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Shale energy resources driving resurgence for ethylene industry

04.01.2013  |  Eramo, M.,  IHS Chemical, Houston, Texas

Keywords: [shale gas] [ethylene] [natural gas] [olefins] [ethane] [naphtha]

The abundant supply of North American shale energy resources is proving to be not only a boon for exploration and production (E&P) companies and energy consumers, but it is also changing the profitability landscape for the continent’s ethylene producers. According to a recently published report, these shale energy resources are driving chemical industry job growth, low-cost ethylene production, significant profitability, and a competitive resurgence for the continent’s producers of ethylene, one of the most essential building-block chemicals in the petrochemical industry.1

Renaissance for North American producers

In the US, due to the forecasted low-cost feedstock scenario providing for globally competitive economics, nearly 11 million metric tons (MM mt tons) of new ethylene capacity has been announced for North America, which is a significant amount of new capacity given the lack of any investment activity for more than a decade. This news is a welcome development for ethylene producers in the region, who were, until recently, executing plans that included capacity closures and asset consolidation.

Not only does this increased capacity mean more low-cost production to both domestic and export markets, but it also means that new, long-term, highly skilled and well-paying jobs will be added in the US, including operators, engineers and maintenance personnel. According to industry research, for every one of these chemical jobs added, three others are created elsewhere, so the job market impact is considerable. Pennsylvania, Ohio and West Virginia are several of the US states likely to see petrochemical job growth, thanks to shale energy resource availability.

Reverse trend

The US ethylene industry is experiencing a complete turnaround. Five years ago, the industry was trying to determine who was going to shut down capacity. Now the US ethylene industry is running at near-maximum capacity utilization and is seeking to add significant increments of new production.

As a result of increasing the availability of low-cost feedstocks, there is a tremendous amount of capital investment underway, including new infrastructure needed for feedstock supply, ethylene and ethylene-derivative capacity, and new logistics investments to support higher levels of ethylene-derivative exports. Present forecasts are calling for the first wave of new investment to start up as early as 2016. What’s exciting for the long-term health of the industry is that many of these investments are not just being made by US-based producers, but also from producers based in other regions, including the Middle East, Asia and Europe.

‘Bellwether’ effect

Why are these developments in ethylene capacity additions and production so important? Quite simply, it is because ethylene is the “bell weather” product for assessing the health of the petrochemical industry. Considered the workhorse of the petrochemical industry, the ethylene market is by far the largest market of the basic petrochemical building blocks, including olefins, aromatics, chlor-alkali and syngas chemicals.

Polyethylene—which is the largest ethylene-derivative market, consuming nearly 60% of all ethylene produced—is used primarily in a wide variety of nondurable goods applications such as packaging materials. Ethylene oxide (used in antifreeze, polyester fibers and detergents), ethylene dichloride [used in polyvinyl chloride (PVC) films, coatings and pipes], and ethylbenzene/styrene (which is used in polystyrene packaging and ABS resins) are also important ethylene consumers. The ethylene steam-cracker typically represents the heart of
a petrochemical complex.

The ethylene industry tends to be a very cyclical industry in terms of profitability. However, in the US, low regional ethane prices are supporting high ethylene margins and are creating a very profitable environment for producers, despite a global oversupply situation. According to new research, ample supplies of natural gas liquids from shale development are keeping ethane prices low relative to other steam-cracker feedstocks.1 As a result, US ethane-based producers experienced excessively strong profits in 2012, which contrasted with naphtha-based producers in the US and in other parts of the world.

These US capacity additions will bring much more supply than the domestic market demands, so there will be significant quantities of higher-value ethylene derivatives exported to Asia, where demand is greatest. This supply resurgence is causing a substantial shift in ethylene-derivative trade patterns, to the benefit of North American producers.

Global market

The global demand for ethylene reflects a mixed demand growth environment—rapid expansion in developing regions and slower growth in developed regions. After contracting considerably in 2008, world ethylene demand is forecast to be approximately 135 MM mt tons in 2013, which is higher than the previous demand peak of nearly 130 MM mt tons in 2012. In the next five years, global ethylene demand is forecast to grow at more than 4%/yr, reaching nearly 160 MM mt tons by 2017.1

Asian market

Demand in Asia, particularly China, continues to grow since China’s chemical industry remains unable to meet the rapidly growing domestic consumption requirements. Sharp increases in consumption, stemming from China’s rapid industrialization, have spurred the development of numerous new domestic ethylene and derivative complexes that are either under construction or planned for the next five years, including several coal-based facilities. The emergence of coal as a potential olefins feedstock in Northeast Asia, however, warrants close monitoring.

As a result of high oil prices in the past several years, there has been tremendous domestic interest to further develop and utilize the abundant coal resources in China. Although the investment involved is often massive, the operating costs of the coal-to-olefins units will be very low, and the units will be competitive compared to domestic naphtha-based steam-cracker complexes, as well as most imports of olefin derivatives. Assuming that China’s strong economic growth can be sustained, this nation will continue to be a major target for petrochemical and derivative exports originating from the Middle East, other parts of Asia and North America.

The net-equivalent imports of ethylene and ethylene derivatives into Northeast Asia increased significantly in 2012, reaching an estimated 8.8 MM mt tons.1 That trend is expected to continue, with the net deficit expected to approach 10 MM mt tons by 2017 and to exceed 15 MM mt tons by 2022.

With the opportunities and challenges presented by this rapidly developing abundant shale resource in North America, there is doubt that the industry will continue to witness the snowball effect of investments that are sure to follow. Refining and petrochemical investments are tied to midstream investments, as well as to other transportation, storage and shipping investments. Increasing capacities at individual petrochemical facilities add high-paying and, equally important, long-term jobs that help fuel local economies and small businesses that, in turn, support the workers who operate these facilities.

It is an exciting time to be a part of this industry, but also an opportunity for the many professionals who work in this industry to educate and remind our fellow consumers about the positive impacts of the shale energy developments happening in North America, but also the inter-connected petrochemical value chain that helps drive much of both the US and world economies, and delivers products that enrich and enhance daily life. HP

Notes

1 IHS Chemical 2013 World Ethylene Analysis covers historical developments and future projections for supply, demand, capacity and trade in the global ethylene and ethylene derivative markets for 2007 to 2022. www.IHS.com.

The author
Mark Eramo is vice president, chemical market insights, at IHS Chemical, a leading provider of information, insight and analysis for the global chemical industry. He oversees the chemical market insight teams that provide in-depth market research and analysis on nearly 300 chemical and plastics products. Mr. Eramo joined IHS is 2011 through the acquisition of CMAI, where he was employed 14 years. Before joining IHS, he worked for more than 12 years in the petrochemicals, vinyls and surfactants industries with Vista Chemical Co. Mr. Eramo holds a BS degree in chemical engineering from Cornell University.  

 



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