its processing plants and storage terminals in Texas.

Yet ethane supply isn’t the only risk faced by ethane-to-ethylene developers, according to Li’s article. Unlike naphtha-based crackers, with their wide variety of potential products, ethane-based crackers make ethylene almost exclusively. To be profitable, they depend on good markets for ethylene derivatives such as polyethylene and ethylene glycol.

A bigger problem than the supply of ethane, according to Li, is that the ethane comes almost solely from the US. Weeks after Li’s article, the trade war launched by President Trump seemed to confirm the worry. In its retaliatory effort, China imposed tariffs of 5% on US ethane, not enough to make ethane-to-ethylene operations unprofitable. Still, the heavy reliance on US exports has raised alarm bells among the country’s policy makers.

Since 2018, petrochemical companies have been lobbying the NDRC for approval to build their ethane-to-ethylene projects. Still, other than SP Chemicals, none of them has received the final permission from the agency, a review of its website shows. Sources anticipate that Satellite will eventually obtain a permit because the NDRC may want to use it to test the concept of ethane-based ethylene production.

Despite the trade war and policy makers’ caution, companies are forging ahead to break the ethane shipment bottleneck. Satellite’s VLEC order in March 2019 was for six ships from Samsung and Hyundai. With a capacity of 98,000 m3each, the vessels were called the world’s largest, but the record was soon broken by AEC, which in September 2019 announced plans to order 17 VLECs of 150,000 m3 apiece.

AEC says its terminal will have the capacity to export 7.2 million t of ethane per year. Yet the company has not begun construction and has not identified a date for completion of the terminal. AEC did not respond to C&EN’s requests for comment.

Meanwhile, state-owned petrochemical giants in China are taking baby steps toward ethane cracking. On Dec. 25, CNPC announced that a 370 km ethane pipline linking its Kelameili natural gas field to its chemical complex in Dushanzi, both in western China’s Xinjiang autonomous territory, had been put into operation and had delivered 500,000 m3 of ethane.

But as a whole, Wood Mackenzie’s Cui says, China’s state-owned firms are conservative about developing ethane-based chemicals, partly because of limited ethane output from the country’s oil and gas fields.

The conservativeness offers a chance of success for new players like Satellite and Nanshan, which also receive massive support from local governments. These governments face the double challenge of promoting the economy and preserving the environment by closing older, more polluting chemical plants.

“Ethane-to-ethylene facilities, with huge investment, bigger profit margins, and cleaner production processes, are ideal for overcoming their dilemmas,” Chem1’s Ye says. He suggests that local governments be staunch allies of the ethane-to-ethylene players in lobbying the central government for approvals.

Given the softening of tensions between China and the US, top Chinese policy makers should also be more favorable toward ethane-to-ethylene projects, Wood Mackenzie’s Cui argues. But she adds that ethylene prices may be experiencing a downturn because of capacity additions and a slowing Chinese economy. “Investors need to be cautious in advancing their ethylene projects,” she says.

Hepeng Jia is a freelance writer who reports on China.


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