Life is good in the U.S. ethylene cracker business. That is, if the ethylene cracker can use ethane for a substantial portion of its feedstock. This is an industry that had given its own self up for dead in 2008. But then shale happened. When the crude-gas differential diverged in 2009, the combination of cheap gas and increasing volumes of ethane pushed the price of that NGL down relative to other petrochemical feeds. Petchem margins on ethane headed north, and have stayed there ever since.
That gives U.S. petchems a huge competitive advantage vis-à-vis crackers in Europe and Asia that rely primarily on much more expensive naphtha for their feedstock supplies. U.S. crackers have been producing lots of low cost ethylene used to make countless petrochemical-based plastics/products for export, and the profits have been rolling in.
So let’s look at the situation carefully. Ethane supply is up because gas production is up, and because producers are concentrating on wet gas that contains lots of ethane. That puts downward price pressure on the price of ethane, which becomes a highly lucrative feedstock for petrochemicals. And petchems are on the way to the promised land.
What do you think happens next? Well of course. Let’s build the capacity to use more ethane. Lots more ethane. First, the industry will continue to debottleneck existing units. When you combine expansions from companies like Westlake, Dow, LyondellBasell, Williams, plus Formosa’s new unit, there could be over 200 Mb/d of ethane capacity added over the next five years. Even that won’t be enough to chew up all of the ethane expected during that same timeframe. In fact, sometime around 2015 there could be enough surplus ethane to push ethane prices down to the rejection level in some parts of the country. That means producers would leave as much ethane as possible in the gas, because in such market conditions the ethane molecules would be worth more as gas than as ethane. As that happens, the petchems make even more money, because ethane is sooooo cheap. Then what?
Let’s build even more capacity. How about several greenfield, world-scale crackers. Chevron Phillips and Dow have announced plans to do so in the Gulf Coast area in the 2017 timeframe. Sasol is looking at a plant in Louisiana. Shell and Petrologistics are talking about Marcellus crackers. Others are in the works. These things aren’t cheap. Figure $3.5-$4.5 billion for a cracker that uses 90 Mb/d of ethane. If they all get built, will there be enough ethane to supply them?
That’s the multi-billion dollar question. The petchem industry has been known to overbuild before. Too many units would soak up the ethane surplus, drive feedstock prices up, and kill the goose that is laying the golden egg. But let’s say that won’t happen. Let’s assume that the petchems get it right this time. Are they out of the woods?
Probably not. Anything that causes today’s historically wide crude/gas ratio to come back to earth would reduce ethane’s feedstock advantage. Let’s consider this scenario. By 2017 (as soon as the new greenfield crackers could be on line), new gas demand has started to seriously kick in. Old coal power plants are being shuttered, replaced by shiny new gas fired power generation. Truck fleets have shifted to gas. T. Boone has a natural gas station on every street corner. Ammonia plants have popped up all over the Gulf Coast. It could happen. At the same time in our scenario, the production of shale and other tight crude in the U.S. has ramped up at a much higher rate than being projected back in 2012.
Don’t forget, five years ago 100% of the industry's forecasts missed the astronomical rate of natural gas growth. Could it happen again with domestic crude? Not impossible.
If both things happen at the same time, the crude/gas ratio will come crashing down, and all those ethane-only ethylene crackers could be in a tough situation. Cracking of naphtha and other feeds would improve relative to ethane. And the ethane advantage would go away. So are the petchems on the Highway to Hell? Maybe not. But it is not impossible.
(I promise, this is the last blog with imbedded classic rock lyrics for at least a week.)
Want to know even more about ethane? See the excerpt below out of NGI’s Shale Daily coverage of yesterday’s Enterprise Products Partners earnings call. COO Jim Teague talks about the current and future ethane situation.
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NGI's Shale Daily: February 3, 2012 With ethane prices down more than 30% in January alone, consumers and analysts on the consuming end of the ethane pipeline might be tempted to say the market is moving toward saturation. Not so, said Enterprise Products Partners COO Jim Teague; the bears are "talking their book.” "Now that a definitive, large-scale solution for the Marcellus-Utica ethane has been reached [namely Enterprise's proposed 125,000 b/d Appalachia-to-Texas (Atex Express) ethane pipeline, there have been many experts -- and in my script that's in quotes -- who are projecting an early and significant supply of ethane on the Gulf Coast," Teague told financial analysts during an earnings conference call Wednesday. "At Enterprise we track supply-demand fundamentals, and I'm not going to ever jeopardize my credibility by saying that there won't be windows where ethane will be oversupplied, or for that matter, undersupplied. I will tell you that our models indicate that ethane is likely to stay in balance even after [the] Marcellus [pipeline] comes into service." The real advantage of cheap ethane in the United States given the price spread between natural gas and crude oil is not that ethane is cheaper, it's the price spread to naphtha, Teague said. "Just last week, for our models, ethylene from ethane cost 20 cents a pound less than ethylene from naphtha," he said. "On a 1.5 billion pound per year plant, that is an annualized $300 million dollars in margin. In addition, that ethylene from ethane is globally competitive. The cost advantage has not been and will not be ignored. "When we talk about softness, we've gone from phenomenal margins to just great margins." Since hitting a recent high of 91 cents/gallon in November, ethane has fallen 39% to 56 cents/gallon, including a 31% drop in January alone. Theoretically, at least, there's still plenty of room for more ethane demand just from cracker conversions, Teague said. "I asked our fundamentals group to model the remaining naphtha and gasoil cracking at a time when we are showing growing ethane use," he said. "They found that the naphtha, gasoil cracking was still 230,000 b/d of equivalent ethane demand. That's probably not likely to be converted, but it gives you an idea of the size of the headroom. "Don't underestimate the petrochemical industry's ability to consume ethane. The economics are compelling, to not only crack all the ethane they can, but as quickly as possible and to position themselves to be able to crack substantial amounts more in the years to come."
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