Apologies for letting this blog slip again, but have been busy trying to make a crust presenting ICIS training courses.
And so as a bonus for our army of avid readers, here are my extended thoughts on the above:
In the midst of the economic crisis it would be so easy to bury your head in the proverbial sand and forget that once the recovery does arrive, the same old feedstock-cost problems seem almost certain to re-emerge.
“The profitability of your average Asian naphtha cracker with the right level of investment in derivatives was extremely good throughout 2007. This was particularly the case if you were processing C4s into butadiene,” said an industry observer.
“But in the first half of last year margins turned negative because of rising crude and naphtha costs. Every manufacturer down every product chain frantically built inventory because of the fear that oil would reach $200/bbl by the end of the year.”
Of course we all know what really happened: Crude prices collapsed in Q4 resulting in the biggest inventory losses in the history of the chemicals industry. Stocks simply had to be liquidated due to the non-availability of working capital.
Governments are lavishing cash on stimulus packages in a desperate effort to return the world to business as usual.
This might on the surface seem the sensible thing to do, but unless that money is spent wisely in boosting energy conservation and renewable technologies, a return to strong growth could hasten the return of $100/bbl plus crude.
There’s not much sign of smart investment in China. A surge in bank lending has been used to ramp up steel and aluminium production and provide the finance for manufacturers of finished goods to run their plants hard in order to limit job losses.
China announced a $586bn stimulus package last November and then in March disclosed plans for heavy investment in ten industrial sectors, including refining and petrochemicals.
“While the (investment) proposals may boost the economy, and thus energy demand in the short term, they could also lead to continued growth of energy-intensive industries in the medium to long term,” writes the UK-based Cambridge Energy Consultants in an article on its website.
The Obama administration has also come in for some pretty fierce criticism over a cap-and-trade-bill before the House of Representatives. Lots of emissions permits would be given free under the bill, offering benefits to coal-based electricity generators and other energy-intensive industries.
Oil industry experts are queuing up to warn that the economic crisis has cut capital investment by the small independent oil companies in harder-to-get-at conventional crude reserves. The oil majors have slowed down development of unconventional sources of oil, such as the Alberta Tar Sands.
OPEC warned at its recent meeting that the fall in prices was resulting in lower investment, and the Paris-based International Energy Agency estimates that spending on oil and natural gas exploration will fall by 21% this year over 2008. This would represent $100bn less spending on building reserves.
The implications of a return of very expensive crude are obvious for Asia’s petrochemical industry, which is largely naphtha-based.
The Middle East gas-based producers would once again stand to benefit due to another surge in margins as, of course, global petrochemical prices are oil-driven.
But what if everyone suffers? Could the return to crude in excess of $100/bbl re-awaken inflation, further stoked by excess liquidity resulting from government stimulus packages?
The danger is that we might repeatedly see nascent economic recoveries nipped in the bud by surging energy costs.
BASF announced last June that it was looking at making petrochemicals from biomass using its catalyst expertise, and said that it had made good progress at the laboratory stage.
Numerous companies were also looking at methanol-to-olefins technologies, including ExxonMobil and LyondellBasell.
China’s coal reserves offer an opportunity to make methanol into large amounts of olefins and transportation fuels.
Let’s hope that cutbacks forced on companies by the financial crisis have not included freezing research into attempting to break the crude-petrochemicals link.
Another concern is the long-term outlook for naphtha supply.
The US announced new car and truck fuel-efficiency regulations last week, which, in the short term could increase the availability of the feedstock.
By 2016, all new autos will have to meet a 39 miles per gallon standard (mpg) standard, up 42% from the current 27.5 mpg. Trucks will have to do 30 mpg versus 23 mpg today.
“Europe was already heading for an enormous gasoline surplus by 2015 even before this announcement,” said Paul Hodges, chemicals consultant with the UK based International eChem.
Diesel demand in Europe has surged at the expensive of gasoline. However, the Europeans have been able to export their way out of gasoline surpluses due to shortages in the States.
But these exports were already under threat from increases in US refining capacity and the mandated steep rise in ethanol blending, added Hodges.
“The new fuel-efficiency standards will increase the pressure for European refinery closures, but in the interim there could be a disposal problem.
“This could create the opportunity for cost-advantaged naphtha supplies into the hard-pressed European and US petrochemical industries.”
Eventually, though, refinery capacity will have to close because, as one Asian-based oil and gas consultant put it “there is going to be a worldwide glut of gasoline. Even on a straight-run basis before you look at more advanced processing, there will be a big surplus requiring rationalisation.”
It is far too early to say whether refinery closures will lead to a net reduction in available naphtha.
Asia is adding capacity as Europe confronts the need to rationalise. In 2009-10 alone, 2.7m bbl/day of refining capacity is due to be come on stream in Asia Pacific, according to oil and gas consultancy FACTS Global Energy.
But naphtha exports from the Middle East could decline as the region looks to crack more naphtha in order to widen its petrochemical-product slate.
In Abu Dhabi, for example, a naphtha cracker complex is due to start-up by 2013.
Anyone with either access to advantaged ethane, propane and butane or with a proven technology that breaks the refinery/petrochemicals interface might be OK during the next oil shock.
The key for Asian liquids-based producers without either of the above must surely be maximising feedstock flexibility.
This flexibility could include cracking more liquefied petroleum gas (LPG).
LPG should be in abundant supply once liquefied natural gas (LNG) demand is booming again on higher oil costs and rising environmental concerns.
LNG producers either extract the gas during initial processing or leave it in the LNG to be taken out at re-gasification terminals.
Whatever are the solutions, they need to be found and found quickly if surging stock markets are proof of a quicker-than-expected economic recovery.