Projected growth in U.S. methanol production was based in large part on the expectation that domestic natural gas prices would remain significantly lower (on a per-MMBtu basis) than the price of crude oil, and that Asian demand for U.S.-sourced methanol would continue rising at a fast clip. Today both of those assumptions look dicey. Natural gas prices remain low, but crude prices have languished below $50/Bbl for most of the past two months, and there are worries that China (by far the world’s largest methanol consumer) may be an economic bubble about to burst. Today, we consider recent developments that could slow the long-anticipated growth in natural gas use by U.S. methanol producers.
Just over a decade ago, U.S. oil and natural gas production were on the decline and scores of petrochemical plants—including 90% of the nation’s methanol capacity--were being shut down. Now, the only constraints on domestic oil and gas output are prices (they need to be high enough to encourage drilling) and infrastructure (it needs to be sufficient to move product to market). Abundant, inexpensive natural gas has spurred interest in a variety of gas-based chemical production projects, including projects to make ammonia (for fertilizer; see Fertile Prospects for Natural Gas), propylene (Got My MTP Working), and—as we will revisit today—methanol. A three-step process is used to produce methanol from natural gas. (No angst please; we’ve really simplified things for our organic chemistry-phobic readers). First, a steam-methane reformer (SMR) converts natural gas into a synthesis gas (syngas) consisting of carbon monoxide, carbon dioxide, water and hydrogen. Next, hydrogen is stripped from the syngas, and third, methanol is produced through a catalytic synthesis of the syngas. As we said a while back (in Skyrockets in Flight, Methanol Delight), about two-thirds of worldwide methanol demand (recently estimated by Methanex, the leading methanol producer, at 61 million metric tons per annum, or MTPA) is tied to its traditional use a basic chemical feedstock for making formaldehyde, acetic acid and petrochemical intermediates that, in turn, are used to make plastics, synthetic fibers, paints, resins, solvents and the like. The balance of methanol produced annually is used in “methanol-to-olefins” (MTO) plants (most of them in China) that directly convert methanol into ethylene or polyethylene; as a fuel (again, mostly in China); or as a fuel additive (it can be used to produce dimethyl ether (DME), an alternative motor fuel and sometimes replacement for propane, and to make methyl-tertiary-butyl ether (MTBE), an octane booster the U.S. has banned for domestic use but still produces for export). Methanol’s fastest-growing use has been in MTO plants (China now has 10 such plants, which at full capacity can consume a total of 10 metric tons per annum, or MTPA) and as a fuel; it’s been estimated that by the 2020s worldwide methanol demand may top 100 MTPA or 40 MTPA above the current level – representing about 7% per year growth.
Methanol competes on price with oil-derivatives (naphtha included) that can serve as methanol substitutes. Since the Shale Revolution, the big selling point for methanol production in the U.S. has been the availability of significant natural gas volumes at substantially lower prices than oil. Figure 1 shows the ratio of U.S. crude prices (the West Texas Intermediate or WTI) to natural gas prices (at Henry Hub, LA) since April 1990. The crude-to-gas ratio is calculated by dividing the price of WTI crude ($/Bbl) by the price of Henry Hub natural gas ($/MMBtu) and is calculated every day in our Spotcheck feature available exclusively to Backstage Pass subscribers. The ratio averaged about 9.5 X (crude is 9.5 X natural gas) between 1990 and 2009. Then as gas prices fell in response to the boom in shale production and crude stayed high, the ratio took off to reach a peak of more than 53X in April 2012 (red arrow on the chart). The higher crude-to-gas ratio made U.S. methanol economics extremely favorable and encouraged investment in new plants. However that favorable ratio has been eroded by the collapse in oil prices in late 2014/early 2015 (responsible for most of the crude-to-gas ratio decline indicated by the black arrow on the chart).
To access the remainder of Will You Still Love Me(thanol) Tomorrow?—Crude Prices and China Woes Threaten the Boom you must be logged as a RBN Backstage Pass™ subscriber.
Full access to the RBN Energy blog archive which includes any posting more than 5 days old is available only to RBN Backstage Pass™ subscribers. In addition to blog archive access, RBN Backstage Pass™ resources include Drill-Down Reports, Spotlight Reports, Spotcheck Indicators, Market Fundamentals Webcasts, Get-Togethers and more. If you have already purchased a subscription, be sure you are logged in For additional help or information, contact us at [email protected] or 888-613-8874.