Gulf Coast ethylene margins begin in this issue

Sept. 16, 2002
In the statistics section of this issue, Oil & Gas Journal introduces Muse, Stancil & Co.'s monthly Gulf Coast ethylene margins. This series will provide insight into the profitability trends of the merchant olefins business by tracking the gross margin and cash-operating margin of a reference US Gulf Coast ethylene cracker.

In the statistics section of this issue, Oil & Gas Journal introduces Muse, Stancil & Co.'s monthly Gulf Coast ethylene margins. This series will provide insight into the profitability trends of the merchant olefins business by tracking the gross margin and cash-operating margin of a reference US Gulf Coast ethylene cracker.

This profitability series derives from current prices and Muse's estimates of typical feedstocks, product yields, and operating costs.

The Muse Ethylene Margins are not meant to represent any specific plant but rather provide a barometer of industry profitability. The series should help readers gain insight into the fundamentals that drive industry profits and provide a benchmark for monthly trend comparison.

Olefins manufacturing capacity

The latest OGJ ethylene survey (OGJ, Mar. 11, 2002, p. 66) shows a total of 107 million tonnes/year (tpy) of worldwide production capacity. Table 1 shows that 27% is in the US; more than 90% of this is on the Gulf Coast.

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The US Gulf Coast is a logical ethylene plant location for several reasons. There is an abundant supply of low-cost feedstocks and an infrastructure that provides convenient access to feedstock and olefin distribution pipelines.

Operating costs are favorable due to the availability of local utilities and other services. The proximity of petroleum refineries allows economical disposition of by-products generated from ethylene plants.

Ethylene product is typically routed to polyethylene and primary derivative petrochemical manufacturing plants. Most of the US capacity for these plants is also on the Gulf Coast.

Feedstocks, product distribution patterns

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Since the 1980s, NGL has been the feedstock of choice for ethylene plants in the US. Ethane-propane mixtures are commonly traded on the Gulf Coast. To a lesser, but not insignificant, extent naphtha is used as feedstock for olefins manufacture in selected plants. Fig. 1 shows that all of the naphtha crackers are on the US Gulf Coast.

Naphtha has the potential to play a more significant ethylene feedstock role as natural gas and oil compete on an economic price margin and marginal gasoline blendstocks are displaced due to clean-fuel gasoline regulations.

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Table 2 shows that limited quantities of gas oils, butanes, and refinery offgases are also used as feedstocks.

Because ethylene is a difficult product to store or transport by means other than pipeline, ethylene manufacturers tend to be highly integrated with their customers. Much of the US Gulf Coast ethylene production is dedicated to related derivative product manufacturing facilities. Merchant ethylene producers can usually only physically deliver to a limited number of customers.

Ethylene is primarily stored in salt domes, which are typically interconnected to an ethylene pipeline distribution grid. Proximity to salt domes is another reason for the concentration of ethylene crackers on the Gulf Coast.

Although a significant portion of worldwide ethylene manufacturing capacity production is routed to a dedicated market, the merchant market sets the price of ethylene.

Processing

Even though the basic process of steam cracking has been used since the early history of petroleum refining, many technology advances have occurred during the lifetime of plants currently operating. Newer plants use technology that allows more precise control of residence time in cracking furnaces and therefore operate at higher severity and better product yields than older plants.

Significant advances have also been made in energy efficiency. Today's plants require significantly less energy to recover high-purity products that are difficult to fractionate.

The various technologies used in different plants makes the selection of a reference plant problematic, based on average or typical yields and costs.

Feedstock flexibility is also more important. Several Gulf Coast plants have considerable flexibility to process different feedstocks from ethane to gas oil. As relative product prices converge and diverge, feedstock flexibility can add to plant profitability by lowering feedstock costs or maximizing the production of more valuable by-products.

Another process attribute that contributes to specific plant profitability is the flexibility to consume ethane as a process fuel or recycle it. Similarly, pyrolysis tar can be consumed as a fuel, blended into fuel oil, or sold as carbon black feedstock. Operators can recover benzene, toluene, and xylenes (BTX) from pyrolysis gasoline and hydrogen from the process offgas.

The value of increased processing flexibility is not reflected in the generalized profit index presented in this article.

Liquid feedstock selection presents an opportunity to optimize an ethylene plant. It is difficult to characterize naphtha, distillate, or gas oil as a "typical" ethylene feedstock. Variations in oil quality, particularly its polynuclear aromatics, will determine its yield of products and processing severity.

Ethylene margins

The Muse Ethylene Margins will track margins for three reference plants with assumed locations on the US Gulf Coast. The plants will use ethane, propane, and naphtha as feedstock. We chose these feedstocks because they cover over 75% of the US Gulf Coast and global ethylene manufacturing capacity.

An estimated gross margin and cash-operating margin will be published for each reference plant.

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The yields from each reference plant (Table 3) are intended to be typical or average yield patterns for Gulf Coast ethylene producers. The yields assume a medium severity operation with full recycle of ethane.

Plant design and operation can affect product yields. Variations in naphtha yields can be even more pronounced due to the variation in feedstock composition.

Pricing for feedstocks and products is available from commercial sources. All feedstocks and products for the reference plants are related to accepted industry price indices for hydrocarbons readily traded on the US Gulf Coast.

For products that are traded with industry-accepted product specifications (such as ethane, propane, ethylene, etc.), the price needs only to be adjusted for transportation from the delivery point specified to the reference plant.

Pyrolysis gasoline and pyrolysis fuel oil are not widely traded and, therefore, do not have a readily available market price. We have estimated the value of these products based on their fuel blending value to a Gulf Coast refiner.

Operating costs of a particular facility largely determine its competitiveness within the industry. Variable costs tend to be determined by the type of feedstock, the plant's design, and energy efficiency of the processing equipment.

The key design variable is conversion severity. Newer plants tend to be the most energy efficient. We have assumed an industry average age and operating severity for each reference plant.

Fixed operating costs can vary considerably depending on plant size and the degree of integration into a larger chemical or refining complex. We have assumed a standalone plant operation for each of our reference plants and have estimated fixed costs based on an average size plant for the industry. Fixed costs only include direct expenses, excluding allocations for corporate overhead, or marketing and supply costs.

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Table 4 shows a summary of the items included in the costs for Muse's reference plants.

The estimated gross margin is defined as product revenues minus feedstock costs. The cash-operating margin is defined as the gross margin minus the fixed costs and variable costs. All margins are expressed on an equivalent ¢/lb of produced ethylene.

Historical trends

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Fig. 2 shows historical gross margins and Fig. 3 shows cash-operating margins. During the last 3 years, industry has experienced increased margin volatility. This is largely due to a compound effect of natural gas price volatility and gas processing margins.

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In early 2001, margins fell from fairly healthy levels and were severely depressed for ethane and propane due to high natural gas prices and low natural gas inventories. Cold winter weather caused a spike in natural gas prices and a collapse in gas processing margins.

Ethane and propane supplies were severely reduced causing increases in ethylene feedstock costs. Manufacturers were not able to pass much of the resulting increased feedstock costs to buyers in the form of sufficiently higher ethylene prices.

The crisis had passed by mid-2001 and the market returned to the healthy profit levels seen in 2000. The relatively strong profit resulted from growing demand produced by a healthy general economy. The last half of 2001, however, saw generally declining profit levels as the economy and demand slowed.

At present, naphtha margins are low relative to natural gas-derived feedstock because crude oil prices are high relative to natural gas. This makes naphtha a more expensive feedstock in the current market.

Gas processing margins are still relatively depressed, which helps keep ethane and propane prices even lower than naphtha. Profitability generated by running NGL feedstocks for ethylene cracking has, therefore, been fairly favorable for the past year.

The authors

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Kathy G. Spletter is a vice-president and director of Muse, Stancil & Co., Dallas, and leads its valuation services practice area. She worked for Mobil Corp. before joining Muse in 1987 and has more than 20 years' experience in the energy industry. Spletter holds a BS in chemical engineering from Texas A&M University, College Station. She is a registered professional engineer in Texas and an accredited senior appraiser of the American Society of Appraisers.

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William P. (Paul) Ruwe leads the commercial development practice area for Muse, Stancil & Co., Houston. He has more than 25 years' experience in the petrochemical, refining, and electric power industries. Ruwe holds a BS in chemical engineering from California State University, Long Beach.

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Peter J. Killen is associated with Muse, Stancil & Co.'s Houston office and involved in a variety of consulting activities for the hydrocarbon and processing-related industries. Killen holds a BS in chemical engineering from the University of Detroit.