During this year’s first half, ethylene and propylene producers in countries that comprise the Organization for Economic Cooperation and Development enjoyed good margins, supported by strong demand, according to the latest monthly Oil Market Report, released by the International Energy Agency. In second-half 2011, however, those margins have weakened.
In North America and Europe, the IEA report says, margins have remained high on low feedstock prices and stable demand. OECD Pacific margins, on the other hand, turned negative on expensive naphtha and lower Chinese demand.
In the short term, US ethane-based natural gas crackers have been enjoying cheap feedstock prices, while naphtha crackers have benefited from surplus naphtha from gasoline blenders. In the medium term, the US shale gas bonanza is revitalizing interest in new ethane-based crackers, particularly near the US Gulf Coast and the Marcellus and Utica basins.
Currently, the report noted, three US Gulf ethylene producers are tweaking their units to take more ethane and increase capacity by a cumulative 590 tonnes/year by 2014 (OGJ, July 4, 2011, p. 100). In addition, “ambitious plans are afoot” to take advantage of expected abundant ethane, extracted from shale gas, with a couple of new world-scale gas crackers planned for 2015.
Plans exist to lock in almost 200,000 b/d of ethane from Marcellus and Utica producers to an Ontario cracker (OGJ, Feb. 7, 2011, p. 110), while Enterprise Products Partners LP is advancing a competing, 1,230-mile project to transport 125,000 b/d of feedstock to the Gulf Coast (OGJ Online, Nov. 4, 2011). North American ethylene producers can expect relatively cheap, gas-based feedstock persisting through in the medium term.
In Europe, says IEA, healthy summer margins sprang more from relatively inexpensive naphtha than strong end user demand. As 2011 draws to a close, the weight of weak underlying petrochemical demand, exacerbated by the debt crisis, is “injecting a harsh dose of reality” into the sector. The short-term breathing space afforded European producers by cheap feedstock may dissipate in the longer term, says IEA.
Fundamentally, as is the case for the refining sector, OECD operators will come under increasing pressure from world-scale capacity expansions under way in non-OECD countries. A combination of weak end user demand and more expensive oil-related feedstock will likely leave OECD European capacity “vulnerable to closure.”
IEA data show that smaller-than-average naphtha crackers—those with average 2011 ethylene production of less than 523,000 tpy and cracking the most expensive feed—are, under the assumption that with all else being held equal, the least economical or more vulnerable.
In 2011, for example, IEA’s analysis shows that 60% of the most vulnerable crackers in the world are in the OECD and it is expected that in 5 years the region will hold 66% of the least competitive crackers.
If it looks farther ahead, if capacity additions continue as scheduled, OECD Europe could see 45% of its ethylene capacity as vulnerable by 2016.
Something has to give, says IEA, in the face of a “tidal wave of new and more competitive capacity” in the emerging markets: either expansions will fail to materialize, or there will be compensatory closures.
Considering that, on the one hand, the feedstock cost advantage is in North America and the Middle East, while the strongest demand growth prospects are in Asia, IEA says Europe’s vulnerability makes it the likeliest place to see rapid shutdowns in the foreseeable future.