If Six Was Nine - The Case for Building Low-Cost Methanol Capacity

Even in tough times like these, companies need to look ahead, to consider what steps they would take--or investments they would make--if, for example, oil prices were to rise to X dollars per barrel, or the cost of drilling and completing a well were to fall by Y%. For methanol producers, these “what-ifs” might include what if methanol prices (holding steady the past few months at $249/metric ton, or MT) were to rebound to where they stood a year ago ($442/MW in May 2015)? Or what if we could add new capacity at a fraction of the cost of new-build? Today, we consider how building more methanol capacity might make sense in the right circumstances.

Decisions to invest—whether it be investments in drilling and completing a well or in building new infrastructure—are based not only on current and projected prices for the related commodity or product but on the (sometimes changing) magnitude of the investment. Recall that even before oil prices started to collapse in mid-2014, the per-Bbl and per-MMBtu cost of producing oil and gas, respectively, had been falling as producers gained drilling-and-completion experience and increased efficiency. As oil prices slid and demand for drilling and completion services fell, the cost of those services plummeted, further changing the dynamics of when it’s profitable to drill and complete wells. Or consider the first wave of U.S. liquefaction and liquefied natural gas (LNG) export terminals, which was led by the projects that could make use of existing LNG import facilities (including docks capable of handling large LNG vessels, and adjoining pipelines that connect the terminal to the regional gas pipeline network) and thereby reduced the projects’ costs.

As we said in our recent blog on U.S. methanol projects, Bad Moon Rising--Any Credence in a Near-Term Methanol Revival?, it’s been a tough time for methanol producers. Posted and spot prices for methanol have been hovering at low levels not seen since 2010-- dragged down by low oil prices and, with that, low prices for naphtha (a primary competitor for methanol in the petrochemicals industry). Also, new methanol capacity planned when methanol’s prospects seemed brighter has been coming online (further depressing methanol prices), and still more capacity remains under development, including OCI’s 1.8 MTPA Natgasoline methanol project in Beaumont, TX, which is under construction and expected to come online in 2017. (G2X Energy, a subsidiary of Consolidated Energy, in April 2016 entered into a definitive agreement to take a 50% stake in Natgasoline.) All that would seem to suggest we’ve seen the last of any new methanol projects, at least until the methanol market--and the oil and naphtha markets--find firmer footing and market participants regain confidence that they’ve seen the bottom and that better days are ahead.

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