Aggressive investment plans of large oil companies in liquids-rich shale plays will sustain the cost advantage of North American ethylene producers in relation to European competitors "for some time," says Fitch Ratings.
US and Canadian shale plays have increased supplies and lowered prices of the light feedstocks that dominate North American ethylene production in relation to the heavy feedstocks more common in Europe.
The price of ethane relative to Brent crude oil has fallen to 26% from an average of 33% since February 2008 and highs of 45% at times in the intervening period. Recent increases in the price of crude oil magnify the spread in absolute terms, Fitch points out.
"At $60/bbl oil, ethane priced at 29% of Brent would have yielded a difference of $42.60/bbl difference to oil," it says. "However, at prices of $110/bbl this same percentage difference translates into a $78.10/bbl difference."
Heavy feedstocks used in ethylene manufacture, gas oil and naphtha, track oil prices. Amplifying the disadvantage for European crackers of heavy feedstocks is a premium that has developed for Brent crude, the European price benchmark, versus the US benchmark, West Texas Intermediate.
More than 80% of European ethylene capacity uses heavy feedstock. In North America, about 70% of nameplate ethylene capacity uses light feeds such as ethane, propane, and butane.
New trends
Historically, Fitch notes, naphtha cracking economics have benefited from coproduction of propylene, butadiene, and benzene and from advantages in shipping costs.
Ethylene production costs for light and heavy feedstocks were similar until the crude-price increase of early 2008.
Citing data from CMAI Inc., Fitch says naphtha-based ethylene production costs zoomed to almost 80¢/lb in June 2008 from 26¢/lb at the beginning of 2007, while ethane-based costs rose from the same base to only 61¢/lb.
Since prices of both feedstocks plummeted with the price of crude in late 2008, ethane has held and widened its advantage. In February, Fitch says, naptha-based production costs averaged an estimated 56¢/lb vs. ethane-based costs of 31¢/lb. "North American production now ranks second lowest on the production cost curve behind only the Middle East and well ahead of Europe and Asia, according to CMAI," Fitch says.
Low yields of byproducts associated with light feedstocks have tightened supplies of propylene and butadiene in North America and pushed prices to near-record levels, Fitch says. The propylene price reached 75¢/lb in the first quarter.
Project surge
Fitch cited a surge in projects announced recently to move NGLs from shale plays to chemical manufacturers. Its examples include:
• NOVA Chemicals Corp.'s agreement with Hess and Vantage Pipeline for rights to 100% of the output of the Tioga gas plant in the Bakken shale play and a 60,000-b/d pipeline to its plant at Joffre, Alta.
• NOVA's agreements to take NGL supply from Western Canada with AltaGas Ltd. and from the western Marcellus shale from Caiman Energy LLC (20,000 b/d).
• Project Mariner, announced last year by Sunoco Logistics Partners LP and MarkWest Liberty Midstream & Resources LLC, which would transport 50,000 b/d of Marcellus shale ethane to waterborne facilities for shipment to US Gulf Coast chemical producers.
• Mariner West, a 65,000-b/d expansion of Project Mariner to move ethane to Sarnia, Ont.
• Announcements of plans to build chemical production capacity in the US, including one made recently Chevron Phillips Chemical Co.
"Nonetheless, upstream capital expenditure announcements seem to be outpacing takeaway capacity announcements," Fitch says. "While some takeaway capacity has been announced, high oil prices and the aggressive capital expenditure numbers seen among major upstream producers in North America suggest the trend of ample NGL supply may last for some time, to the benefit of North American chemicals producers."
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