Last week the price of ethylene dropped from the low 50s per pound down to the low 40s. In a big flip-flop, propane has been the preferred feedstock for petrochemical plants on the Gulf Coast for a couple of weeks now (it had been ethane for the most part of the last 3+ years). And the petchem market hit ethane where it hurts, whacking the price down to 29.875 cnts/gal on Friday according to OPIS. A month ago that price was 50 cnts/gal. In October of last year the price was almost $1.00 (see graph below). This is good news for petchems, right? Well, it all depends on the margin that the petchem realizes on the feedstocks that are run. So to figure that out, let’s get to Part III of our series on the economics of petrochemical feedstocks.
In Let’s Get Cracking - Part II we noted that economic preferences for different feedstocks are measured in terms of pounds of ethylene produced. The feedstock with the highest margin per pound of ethylene is the most preferred feedstock, and the calculation is based on the following formula:
[Price of ethylene per pound] – [Cost of feedstock per pound of ethylene produced] + [value of byproduct credits per pound of ethylene produced]
This formula puts the preferences for different feedstocks on an apples-to-apples basis. It is simply the price of ethylene per pound, less the cost of producing that pound of ethylene, PLUS byproduct credits. The byproduct credits reflect the value of all the other products that the cracking process yields besides ethylene.
As an example, we said that the ethylene yield from a pound of ethane is about 78%, which means one pound of ethane cracked equals about 0.78 pounds of ethylene. Cracking ethane also yields just over 3% propylene and 19% other products (butadiene, benzene, fuel gas, and a variety of other petrochemical products.
In today’s blog we’ll take a deep dive into the math to see how the formula works to compute the margin for cracking ethane at a typical Gulf Coast olefin cracker.
|Check out Kyle Cooper’s weekly view of natural gas markets in Natural Gas Projections Do Not Anticipate Storage Containment Issues.|
First we need to get more precise with our yields. The aforementioned 78% ethane yield is actually 77.7% for the typical Gulf Coast cracker. Our calculations are going to be based on what it takes to generate a pound of ethylene. Thus the quantity of ethane required to generate a pound of ethylene is 1/.777 = 1.287 pounds of ethane. (For you accountants, we grossed up the ethane needed to generate a pound of ethylene.)
Now we get to some unit conversion gymnastics. Jog some of those synapses from school a few decades ago - 1 metric ton = 2205 pounds. There are 742 gallons per metric ton of ethane. Thus a gallon of ethane weighs 2.972 pounds [2205 / 742 = 2.972.) I could have just told you that the ethane conversion from gallons to pounds is 2.972, but wasn’t this more fun?