Are European ethane imports a fig leaf for a depressed industry?
By Nandita Lal and Hetain Mistry
September 26, 2014 - The US shale gas phenomenon is finally causing waves in the European petrochemical market. In early August, Borealis and Sabic followed Ineos' lead in importing US ethane for their European crackers. But do these imports offer an empty promise to an otherwise depressed industry?
The shale revolution in the US not only provided low-cost ethane to revive the US industry, it has also given hope of economic survival to European producers that can crack gas instead of liquid naphtha. By 2016, three of the world's biggest petrochemical companies will have started to import US gas into European ethylene crackers in a move that would have been unthinkable just a few years ago.
Ethane, a hydrocarbon, is one of five feedstocks for steam crackers, the others being liquid naphtha and gasoil and gases propane and butane.
Analysis continues below...
Global Polyethylene Outlook 2014-15
The report and accompanying dataset offers a global outlook on polyethylene and polypropylene prices out to 2025. It provides essential market data, intelligence and insight by integrating analysis from upstream to downstream.
A shale gas boom in the US has hammered ethane prices so low that it has triggered an investment bonanza in the US that threatens to pump out millions of tons of commodity grade polyethylene, depress PE prices globally and crush European margins.
That has led companies to look west for feedstock. And despite the exorbitant cost of transporting ethane, which includes construction of tanks, building special vessels, and upgrading crackers among others [costs, investments etc], it is still cheaper than European naphtha for many of these firms.
Other majors, like Versalis, are now set to follow Ineos, with cracker operators desperate to improve naphtha cracker margins that have collapsed from $1,164/mt in the first half of 2011 to $726/mt in the first half of 2014.
A look at the economics shows the stark contrast between producing ethylene on either side of the Atlantic. In the US, variable costs are less than $100/mt for ethane crackers to produce a ton of C2 ethylene -- the main building block of all plastics. However, in European naphtha crackers that figure soars to more than $650/mt.
Oeyvind Lindeman, chief commercial officer of Navigator shipping company, hinted there were more companies seeking to exploit cheap US shale.
"We are having numerous conversations and intimate discussions with several European petrochemical producers who are investigating the possibility to access competitively US priced feedstock, particularly ethane."
"Sourcing cheap ethane will cement their continued competitiveness in the global petrochemical market and is therefore high on everyone's agenda."
Saudi Arabia's Sabic, the largest producer of ethylene in the world, said in August it will modify its Wilton plant in England into a gas cracker to use US ethane by 2016. Sabic did not add details of the new feedstock slate.
Borealis' recently concluded deal involves contracting Navigator to build a new 35,000 cubic meter vessel to bring ethane (bought from Antero Resources) from Marcus Hook terminal in the US to crack in its flexible steam cracker in Stenungsund, Sweden. The first delivery of ethane is planned for late 2016.
Ineos, which was the first to plan to import ethane, saw Borealis and Sabic's decision as inevitable. "This is not a great surprise as we have, of course, gone through the same thinking," said Tom Crotty, group director of Ineos. "If you have a gas cracker in Europe, then sourcing the most competitive feedstock possible is the obvious thing to do."
Ineos signed an agreement in 2012 with Range Resources, followed by an agreement with Consol Energy in 2014, for the purchase of ethane from Marcus Hook terminal in US for its crackers in Grangemouth, Scotland, and Rafnes, Norway. Shipments are due to start in 2015. Ineos will also source additional ethane from Enterprise Products from its export terminal in Texas, it announced this year.
But shale gas envy is not just limited to Europe.
India's Reliance (RIL) had long planned to use imported US ethane for its crackers, but Europe's gambit seems to have spurred it into action.
Following Sabic and Borealis' announcements in August, Reliance signed a deal with South Korea's Samsung Heavy Industries to build six very large ethane carriers. Reliance Industries plans to ship 1.5 million mt/year of ethane from its US shale joint ventures to a chemical complex in the Indian state of Gujarat.
Reliance has two joint ventures in Pennsylvania's Marcellus Shale -- one with Chevron, in which it has invested $1.7 billion, and another with Houston-based Carrizo Oil & Gas, in which it has invested $392 million. It has a third JV, in which it invested $1.5 billion, in Texas' Eagle Ford Shale with Dallas-based Pioneer Natural Resources.
The question remains however: will the shift to ethane feedstocks pay off?
Next: Constraints will require major infrastructure investments