SPECIAL REPORT: PETROCHEMICALS

US Renaissance May Change the World

Winter 2012-2013 By WenYin Wong - Associate Editor, Petrochemical MARKETS Sok Peng Chua - Managing Editor, Petrochemical MARKETS

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US Renaissance May Change the World

The US shale gale and newfound abundance of NGLs is touted as the game-changer for its petrochemicals industry. But what does it mean for Asia and the Middle East? Chua Sok Peng and Wong Wen Yin look at the impact of the US revival on other global markets The US began exploring shale gas around 10 years ago but the volume of natural gas liquids only started increasing in mid-2000s as horizontal drilling intensied. Production of wet natural gas, with a high NGLs composition, in 2010 totaled 23.2 trillion cubic feet, and that was up 3% from 2009, due to expanded drilling programs in shale formations. The abundance of natural gas meant that prices were kept low. Indeed, US ethane spot price hit a historic low in July 2012, falling below 30 cents/gal ($222.30/mt) while ethane/propane (E/P) mix (80/20) fell as low as 23.5 cents/gallon. Lower ethane and E/P mix prices meant cheaper feedstock for light-feed steam crackers and US olens makers saw their production margins widen signicantly in the second half of 2012. This is in sharp contrast to naphtha-fed steam crackers, used primarily in Europe and Asia, which have been losing money since mid2010 (see Chart 1). Motivated by cheap feedstock and the promise of great prots, several companies have announced investments in new crackers or expansion to current capacities. Eight greeneld projects have been announced in the US, adding a total of 7.6 to 9 million mt/year of new ethylene capacity by 2017. Another 2.9 million mt/year of new expansion to current capacity was also announced. Assuming that intended projects take place, this means that the US could see 10 million mt/year of new ethylene capacity in the next ve years. While ethylene is closely watched, its the derivatives that are being monitored in Asia and the Middle East. Global polyethylene demand is on the rise, especially from developing countries in Asia, the Middle East, Africa and Latin America and the US is well-positioned to take advantage of the growing market.

agreements that will secure a signicant volume of ethane feedstock from the US, for use in its European cracker complexes. The agreements will be valid for 15 years and will provide Ineos Olens & Polymers Europe with signicant supply options for the future. If further agreements are secured, this could put upward pressure on ethane prices in the US. Further muddying the waters is the fact that shale gas is not unique to the US but is actually a global phenomenon. According to an EIA report, China has 1,275 Tcf of shale gas, almost double that of the US capacity, while Argentina and Mexico have 774 Tcf and 681 Tcf respectively. The main advantage the US currently enjoys is its drilling technology. When the technology becomes widely available, the US advantage could disappear.

ETHYLENE BETTER TO POLYMERIZE GAS

At present, total optimum US ethylene capacity is around 27 million mt/year. With cracker operations estimated at 80%, the annual ethylene output is about 21.6 mt/year, of which exports make up less than 1% due to limited terminal capacity and high freight cost. The main export market for the US is Canada and South America but Asia is becoming a big customer as well, accounting for more than 40% of its total export volume since 2010. Statistics from the US International Trade Commission showed that China and Japan were the top two buyers of US ethylene between January and August 2012, accounting for 43.21% or 2,073 mt. In 2011, Japan, India and China made up 40.63% and in 2010, Japan and Taiwan bought 41.54% of total US ethylene exports. Prior to 2010, Canada and South America were the main buyers of US ethylene and geographical proximity meant that it made more economic sense for US producers to trade with their neighbors. Interestingly, lower production costs did not lower prices as US ethylene was the highest priced globally for the rst half of 2012. Industry sources said ethylene producers would prefer to polymerize the ethylene as polymers are cheaper and easier to transport. More prot could be made by turning the ethylene into PE and monoethylene glycol, and freight for those commodities is less than half that for ethylene, which is at $300/mt between US and Asia.

OVERBUILDING AND COST CONCERNS

While the US is developing its crackers, however, its neighbors have also been busy. To the south, Braskem and Grupo Idesa are working on the Etileno XXI project in Veracruz, Mexico. The project will consist of a 1 million mt/year steam cracker and integrated polyethylene plants and is expected to be complete in 2015. To the north, Nova Chemicals is slated to expand its capacities at its Corunna, Ontario, and Joffree, Alberta, complexes and will add 1 million mt/year of polyethylene units at each location. Nova is targeting a completion date of 2017. In the midst of all that excitement over cheap ethane, there is concern that the feedstock price might not stay low due to export agreements coming on stream. In late September, Ineos announced it had completed supply and infrastructure

PE EXPORTS NEIGHBORS THE BEST CUSTOMERS

Polyethylene expansions in North America are lagging behind new ethylene capacities. Formosa Plastics, Shell Chemical, Chevron Philips and ExxonMobil have announced polymer expansions totaling 3.6 million/year by 2017 if they are fully realized. With new ethylene capacities estimated at 10.5 million mt/year, this means an excess ethylene capacity of 6.72 million mt/year. (It takes 1.05 mt of ethylene to produce 1 mt of PE, so that is 3.6 million times 1.05, then subtracted

PLATTS SPECIAL REPOrT: PETROCHEMICALS

US Renaissance May Change the World

from 10.5 million.) Over in Africa and the Middle East, new PE production capacities are slated at 4 million mt/year by 2015, and Asia is adding 2.5 million mt/year by 2016. All these new plants will imply more competition for the US, which should still be concentrating on its neighbors given that majority of its polymer exports are to the Americas. Data from US ITC showed that between January and August 2012, low density PE exports to Canada and South America comprised 84% of total volume while Asia makes up just 16%. For high density PE, it is 77% going to the Americas and 5% to Asia (China and India). For linear low density PE, it is 45% for the Americas and 24% for Asia. As such, it is not expected that the US would change its trading pattern and seek out new markets in Asia and the Middle East. In fact, US materials are expected to replace Asian materials unless countries turn protectionist and start imposing antidumping tariffs. In September 2012, Brazil raised import tariffs on 100 US imports including PVC and PE from 14% to 20% in an effort to protect its plastics industry. More countries could follow suit if US exports to Latin America surge ve years later but thats a tale for another day.

IN THE MIDST OF ALL THE EXCITEMENT OVER CHEAP ETHANE, THERE IS CONCERN THAT THE US FEEDSTOCK PRICE MIGHT NOT STAY LOW DUE TO EXPORT AGREEMENTS COMING ON STREAM. FOR EXAMPLE INEOS HAS JUST COMPLETED AGREEMENTS THAT WILL SECURE SIGNIFICANT VOLUME OF ETHANE FEEDSTOCK FOR USE IN ITS EUROPEAN CRACKER COMPLEXES
Chart 1: US ethane-fed cracker vs NW Europe naphtha cracker

MEG FEEDING CHINAS POLYESTER MARKET

There is no new monoethylene glycol production of global scale coming on stream in the next three years but China has been the top export destination for the US for the last two years. Between January and August 2012, the US exported 392,500 mt of MEG, of which 43% went to China, 21% to Mexico and 11.7% to Argentina. The trend was similar for the past ve years, indicating that US exports should concentrate on the developing Latin American markets. There is no material going to the Middle East, which is itself a powerhouse in MEG production. Demand from China would be curbed by its slowing polyester market as a result of the European economic fallout depressing demand there. Rising labor costs coupled with high cotton prices in China also dented its textile production during 2012 and home-grown methanolto-olens plants could mean that Chinas MEG imports might taper off.

CHINAS EDC IMPORTS EDC AN OUTLET FOR BYPRODUCT CHLORINE

With the availability of cheap electricity, US caustic soda production is one of the most competitive in the world. In the chlor-alkali process, chlorine and caustic soda are produced in a xed ratio by the electrolysis of sodium chloride. Production is measured in ECUs, or electrochemical units, consisting of 1 mt of chlorine, 1.13 mt of caustic soda, and 0.03 mt of hydrogen. The US caustic soda prices were more competitive than those from Asian manufacturers due to a lower electricity

PLATTS SPECIAL REPORT: PETROCHEMICALS

cost, which is around 50% of the production cost. The ECU cost of caustic soda in US was heard at around $200/ECU versus $400/ECU in Asia. Byproduct chlorine is corrosive and thus storage can be expensive. As EDC consist of 71% of chlorine by weight, most vinyl makers prefer to convert chlorine to EDC. As such, it is likely that the US will export more EDC to China as US makers have lower input cost than Asian producers. Asian producers may have to run their caustic soda and EDC at lower rates as the result. Recently, Asian producers are lowering their EDC run because of poor demand and high feedstock cost. Spot availability in Asian is scarce, buyers have turned to the US material.

What is Shale Gas?

According to the US Energy Information Administration denition, shale gas refers to natural gas that is trapped within shale formations. Shales are ne-grained sedimentary rocks that can be rich sources of petroleum and natural gas. Over the past decade, the combination of horizontal drilling and hydraulic fracturing, or fracking, has allowed access to large volumes of shale gas that were previously uneconomical to produce. The production of natural gas from shale formations has rejuvenated the natural gas industry in the United States. The EIAs Annual Energy Outlook 2012 projects US natural gas production to increase from 21.6 Tcf in 2010 to 27.9 Tcf in 2035, a 29% increase. Almost all of this increase in domestic natural gas production is due to projected growth in shale gas production, which is set to grow from 5.0 Tcf in 2010 to 13.6 Tcf in 2035.

Note: 2012 statistics consist of import from Jan to Aug. US is largest EDC exporter to China. US EDC export has been growing steadily over the past three years.

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