US shale gas casts a long shadow over petrochemicals

Middle Eastern petrochemical companies are known for their lavish hospitality, but at a cocktail party organized by a major Saudi company in Berlin recently, the atmosphere was quite somber. A conversation with one of the hosts on the impact of shale gas went some way to explaining this.

"We are worried that the Americans will be able to sell their products [polymers] into China at prices cheaper than we can," he fretted.

He was referring to an expected rise in imports of polymers manufactured using shale gas as a feedstock in the US, which, from the end of 2017/early 2018, is expected to hit every market into which Middle Eastern companies sell.

The Middle East has long enjoyed the status of the petrochemical-producing region with the lowest feedstock costs in the world. Even though the Saudi government hiked the price of ethane to $1.75/MMBtu, more than double its longstanding fixed price of $0.75/MMBtu at the end of 2015, it still remains the lowest-cost polymers producer in the world.

However, the advent of shale has helped US-based petrochemical companies narrow the cost gap to $20/mt of ethylene or even less. "That means, if companies in the US can negotiate their freight well, they can land their products into China at prices cheaper than us," the Saudi host said.

Though a small volume of polymers manufactured from shale feedstock in the US is already being exported, this figure is expected to soar by December and in early 2018. About 1.7 million mt/year of new polyethylene capacity is expected to start up by end-2017.

According to data from Platts Analytics, the US will have a PE surplus of about 4.11 million mt during 2017 and this will touch 5.94 million mt in 2018. It will then rise on to 7.13 million mt in 2019 and 7.54 million mt in 2020.

This surplus is expected to put petrochemicals producers in the Middle East and Europe under pressure. While this has been a major cause for concern on the part of companies in those regions, who expect an erosion of net profits as early as the fourth quarter, it has also forced them to innovate and focus on an alternative product streams. According to figures from the Gulf Petrochemicals and Chemicals Association, petrochemical companies in the Gulf Cooperation Council spent $700 million on research and development in 2016, up 40% from 2015 and more than double 2010's $300 million.

The efforts are being led by Saudi Basic Industries Corp, or Sabic, which is importing ethane for its cracker in Wilton, Northeast England, besides making an investment in a shale-based project in the US and in a coal-to-olefins plant in China.

Along with Saudi Aramco, it has invested in producing crude-to-olefins petrochemicals in Saudi Arabia. All these projects have a timeline for completion by 2025.

The European industry is trying to produce more propylene, butadiene and their downstream products. C3s and C4s are valuable alternative streams to ethylene, which ethane produces in high volumes when cracked.

Some of the largest European petrochemical companies have plans to begin producing more C3 and C4 streams of products.

These include companies such as Borealis and MOL. At the end of September, Borealis moved to the front-end engineering design phase for a new, world-scale 740,000 mt/year propane dehydrogenation plant at Kallo in Belgium.

Borealis has also identified recycling polymers as a part of its strategy to compete with US companies.

These steps go beyond to those taken by companies such as Ineos, Borealis and Sabic UK to import shale ethane to produce polymers within Europe.