By John Richardson
THE first shipment of ethane from the US to Europe, which is set to arrive on Wednesday to feed the INEOS cracker at Rafnes in Norway, will be widely interpreted as meaningonly one thing: That nothing in petrochemicals has essentially changed , as most of what we do to be successful is still about feedstock advantage.
Thus, one of the main focuses of analysis will be on how much more ethane might be imported from the US by other companies.
This type of analysis is partly about estimating the effect of future US ethane shipments on the economics of the European – and also Asian cracker business – as a whole. Reliance Industries also plans to ship US ethane to some of its crackers in India. A cracker project team are evaluating shipping ethane all the way to China. And I have been told, in confidence, that at least one major Asia ex-China producer is evaluating shipping ethane from the US.
People are no doubt also busy working out of how higher US ethane exports could affect the profitability of the US ethane-based cracker business.
The US business could obviously also face upward pressure on ethane costs when a huge wave of new, ethane-based crackers comes on-stream from 2017 onwards.
Then you have all the scenarios to work through on how much US natural gas liquids production might decline on oversupplied gas and oil markets. How quickly will shale gas reserves deplete in the US on your understanding of the geology? The quicker the rate of the decline in production, for geological as well as economic reasons, the greater the upward pressure on ethane costs.
These questions really matter, as do obviously the answers, which no doubt will be presented via a big volume of squiggly-lined PowerPoint slides at many conferences, and internal presentations, over the coming months and years.
But I would strongly recommend that whenever an analyst comes to you with these kind of forecasts, you should challenge her or him with the following additional seven groups of questions and themes:
- To what extent might the future of US-European ethane trade be supported by European governments in a world where markets are set to become more regional and protected?
- Might US petrochemicals producers fight back through political lobbying in an effort to prevent the upstream gas industry from exporting greater volumes of ethane? They could well argue that that a bigger jobs boost would be provided by guaranteeing the long-term profitability of US petrochemicals, and other downstream manufacturing sectors, through preventing a big sure in natural gas exports in general.
- But the gas industry could fight back by claiming that local economic value addition from exporting more ethane, LPG and LNG would be greater than that through blocking these exports. Or they may instead say, “What about the free market?”
- As China is firmly committed to much-greater petrochemicals self-sufficiency, might we see government support for companies wanting to ship ethane – and more propane as well – from the US to China? Could, for example, soft loans from state-owned banks make ethane crackers in China, and more propane hydrogenation-based propylene plants, very viable indeed?
- In a world of more regional petrochemicals markets, what does this mean for the export-focused model for petrochemicals projects?
- What would more regional markets, and a more self-reliant China, mean for US producers in particular? How successful will they be in selling their surplus polyethylene (PE) volumes when the big new wave of PE comes on-stream from 2017 onwards?
- Is the whole ethane story actually, though, of little importance, except for a few companies like INEOS that can make this work? In a world of abundant and so cheap oil and gas in general, won’t it make sense for most companies to instead stick to naphtha cracking?
Yes, feedstock advantage still matters in this business. But what also matters is the radical shift in economic fundamentals that are redrawing today’s feedstock environment.
And if you cannot sell enough of what you make, it doesn’t matter how cheap your raw material costs are.