Much has been written about how oil and gas derived from shale is going to bring back North America as a viable energy source, making it at the least more self-reliant and at the most a major exporter of energy products and fuels.
To many in the manufacturing world, the shale plays have provided nothing short of a rescue plan for the continent. The promise of low-cost petrochemical feedstocks derived from shale reserves has gotten the attention of not just world markets, but of billions of investment dollars the U.S. and Canada thought they might never see again.
The U.S. petrochemical industry is roughly about 75 years old and has long been cyclical. Upstream, it has been at the mercy of energy markets and its volatility over the years. Downstream, petrochemical derivatives such as plastic resins, have faced increasingly fierce competition from global markets through the decades, even as overall global demand increases.
Chemical investment funding has logically followed the most competitive locations for production. In the 1990s, unsurprisingly, investments in the Middle East created a petrochemical production region that quickly became a global reckoning force. Production from Saudi Arabia, Iran, Kuwait, UAE, and Qatar easily served the soaring consumer demand emerging in Asia. Traditional petrochemical suppliers to Asia – in particular, China – were shunted to the side as the sleek, new chemical plants were fueled by raw materials that cost mere pennies against Europe’s and North America’s dollars.
In the U.S. and Canada, the result was the shuttering of older plants, and a resolve from U.S. chemical manufacturers to focus on selling higher-return products to the domestic market. Few new investments emerged in the U.S. petrochemical industry as the 20th century ended and the 21st began. The last major chemical complex construction was completed in 2001, a joint venture between European firms BASF and Total, built in Port Arthur, TX.
To stay competitive even regionally, however, most North American petrochemical plants have been flexible by design. This flexibility centers on the heart of major petrochemical complexes – the steam cracker. Like refineries, steam crackers are very large yet delicate plants, and the raw materials put into them have a major effect on their output. Much like how light crudes have a high gasoline yield, certain chemical feedstocks can maximize a plant’s yield of ethylene.
Just as heavier crudes have a high yield of distillates, certain chemical feedstocks can maximize a plant’s yield of propylene. Ethylene is a very light gas that can be further refined into thousands of other chemicals. Propylene is a heavier gas that can also be refined into thousands of different chemicals. In this sense, the co-products are very complementary, and many steam crackers produce at least twice as much ethylene as they do propylene.
Steam crackers can use a variety of feedstocks that share basic properties of hydrocarbons. They are largely a part of the natural gas liquids complex which is produced through natural gas fractionation or as a byproduct liquids stream during the crude oil refining process. The historical abundance of natural gas in the continental U.S. and Canada gave rise to these complementary technologies and thus created a petrochemical industry that was based on “flexible” feedstocks. In comparison, many of the major chemical complexes in Europe and Asia were built to favor heavier, crude oil-based feedstocks.
When crude and gas were both at historic valleys in the late 1970s and throughout the 1980s, investment to build up the U.S. petrochemical industry boomed. It slowed in the 1990s though the crude price ditch of 1998-99 inspired some later investments. But the abundance of natural gas reserves (as compared to Europe and Asia) meant that most U.S. chemical plants built in the 1980s and 1990s and early 2000s were built to be truly flexible and could use feedstocks from either processing natural gas or crude oil.
Still, the investments in the 1990s U.S. chemical markets were small compared to the pursuit of building atop what was viewed as the cheapest chemical feedstock on earth – Middle Eastern ethane.
Middle Eastern ethane changed the world’s balance of petrochemical (and manufacturing) power and influence. In addition to local investments from their governments or private equity groups, U.S. chemical majors vied for the chance to enter the rapidly developing industry throughout the region. Dow in Kuwait. ConocoPhillips in Qatar. Lyondell in Saudi Arabia. Between 2000 and 2010, new production in the Middle East is greater than the sum of North American production.
In short, not even U.S. companies were investing in U.S. industry. The situation had become so universally accepted by the global business community that a movement began in the mid-2000s to position the U.S. industry as at least sustainable – it was the LNG movement. Liquefied natural gas was going to save the U.S. petrochemical industry. LNG was going to level the metaphorical playing field by enabling U.S. steam crackers to import cheap feedstocks – specifically, cheap ethane.
In 2005, then-Federal Reserve Chairman Alan Greenspan famously addressed an audience at the National Petrochemical & Refiners Association annual chemical conference extolling the virtues of LNG. U.S. petrochemical companies scrambled to invest in LNG import terminals. Less than five years later, a chemical company executive remarked during an address to the industry that not investing in an LNG import terminal was “a bullet we dodged.”
U.S. ethane dropped below the $1/gal level during the third quarter of 2008, following the steep sell-offs in most energy markets. Unlike most energy markets, however, ethane prices still have not fully rebounded three years later. By mid-2009, some U.S. chemical companies that had previously built their steam crackers to accept more of a “heavy” feedstock slate began making capital investments to build or switch furnaces to be able to accept more ethane than ever before. In 2010, the major investment announcements began.
There are currently 20 companies in North America that produce ethylene. Of those, 10 have announced major investment projects in U.S. ethylene capacity, either by expansion or new construction. Every announcement has directly attributed the investment decision to North American shale-based resources. Still more companies have announced investments in shale-based ethane – its gathering, processing and transport.
Some of the largest investments are in this space – the combination of ethane and its delivery to existing or proposed new chemical plants. When the announcement is about ethane, the announcement is about petrochemicals. Unlike other materials used as chemical feedstocks, such as propane and butane, which have historically widespread use as fuels and heating sources, ethane’s only use is to produce ethylene.
On a global basis, North America and the Middle East are now nearly equal to their percentage of ethane consumption, with a combined 80% pull on the feedstock’s global supply.
Ethylene, like crude oil, is not the end unto itself. While ethylene has thousands of chemical uses, its primary use is to produce polyethylene. In chemical markets, polyethylene is ubiquitous. Its uses are varied, it travels globally, and it is sensitive to consumer trends, weather events, shipping rates and foreign exchange fluctuations. And plastic is everywhere. Its uses are seemingly endless, from industrial applications to home use, medical use, recreational use and even food use.
If ethylene is akin to the crude oil market, polyethylene is its gasoline. Turning the ethylene gas into a polymerized pellet that can be melted and formed into nearly any item imaginable leads the region’s manufacturing base of everything from automobiles to computers to buttons and toys back to the promise of cheap ethane from the shale rocks of North America.
And so, while the scores of shale plays hold specific goals and promises for investors, the shale-ethane plays (so far, most prominently in the Barnett, Marcellus and Eagle Ford projects) are all about the ethylene. And the polyethylene.
Kathy Hall is founder and executive editor of PetroChem Wire (PCW), a daily U.S. petrochemical industry newsletter. PCW’s cash market assessments are used to settle the cleared NYMEX ethylene and plastics contracts. Prior to launching PCW, Hall spent more than 10 years as a commodity markets reporter and editor at Platts, a division of the McGraw-Hill Companies. She can be reached at Kathy@petrochemwire.com; 720-480-6288; www.petrochemwire.com.