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Shale sparks US petchem renaissance
5:45 PM MST | November 25, 2013 | —Robert Westervelt
The US unconventional oil and gas supply surge is moving downstream as investments ramp up, providing a boon for US chemical makers. The margin benefit is already being felt. The supply impact is modest today but will accelerate as projects come onstream the next few years.
Cheap energy and feedstocks have quickly reset the competitive balance for US petrochemical makers. With natural gas available at a fraction of the cost of its oil equivalent, the United States is again one of the world’s lowest-cost petrochemical producers.
“Manufacturers can make ethylene in the United States for less than half of what it costs in Europe, Asia, and Latin America,” says Stephen Pryor, president of ExxonMobil Chemical. The advantage has reversed the fortunes of US chemical makers, he says.
Although petrochemicals, particularly ethane-based ethylene and its derivatives, are some of the strongest beneficiaries, the impact will be felt across the US economy. The impact of unconventional energy, in the form of new supplies of shale oil and gas, is expected to add 2.0–3.2%/year to US GDP through 2025, according to a study from IHS. The rate of GDP increase builds rapidly and peaks at 3.2% in 2016. In the context of a $13–15-trillion US economy, this 2016 peak equates to an increase in GDP of $500–600 billion, IHS estimates.
While the GDP growth rates and capital investment peak early, gains in chemical production and broader industrial production will continue unabated through the forecast period.
By 2015, lower natural gas prices and higher activity will lift industrial production by 2.8%. By 2025, industrial production will be 3.9% higher, according to IHS. Chemicals will outperform thanks to their energy intensity and use of natural gas feedstocks. IHS estimates that unconventional energy lifted organic chemical production by 1.5% in 2012. That figure ramps up to 4.9% in 2015, 7.1% in 2020, and 9.5% in 2025. The figures for resins are 1.7% in 2012, 4.4% in 2015, 7.1% in 2020, and 8.1% in 2025.
A massive wave of new petrochemical capacity—with investment exceeding more than $100 billion—will support this growth. “Chemicals investment activity is expected to peak in 2017 and will represent one of the largest expansions to ever occur in North America,” says Russell Heinen, senior director/chemical technology and analytics at IHS Chemical. Direct petrochemical investment between 2013 and 2030 for a group of 20 products impacted by shale will total $123 billion, Heinen says. The figure in constant 2012 dollars is roughly $90 billion. US spending peaks near $10 billion in 2017. Ethylene investment alone accounts for 34% of the spending over the period.
While the US has not added a cracker since 2000, industry has continued to build elsewhere. Between 2008 and 2013, global ethylene capacity increased by about 25 million m.t./year, mostly in the Mideast and Asia, bringing the total to 154 million m.t./year. For 2013–18, IHS Chemical projects another 37 million m.t./year of ethylene production capacity will be installed. “There’s continued growth in the Middle East, although not at the same rate as in the past,” Nick Vafiadis, senior director/global polyolefins and plastics at IHS Chemical says. “If you look at Asia, we’re seeing more and more of that capacity being skewed toward the coal-to-olefins technology. But the big change here is the return of North America to the scene.”
Total US capacity added because of shale is close to 100 million m.t. for the 20 products tracked, Heinen says. The likely peak, now estimated in 2018, is 18 million m.t. of additional capacity, far exceeding the previous peak in North America, Heinen says.
Upstream and midstream investments are also surging, so feedstock supply should not be a constraint, with US natural gas liquids (NGLs) supply set to double by 2020. Since 2008, US NGLs production from natural gas processing has increased by over 500,000 bbl/day, reaching about 1.8 million bbl/day, according to IHS. “Because of the ongoing development of shale gas and tight oil resources, US NGL production is expected to continue expanding rapidly over the next decade,” IHS says. “By 2020, total unconventional NGL production from natural gas processing is expected to reach about 3.8 million bbl/day, which represents an increase of 100% over current levels.”
Shale has created an abundance of industry’s principal feedstocks in the United States and has quickly reset competitiveness, Pryor says. “Just five years ago, the United States was losing ground in the export market. The country was on the verge of becoming a net importer of chemicals. But today, chemicals are once again America’s single biggest export—larger than agriculture, automobiles, and aerospace.”
ExxonMobil Chemical has announced plans to build a 1.5-million m.t./year cracker at its Baytown, TX, site and two 650,000-m.t./year polyethylene (PE) plants. “We’re confident in positive permit decisions and expect construction to begin 2014, with target completion late 2016,” Pryor says.
There are now nine announced crackers in the United States, with several more under consideration (p. 23). The trend is now undeniable, but the idea just started to form in the second-half of 2010. “It was over three years ago that we started to get a sense that this was real,” says James Fitterling, executive v.p./feedstocks and performance plastics for Dow Chemical. “At that time, there was enough information to know that gas would be available [from Marcellus and on the US Gulf Coast], and people were starting to talk about activating pipelines.” Since those initial considerations, and Dow’s announcement of a planned cracker in April 2011, other shale production areas such as Bakken in North Dakota and rest of the “liquids fairway” down the US Rocky Mountains through Eagle Ford in south Texas proven more productive than expected.
“The US sits today with a propane export terminal in operation, gas prices have dropped below $4/million Btu, and ethane is in complete rejection,” Fitterling says. “You add all of those dynamics together and it is clear that this real,” Fitterling says. “We are very confident in these investments and it is all systems go.” The company expects to secure final permitting in first-half 2014 for a planned 1.5-million m.t./year Freeport, TX cracker and meet an expected first-half 2017 start up. “Everything looks like it is falling right in line,” he adds.
Ron Corn, currently v.p./corporate planning and development for Chevron Phillips Chemical (CPChem), says company officials started “noodling around with the idea” of a US cracker in July 2010.
Since 2000, CPChem’s spending had been focused on the Mideast, where the company built three major projects. The final project came online in early 2013. As planning started to wind down on Mideast projects in 2008–09, Corn says CPChem looked around the world for the next big project. “We looked at the Middle East, South America, and Asia, but we didn’t come up with anything that fully met our standards,” Corn says. “We kept looking, however, and, lo and behold, one of the best opportunities was right in our back yard.”
CPChem and the US chemical industry had been hit hard by the 2008–09 recession, and the company had idled some capacity, including a smaller ethylene unit at Sweeny, TX. Hurricanes in 2008 and 2009 were also severely harmful and set the United States back. By summer 2010, however, it was clear that fortunes were shifting in the United States even though industry was still coping with the impacts of the recession.
US ethane-based capacity was competitive again, and the company decided to restart an ethylene plant at Sweeny that had been idled. “It had a pretty sizable advantage even though it was our highest-cost and smallest cracker,” Corn says. “We started thinking, ‘Maybe this is the next place to build.’” Corn notes that ethane was 70–80 cts/gal, well above the mid-20-ct range today. “The scale of the advantage wasn’t yet obvious from a pricing standpoint,” Corn says. “You could see what was coming, however, because of what US midstream activity was starting to look like. Sooner or later, it would affect NGLs’” supply and pricing in a more substantial way. CPChem also notes activity in its own midstream business, including a pipeline that gathers and collects NGLs in western Texas and New Mexico. “In 2005 and 2006, we had trouble keeping it full,” Corn says. “By 2009, it was full.”
The decision to build a cracker now looks so simple, but it was pretty radical at the time given the turmoil industry had just been through, Corn says. “One of the questions I asked my boss [in 2010] was, ‘Do you think we’ll get fired if we suggest this?’” The proposed cracker project received strong immediate support all the way to the CPChem board.
Corn says it is difficult to assess just how long the United States will be advantaged, but it the advantage is likely to be durable. “Many have been humbled trying to predict the future in energy,” Corn says. “If you look at current trends and hydrocarbon potential, however, you have to be encouraged.”
The United States likely has a long runway on shale development, he adds. “Development of competing resources is not advancing as rapidly,” Corn says. “There is a variety of reasons for that, including issues around land rights, water availability, and trickier geology. But, even in some high-profile areas, such as Poland and China, shale exploration efforts are not proceeding as quickly.”
Corn says that CPChem sees some possible potential in aromatics—but that assessment more complex. There is likely to be a supply of C6s through C10s needed to support an aromatics project from regions such as Eagle Ford, but a decision on aromatics is much more complex than ethane and ethylene. “Do you take the higher cuts to a splitter for export, use in [fuels], or do you think about taking it though benzene, styrene, and para-xylene projects in the US? The big markets are in Asia, so almost output would have to be exported unlike ethylene in the US. It’s a bigger mystery, but we are intrigued and watching very closely.”
Mitigating resource constraints
Companies say they are focusing on careful planning and execution to mitigate any possible impact. Fitterling says that the company is carefully phasing projects to manage potential constraints in labor. Dow’s plans include the Freeport cracker; two propane dehydrogenation (PDH) units; and PE, elastomer, and derivative investments spread across sites in Louisiana and Texas.
The company has started constructing its Freeport PDH unit. “As we start up PDH, we can then roll resources over to the cracker,” says Fitterling. “We have also split the PE investment between sites in Louisiana and Texas. We are taking a strategic and long-term approach,” Fitterling says.
CPChem is also investing heavily in recruiting and workforce development to attract and retain the needed talent. Producers and analysts expect the timing of some projects to slip as activity peaks and constraints materialize. “It is fairly clear that six to seven US projects cannot be completed in a 12–18 month time frame,” Corn says. The experience of the Mideast in the 2000s, where costs escalating and timing slipped, underscores the importance of being first. “It is definitely better to be first,” Corn says. “We covet our first-mover position.”
The situation also reflects a broader demographics challenge that CPChem and other chemical makers are facing. US chemical industry employment peaked in the early 1980s and has generally been in decline since, according to US Department of Labor statistics. Shale is reversing that trend, and industry employment will increase over the next few years, according to ACC forecasts. CPChem currently has 5,000 employees and expects to need to hire 2,800 people over the next 10 years to support growth as well as replace retirees, Corn says. “We have to make sure we have a skilled workforce,” Corn says.
Richard Meserole, v.p./construction for Fluor’s energy and chemicals business group, says US petrochemical projects will require companies to maximize local labor resources as well as draw in from other regions of the United States. Extensive recruiting and training will also be needed. He draws parallels with 2006–10, when Fluor was responsible for several megaprojects as part of a US refinery construction boom. The company was able to attract 25,000 craft workers to five megaprojects it was involved in, he says. “We’re confident we can do it again.”
Fluor, which is involved in several of the US cracker projects, is encouraging off-site prefabrication and modularization where possible. Off-site fabrication can achieve significant time and cost savings, support fast-track project schedules, and reduce risks related to weather conditions and labor shortages. “It can remove labor from [tight] local markets and also helps provide some cost certainty,” Meserole adds.
Dow’s Fitterling says that Dow expects most of its output will remain in the Americas, including exports to Latin America. The need to export to Asia should be fairly small. “Even though the US advantage will allow us to export anywhere in the world, supply chain efficiencies are best if we export to Asia and Europe from the Middle East,” he says. Americas demand should soak up most US output from Dow’s projects. The last increment that leaves the Americas will be relatively small, Fitterling adds. “It is likely below 10%, and maybe even 5%. It’s not going to be a big issue.”
There is some concern about trade barriers. “As US petrochemical exports are ramped up, these lower-cost American exports will put pressure on local producers in Latin America, Asia, and Europe—regions that rely on more expensive, oil-based feedstocks,” Pryor says.
Countries are becoming more insular, and there is some pull back on globalization, Fitterling says. “As in the US, political issues drive and sometimes overwhelm trade issues, which is not a surprising development in a slow-growth environment,” Fitterling says. The case for trade liberalization is a difficult sell in a tough economic environment with high unemployment, producers acknowledge. “There is a period of time here that we that we will have to get through,” Fitterling says. “A little bit more GDP growth would take some of the wind out of the sails and help even this out.”
ACC says it expects additional supply to boost US chemical consumption. ACC’s current forecast calls growth of 3.5%/year growth through 2017, says Martha Moore, economist with ACC. The council has tracked more than 170 downstream plastics processing projects across the United States, an indication of confidence in US markets.
Specialty makers are also encouraged. “The impact is not just limited to what is happening in petrochemicals,” says PPG Industries chairman and CEO Charles Bunch. “We’re a low-cost manufacturing region. Energy costs and chemical manufacturing are such important components of our industrial base that I see this shale revolution as a boon to our economy.
“There are obvious impacts; oil and gas are certainly strong markets for our coatings right now,” Bunch adds. “But I’m more excited about the rebirth of manufacturing that I see gradually coming. That benefits all markets that PPG plays in and is going to be paying dividends for our region for years to come.”