HOUSTON/EDINBURGH/SINGAPORE, 20th March 2014 – Ethylene production from export-oriented steam crackers associated with advantaged gas-based feedstocks is set to alter the global ethylene markets, according to analysis from energy research firm Wood Mackenzie's new Chemical Markets Service.
"The key competitive differentiator for ethylene producers is access to low cost feedstocks or proximity to local demand. Through 2030, advantaged cracker investments will continue in the Middle East, sharply increase in North America (especially on the Gulf Coast which now has at least ten ethane-based crackers in operation [supplied by producers in Texas, Louisiana and Oklahoma], Canada's largest petrochemical complex in Sarnia, Ontario [with two ethane crackers operated by Imperial Chemicals and NOVA Chemicals which receive the bulk of their ethane and propane supplies from Ohio, West Virginia and Pennsylvania], and ethane crackers in Grangemouth, Scotland and Norway operated by INEOS [which also get their ethane/propane supplies from the Tri-State area]), and then later develop in Russia and The Caspian," says Stephen Zinger, Head of Americas Chemical Research at Wood Mackenzie.
Ethylene producing assets that have access to low cost gas feedstocks, such as the ones in North America, will lead the competition with total ethylene and derivative investment set to reach US$40-50 billion in the next decade. Over the same time period, global ethylene demand will grow by 3.3% per year, on average, according to Wood Mackenzie.
While Gulf Coast and Ontario petrochemical infrastructure (upstream, midstream and downstream) is well developed, the Ohio Valley's infrastructure is deficient only in the downstream area. Ohio Valley upstream (production) is, arguably, oversupplied, while its midstream (fractionation plus pipeline transportation) is already serving the needs of export markets to Canada and Europe quite well. As for downstream (polymer production and marketing) in the Ohio Valley, that remains largely undeveloped in spite of favorable demographics (geography and population concentrations: no blank spots such as west of Texas and north of Oklahoma; north of Ontario, for example). The craft and engineering skills relevant to polymers are not as abundant and readily available in the Ohio Valley as they are in the Gulf Coast, Ontario, Grangemouth and Norway.
In turn, China will continue to have the fastest demand growth for ethylene and ethylene derivatives and will satisfy this demand through increases both in domestic production capacity (coal-to-olefins and naphtha cracking) and imports from producers around the world with advantaged feedstocks.
Wood Mackenzie’s new long-term ethylene analysis categorizes the transformation of the global ethylene market into three types of market positions; locations supportive of new export-oriented ethylene investments based on advantaged feedstocks (North America (note that the Ohio Valley is the only North American ethane/propane producer that exports), Middle East, and Russia and The Caspian); locations supportive of new ethylene investments which have higher costs due to reliance on naphtha feedstocks but with very high levels of local demand growth (China, India and Southeast Asia); and locations of existing aging assets with a high cost basis that will be subject to rationalization, consolidation, and specialization (Europe, Japan, Korea, and Taiwan).
"Producers and consumers involved in the global ethylene industry will have to employ vastly different strategies depending on their location in order to be successful," explains Zinger.
North American ethylene investment renaissance
In the next 10 years, Wood Mackenzie estimates total investment in ethylene and derivatives is expected to reach a record $40-50 billion in North America. In addition, ethane feedstocks to make ethylene have increased from under half of total feedstock for ethylene in 2005 to about 65% of total feedstock in 2013, and are expected to continue to rise to over 80% of total feedstock consumption.
Thus, it puzzles me why the Ohio Valley remains on the sidelines in the sector of downstream polymer industries.
"The development of shale gas resources in North America has triggered an ethylene investment renaissance, with the abundance of competitively priced natural gas liquid feedstocks, particularly ethane," adds Zinger.
Wood Mackenzie says domestic demand in North America for ethylene derivatives will grow more slowly than the planned ethylene capacity increases, which will lead to derivative exports more than tripling over the next 15 years.
Asia, the most diverse ethylene market
China will continue to add capacity aggressively, with a significant portion through coal-to-olefins (CTO) plants, resulting in a rise in self-sufficiency. Although there have been many announced CTO projects, water supply constraints and overall environmental impact will slow the rate of capacity build-up longer term.
"In the next two decades, China's shift to an increasingly domestic consumer demand driven economy will alter ethylene and derivative demand patterns, but expectations are that growth rates will remain strong," explains Vincent Sinclair, Head of Asia Pacific Chemical Research at Wood Mackenzie.
Over the next decade, the more mature markets of Japan, South Korea and Taiwan will go through a period of consolidation, cost cutting and product value creation to increase their competitiveness, as their export market share to China is gradually replaced by low cost material from the Middle East, North America, Russia and The Caspian.
“Emerging economies with growing populations including India, Indonesia, Philippines and Vietnam have the potential to become the next rapid growth demand centres in Asia. However, under-developed infrastructure, weak support from local governments and/or lack of abundant feedstock resources will continue to slow the pace of ethylene investments in these countries,” says Sinclair.
Middle East expected to almost double existing capacity
Advantaged ethane-based ethylene investments drove massive capacity growth in the Middle East throughout the 1990s and 2000s, culminating with significant new capacity additions in 2008-2010. The Middle East is again expected to almost double its existing capacity by 2030 and remain the largest ethylene derivative exporting region globally. Forced to change feedstocks by an impending shortage in ethane supplies, projects in Saudi Arabia, Qatar and eventually Oman will adjust feedstock mix to diversify and include LPGs and naphtha.
"This region has been very dependent on exports of ethylene and ethylene derivatives - a trend that will continue throughout the forecast period," explains Alex Lidback, Head of Chemical Research EMEA (Europe, Middle East and Africa) at Wood Mackenzie.
Russia and The Caspian come alive as Europe restructures
"After decades of stagnation, the Russia and The Caspian region will undergo considerable change, with plans to add nearly 10 million tons of capacity by 2030," adds Lidback. "In Russia, capacity expansions are planned in six discrete production clusters across the Western, Siberian and Far Eastern territories."
The region's emergence as a major exporter will place increasing pressure on high cost producers who do not have the benefit of advantaged feedstock. Europe, in particular, will be under considerable pressure with the addition of a neighbouring region with low cost supplies. Its ethylene industry is restructuring due to its weak demand growth, competitive disadvantages and widely available imports from low cost producers in other regions.
"Since Europe is forecast to remain uncompetitive in terms of commodity chemical production, producers will focus on lower volume, higher-value speciality products in order to survive," concludes Lidback.
Now, for the kicker:
If the price of naphtha and ethane feedstocks for polymer producers in North America are essentially the same, why have virtually all of them switched to ethane? Ten on the Gulf Coast, two in Canada, two INEOS plants in Scotland and Norway and soon Odebrecht's Mexico plant? I think that they think naphtha is going to be much higher priced than ethane for decades.
Just last week, Daniel Yergin and T. Boone Pickens both predicted that crude oil (to which naphtha is linked) will be about $48/bbl by the end of the year. This in spite of downward pressures cited by various pundits: slowing economy in China, new supplies from Iran and maybe Libya, increased production from Russia and the US (together with its exports), etc.
But the best indication that crude prices are set to begin their ascent happened on February 1, 2016. On that day, 1,800,000 exchange-traded notes worth more than $600,000,000, the Credit Suisse Velocity Shares 3X Inverse Crude Oil ETN (DWTI) were redeemed. That was the largest single-day redemption in history.
