Building boom: five things keeping US

ethylene producers up at night

By Bernardo Fallas | April 19, 2013 12:01 AM

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• A popular topic of conversation among industry participants at recent

petrochemical gatherings in the US and abroad has been the looming US

ethylene boom.

• More specifically, how real it is and what, if anything, might stop it from

happening.

• Market participants in North America want to know for obvious reasons; it will

likely affect their bottom line. Downstream market participants have the same

perspective.

• Their South American counterparts are curious, as this key part to the US

petrochemical renaissance stands to make or break their business,

depending on where they stand.

• Same for the Europeans. The Asians, too. This comes as no surprise. The

development of shale gas in the US has injected new life to the petrochemical

sector.

• The US stands to solidify superpower status in the world of plastic

resins, primarily polyethylene, the most common of plastics. This is because

if the industry plays its cards right, the country could enjoy a cost advantage

second only to the Middle East.

Market Overview

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• Industry insiders will tell you that this advantage stands to be realized mainly

through the export of PE and other ethylene derivatives. Hence, the rest of

the world is eager to see what happens next.

• So far, eight companies have announced plans to build steam crackers in the

US by 2017. Most call for world-scale crackers to go with derivatives plants,

and all but two would be located in the US Gulf Coast region, within easy

access to both feedstock and export terminals.

• To that end, 2013 is shaping up to be a year of big decisions for many of

these companies looking to build or otherwise expand ethylene and polymer

capacity. Billions of dollars are at stake, and time is of the essence.

• With that in mind, we asked multiple sources from the petrochemical and

construction sectors to rate the biggest challenges or risks facing these

companies as they decide whether to proceed with multi-billion dollar

investments.

Market Overview continued

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So what are the top five:

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• COST: This is the first deterrent for companies wanting a piece of the

ethylene pie. Steam crackers aren’t cheap. We are talking $1-$4 billion

projects, depending on size, capacity and derivatives plants to complement

the main asset. Thick skin and deep pockets are required to make this type of

investment. There is a reason why companies including LyondellBasell, a

major, mind you, have opted to grow olefin operations through

expansions/debottlenecks.

Number 5

• TIMING: Some may argue — rather successfully — that this is the all-

encompassing, most important factor in making a decision under the current

circumstances. Build too late, and you might miss the train to the promised

land. This is why 2013 is shaping up to a key year. Shell Chemical, for

example, has a decision to make come June regarding its land purchase

agreement in Monaca, Pennsylvania. Recently, Sasol announced it had

ordered critical long-lead items for its proposed steam cracker and derivatives

project in Louisiana. To quote LyondellBasell CEO Jim Gallogly: ―The first

guys done are going to be in the best position.‖ But even an early start won’t

guarantee a first-place finish.

Number 4

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• PERMITTING: With the exception of Shell and the upstart Aither, all other ethylene plant projects are slated for the US Gulf Coast, more specifically Texas and Louisiana, two states with, shall we say, friendlier attitudes toward the petrochemical industry. And few in the industry expect permitting at the federal level to interfere at a time when the economy is growing at a snail’s pace and job creation is paramount to the ongoing recovery. (One estimate by ExxonMobil has its proposed steam cracker and polyethylene plants in Baytown, Texas, providing 10,000 jobs at the peak of construction, plus an additional 3,800 other jobs in the area. And the impact in regional economic activity? An increase of $870 million, according to ExxonMobil.) Those numbers sound nice and all, but… even ExxonMobil will have to defend its plans. Just last week, reports surfaced that at least three environmental groups plan to challenge the company’s application for a key air permit for its Texas project. Other companies seeking similar projects could expect similar challenges in the weeks and months to come. Delays in the permitting process could prove costly.

Number 3

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• CRAFT AVAILABILITY: Major contracting firms including Fluor and Technip

agree on something: if all these projects come to be, there simply won’t be

enough trained personnel to build these plants. Matthew McSorley, a group

VP at Fluor, recently told Platts that: ―If all these projects go at the same time,

we could be looking at 40,000-50,000 skilled resources needed — at peak —

to do all this work, just in the US Gulf Coast, and that will be in the 2014-2015

timeframe.‖ Importation of craft — meaning, the need to bring foreign workers

to do some of the jobs — and outsourcing through processes such as

modularization–in other words, assembling parts elsewhere, such as the

Philippines — will be necessary just to keep up, McSorley and others have

said. Imagine being the last guy with a project and realizing a) there is no

space in the shop and b) there is a skilled-labor shortage. Again, time is of the

essence.

Number 2

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• OVERBUILDING: US petrochemical industry executives will be the first to tell you this: this is one thing they are good at doing, which is bad. Simply put, the industry will have shot itself in the foot if it commits this sin again. They need only to look at the numbers to realize that this is a very real threat. As things stand, ethylene production in the US and Canada could grow by more than 10 million mt/year — or 35% of current estimated production — by 2018, if all announced projects are realized. (Fellow NAFTA member Mexico has an ethylene and derivatives project of its own in the works. Etileno XXI in Veracruz state is expected to come online as early as Q2 2015.) Derivative expansion announcements haven’t kept pace just yet. But even if they do, there is no way US demand will grow that rapidly to absorb this capacity, so derivate exports will be required to both balanced the domestic market and realize any feedstock advantage (ethylene is costly to export; value-added derivatives are the better choice). Build too many crackers/derivatives plants at or around the same time, and you could end up flooding the market with product — in this case ethylene and polyethylene — which could result in depressed prices. At the same time, multiple industry reports forecast US demand for ethane to surpass available supply as early as 2018 and through at least 2023, accounting for some ethane rejection. The feedstock advantage could fizzle.

And the No. 1 threat/risk facing ethylene producers:

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• No one expects all announced projects to be realized. The consensus seems

to be that between 3-6 world-scale crackers will see the light of day. But even

then, foreign companies including SABIC (Saudi Arabia) and Braskem (Brazil)

continue to talk about investing in crackers in the US.

• Which begs the question: Aren’t they a little late to the party already?

• The likely answer appears to be yes. A better option for some of these

companies might be to look at the derivative sector, which, as stated earlier, is

lagging behind in terms of expansions.

Conclusions

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See this and other news features on the Platts Blog

http://blogs.platts.com/2013/04/19/ethylene-plans/

Or

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