The US exported close to 3 million barrels of ethane in H1 2017, a rise of 83% year-on-year. A majority of these exports were headed to Europe with volumes also headed to Canada, Brazil and India. Ethane from shale gas goes into making ethylene and then subsequently into the polymer polyethylene.
Besides extracting ethane and exporting it, the US has built up large ethylene and PE capacities. About 4 million mt of PE will be surplus in the US during 2017 and this figure will touch 6 million mt in 2018. Starting at the end of 2017, and early 2018, we expect a high volumes of American PE to begin getting imported into Europe.
Shashank Shekhar, S&P Global Platts petrochemicals editor is joined in London by Michael McCafferty, petrochemicals managing analyst, and in Houston by Christopher Ferrell, managing editor for olefins and polymers to discuss in-depth the growing impact of shale gas on the global petrochemicals industry.
Growing impact of shale gas on petrochemicals industry
With Shashank Shekhar, Michael McCafferty, and Christopher Ferrell
SHASHANK SHEKHAR: Hello and welcome to the Platts Commodity Pulse. In this edition, we'll discuss the constantly growing impact of shale gas on (the) petrochemicals industry. My name is Shashank Shekhar, and I'm the Platts petrochemicals news editor for EMEA.
As a starting point, shale gas is natural gas extracted from shale rock formations. The US exported close to 3 million barrels of ethane in the period January to June, 2017: the figure rising 83% year-on-year. This is ethane extracted from shale formations. A majority of this export was headed to Europe, with volumes also headed to Canada, Brazil, and India.
Ethane from shale gas goes into making ethylene and then subsequently into the polymer, PE, or polyethylene. The sites that extract the ethane and exporting it; the US has built up large ethylene and PE capacities: about 4 million mt of PE will be surplus in the US during the year 2017, and this will touch a figure of 6 million mt in 2018.
Starting at the end of 2017 and early 2018, we expect high volumes of American PE to begin getting imported into Europe. I have with me my colleagues Mike McCafferty, Platts petrochemicals managing analyst, based in London, and Christopher Ferrell, the managing editor for all of olefins and polymers, based in Houston. Mike has literally followed the shale export having shifted from the US to Europe, almost at the time the first ethane vessel made its maiden cross-Atlantic trip. Chris, based on the US Gulf Coast, keeps his ears close to the ground on shale-based petrochemicals development in this country.
So Mike, how and why are you European petrochemical companies importing ethane, and how do we see this going forward in years to come?
MICHAEL MCCAFFERTY: Yeah, as you mentioned, European chemical companies are really some of the first movers to take advantage of US low-cost feedstocks which are derived from shale. And really that's been the catalyst for the investment that we've seen from European petrochemical companies and other companies around the world.
Now, the way that European chemical companies have invested in US feedstocks I think has really been twofold: I think the main one -- and the one that's really been in the news -- has been exporting ethane at the United States to Europe, and we've seen that from companies like Ineos who is a first mover in this game, but we've also seen it from other companies such as Borealis, from Sabic, and we also know companies like Exxon and Shell have offtake agreements with companies like Ineos, who bring it in from the US. But the other way is European companies have also been investing directly in the US.
We've seen greenfield, major greenfield, projects occurring in the US. Shell's building the big plant in the Northeast. But we have also seen extensive expansions of existing projects in the US, right, and we've seen that from companies like LyondellBassell, Ineos and others.
SHASHANK SHEKHAR: Chris, how has PE production export evolved in the US since the onset of the shale phenomena?
CHRISTOPHER FERRELL: You know, ultimately there are expectations that export activity will see a significant uptick and that pricing will probably come down as well. When those two things going to happen is still kind of the big question. We've seen new capacity from Dow Chemical start up, and Chevron Phillips has new capacity online. You know, both of those are working to get to prime grades right now, while ExxonMobil's in the process of starting up, and we aren't too far from seeing the Ineos-Sasol joint venture HDPE units coming online here in Texas.
And, you know, over the course of the next year, regions like Latin America, Asia, and certainly Europe, they can expect to see more pellets coming from the US. As far as pricing, you know, I think it's important to remember that just because producers here can make the PE cheaper, that doesn't necessarily mean that they're going to sell it cheaper, unless they really find themselves in a position where they have to, either because of weak demand or low global prices.
We've seen billions and billions of dollars worth of investment here in the US on all these new plants, and those have to be paid off. You know, export resin from the US, based on what we've heard from the market, has the ability to undercut prices to other regions, but I don't think you're necessarily going to see US sellers offer cheaper, just for the sake of offering cheaper resin. You know, if you want to maximize the sales to pay off these units -- these investments -- ahead of the next wave of capacity expansions which we expect to see coming online (in) early in the next decade.
SHASHANK SHEKHAR: Mike, (in the past) we've seen crude at a very high price, a price higher than $100 per barrel, that supported the development of a shale-based petrochemicals industry. Now, things have changed since this was the case, you know, crude prices have fallen down, so, how do you see the economics developing now and, with these changes, how do you see the strategies that were initially in place changing (now)?
MICHAEL MCCAFFERTY: So the economics are certainly different from when Ineos decided that they were going to export ethane out of the US to the European base crackers. As you mentioned, crude was over $100 per barrel, gas prices -- which ethane is linked to -- were relatively in the same range which they are now, but with crude prices coming down, you know, the differential between cracking ethane, say, and cracking naphtha, it's certainly flattened out when we look at the cost curve, right, so the economics are certainly a lot different from when they were, and really what you see now in Europe is heavier traditional feedstocks.
The cost of production of those are a lot closer to ethane, right. When we look at ethane export out of the US, we add on $200/mt to whatever the price is, in the US, to kind of determine a landed cost into the European market. And, when you look at taking that feedstock and cracking it, and compare it to the traditional feedstocks that we see in Europe, such as naphtha, propane, and butane, they're a lot closer than where they were when Ineos and others, you know, initially made these plants to export ethane out of the US into the European market. So, things have certainly shifted.
SHASHANK SHEKHAR: Right, and how has this changed the strategy of companies that, you know, the initial strategies that they had and, you know, over the change in prices, how have they changed?
MICHAEL MCCAFFERTY: Yeah, I mean, I certainly think that it's not as easy as a decision that it was, you know, a few years ago. Certainly, when you saw crude prices -- as you said earlier -- over one $100 a barrel, and ethane prices where they were, right. It was a difficult decision then, but I think it's (even) a much more difficult decision now. But, with that said, I think that you'll continue to see incremental ethane coming out of the US into the European market.
Another major factor of the European chemical companies, and really companies around the world that are looking to export ethane out of the US to wherever their crackers may be, is that they're looking at availability of ethane in the US market, right. And, when you look at the supply/demand forecast going out 5, 10 years, we see that there's going to be ample supply.
We continue to see rejection forecasted into the future and that's leaving ethane in the natural gas, not recovering it, because there isn't a market for it, right. And, so we expect to see that to continue as we look out into the future, because we don't have these incremental crackers built into the, into the forecast, right. But, what it says is, there's ability for companies around the world to take US ethane.
SHASHANK SHEKHAR: Chris, lingering on to what Mike just said, you know, the price impact. If we have the same reflection on polyethylene, you know, what impact on prices do you see over the horizon on PE prices globally? There is a European CEO for a major petrochemical company who has said that beginning the end of 2017, and perhaps early 2018, there will be an impact on balance sheets of companies into the petrochemicals business. Practically, because there's a lot of import scheduled to come into Europe from the US.
CHRISTOPHER FERRELL: Yeah, I think if you talk to people here in the US, a lot of them thought that this month is when we would start to see some of those changes, and certainly the impacts of Hurricane Harvey impacted that. You know, I think as far as pricing, what's interesting is that, you know, some of this new capacity includes grades like metallocenes and specialty grades.
There aren't necessarily a lot of commodity HDPE grades, for example, at least not in these additional start ups. And, those are some of the things that you would expect to see the price come down on, but as we get into 2018, especially as we see a few more producers start to come online, the exports are really expected to pick up, and I think then you'll start to see North American producers, you know, US producers in particular, in a position to become more of a player in the global markets, and that's when you potentially could see prices start to come down a bit more.
The thing we have to remember in the US is that up until now, for a lot of these producers, exports have kind of been more of a relief valve. What was being produced in North America, for the most part, has stayed in North America. But, domestic demand in the US is just simply not going to keep pace with this new capacity. You know, exports have always kind of been the endgame for this, and the ability to sell PE produced from, you know, feedstock-advantaged ethane against naphtha-based ethylene-produced PE, you know, that's something that gives the US producers an advantage and I think that ultimately you will see them cash in on that.
SHASHANK SHEKHAR: Thank you for listening to us today. Mike, Chris and I were a part of the team that wrote a special report on impact from shale under open petrochemicals industry recently. We wrote it on a range of topics including LNG, the impact on naphtha, and even the credit ratings of companies that are in the shale business. The report can be downloaded from Platts.com. On the same website, you can get and access to a range of information on various commodities.