Beyond Hypothermia - Extreme Petrochemical Feedstock Margin Declines for Steam Crackers

Falling crude oil prices and other factors have crushed margins in the steam cracker/olefin unit segment of the petrochemical industry.   Margins per pound of ethylene have declined from more than 60 c/lb in October 2014 to less than 20 c/lb today (November 2015) for NGL feedstocks, including ethane.  We expect some petrochemical companies might be feeling a chill in the air.  That’s because five new Gulf Coast world scale steam crackers and a couple of smaller units are under construction or being developed to add still another 20 billion/lbs of capacity by the end of 2018.    In today’s blog, we assess NGL feedstock margin declines.

First, a quick recap of the U.S. petrochemical industry from our March 2014 blog, “Beyond Hypothermia and Extreme Propane Price Spikes – Petrochemical Feedstock Switching 2013-14”.  In the U.S. there are currently 37 steam crackers (a.k.a, olefin units or ethylene units) owned by 15 companies which soak up the vast majority of the NGLs consumed in the petrochemical sector.  In aggregate, these units consume nearly 1.7 MMb/d of NGLs as feedstock, which is over half of all U.S. domestic NGL consumption. Most of these units are on the Gulf Coast.  Ethane holds the largest share of the feedstock market with propane, normal butane, and naphtha (natural gasoline) holding the second, third and fourth positions, respectively.  Steam crackers also use a small volume of gas oil (distillate range material) as a feedstock.

One of the challenges for feedstock buyers for these units is that each feedstock has a different product yield.  The primary product being produced is ethylene (hence the moniker ‘ethylene unit’).  But they also produce significant quantities of byproducts, including propylene, butadiene, benzene, toluene, xylene, etc.   The catch is that each feedstock has a different yield of ethylene and each of the byproducts.  For example, ethane produces a lot of ethylene and not much in the way of byproducts, while natural gasoline (a light naphtha) produces more byproducts (propylene and flue gas holding the largest shares) than ethylene.  For olefin unit feedstock buyers the goal is to purchase the slate of feedstocks that will produce the highest margin ethylene possible, within the constraints of their cracker capacity. (Some crackers can switch among alternative feedstocks easily and quickly, while others are stuck with running only a few, or in some cases only one feedstock – such as ethane-only crackers.)

The simplistic version of this ethylene margin equation is:

In other words, the margin is the price of ethylene less the cost of the feedstock, PLUS the value of byproducts sold.  That approach puts the margin of all the feedstocks on an apples-to-apples basis so they can be easily compared.   For a more in-depth discussion on calculating margins for producing ethylene please see Let’s Get Cracking - How Petrochemicals set NGL Prices.   Also, we calculate these margins each day and display the graphic results in Spotcheck, a service provided in RBN’s Backstage Pass premium service.  For more information on Spotcheck, click here or scroll to the bottom of the RBN Energy home page.

Looking back in not too distant history, the margins for producing ethylene from all feedstocks were relatively low.  Figure #1 below shows the margins for producing ethylene from ethane, propane, normal butane and natural gasoline.  During 2007 and 2008 margins were15 c/lb or under, and it was much worse in 2009 as the petchem industry dealt with the great recession.  But once we entered the shale gas revolution and oversupply in ethane, propane, and normal butane markets pushed the prices for those products down, the story changed rapidly with significant margin growth occurring for the lighter feedstocks (ethane, propane, normal butane) from 2010 to 2014.  Margins for producing ethylene from ethane averaged over 50 c/lb during 2014, almost five times the level during the mid-2000s.  You can see the annual average margin for propane fell slightly from 2013 to 2014 as a result of the back to back crop drying and Polar Vortex weather events, but due to the short duration of these events (6 months spread across the end of the 2013 and first quarter of 2014) and the continuing oversupply of propane overall margins remain strong for 2014.