Every day, about 1.8 million barrels of NGLs, naphtha and other ethylene plant feedstocks are “cracked” to make both ethylene and an array of petrochemical byproducts. And every day, decisions are made for each steam cracker on which feedstock—or mix of them—would provide the plant’s owner with the highest margins. Within each petchem company, these decisions are optimized by staffs of analysts and technicians using sophisticated and complex mathematical models that consider every nuance of a specific ethylene plants’ physical capabilities. Fortunately for us mere mortals, it is possible to approximate these complex feedstock selection calculations for a “typical” flexible cracker using a relatively simple spreadsheet model. Today we continue our series on how the raw materials for ethylene plants are picked with an overview of RBN’s feedstock selection model, a review of feedstock margin trends, and an explanation of how the model also can be used to indicate future NGL and naphtha prices and to assess the prospects for various industry players.
As we said in Part 1, the Shale Revolution has had a profound impact on U.S. natural gas liquids (NGL) markets by vastly increasing production and by lowering NGL prices relative to the prices of crude oil and natural gas. That has been good news for the nation’s steam crackers—ethylene-producing mega-plants that have enjoyed low NGL feedstock prices since 2012. We noted, however, that NGL markets are in for some big changes as new U.S. ethylene plants coming online over the next two years will be competing for supply with export markets, raising the specter of higher NGL prices—a good thing for NGL producers, but not necessarily for petchem companies. We’ve considered NGLs and feedstock economics in several other blogs over the years, beginning with an introductory series in 2012 (Let’s Get Cracking) that reviewed the basic principles of cracker feedstock selection, including the maxim that drives these economics: The best cracker feedstock is the one that will produce the highest ethylene margin possible, after deducting byproduct credits.
Two years later, in the midst of the biggest run-up in NGL production in U.S. history, we took an even deeper dive into the NGL/steam-cracker world with our What’s Crackin’ With Steam Crackers Drill Down Report (available to RBN Backstage Pass members). There, we discussed the fact that the margin for producing ethylene with ethane (the lightest and most prolific NGL) in September 2014 had just hit an all-time high (~70 cents/lb—a record that still stands today) due to the combination of a low ethane price (~24 cents/gal) and a high price for ethylene (76 cents/lb). In Beyond Hypothermia and in our Drill Down Report on NGL/steam cracker infrastructure, It’s Not Supposed To Be That Way Drill Down/Part 1 and Part 2, we focused on how much things had changed since then: NGL production volumes remained high and ethane prices were still on the low end, but ethylene prices had tumbled and so had the margin for producing ethylene with ethane. We also discussed our view that the three key assumptions behind the build-out of new U.S. ethylene production capacity and NGL export terminals—1) U.S. NGL production would continue to grow significantly, 2) U.S. NGL prices would remain low, and 3) crude oil and naphtha would stay expensive—no longer applied.
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