Uncertainty looms for US olefins industry

March 5, 2018
The US olefins industry is entering a period of 5 critical years in which decisions made by senior management in a few global petrochemical companies will set the stage for profitability and future expansion projects in the next decade or more. Industry consultant Daniel Lippe examines the US olefins market during second-half 2017 and provides guidance for what to expect during first-half 2018.

Dan Lippe

Petral Consulting Co.


In 1859, Charles Dickens wrote A Tale of Two Cities, drawing on 70-100 years of historical perspective regarding life in England and France in the decades preceding and following the French Revolution and the insanity of the French Reign of Terror. With the perspective of a historian, Dickens confidently began the best of his novels with an oft-quoted saying: "It was the best of times; it was the worst of times. It was the age of wisdom; it was the age of foolishness."

For the US petrochemical industry, none of us knows how the story will play out during the next 5 critical years. Decisions to be made by senior management in a few global chemical companies will set the stage for profitability and future expansion projects in the US for the following 10-20 years. Hence, the theme for the next several articles in this series, 'A Tale of Two Futures.'

In one scenario, US ethylene-polyethylene producers use their cost advantages to greatly expand global market share in all grades of polyethylene. Petral Consulting Co. sees polyethylene prices falling 10-15¢/lb if this happens, with gross margins vs. ethylene spot prices falling to breakeven levels. As gross margins for polyethylene weaken, gross margins based on spot ethylene prices also are likely to fall to 0-5¢/lb below cash costs for high-cost feedstocks.

In the other scenario, key US producers adopt strategies that will come to be known as "minimum market disruption." In this case, spot prices for polyethylene remain steady or decline only a few cents/lb and margins for spot ethylene vs. costs for high-cost feedstocks remain marginally positive.

The industry's journey to this pivotal point in its history began when US Gulf Coast (USGC) producers first considered building new world-scale plants for ethylene and polyethylene in 2011-12. For the first time in decades, chemical company executives viewed 2012 and beyond as the best of times. Saudi Arabia and other key members of the Organization of Petroleum Exporting Countries were firmly in control of oil markets and everyone believed oil prices would remain above $100/bbl indefinitely. Furthermore, US oil producers were successfully applying horizontal drilling and fracturing techniques to oil-prone shale plays in North Dakota and Texas.

In less than 5 years, US oil producers had reversed decades of decline and increased US crude oil and associated gas production at accelerating rates. Midstream companies did what they always do: They expanded gas processing capacity using state-of-the-art technologies. For all practical purposes, each new gas processing plant increased the industry's ethane-recovery capability.

The combination of rising associated gas production and increasing state-of-the-art gas plant capacity soon gave USGC ethylene producers the other half of their perfect world: growing ethane supply surpluses and steady, economically attractive, ethane pricing.

If two new ethylene plants at 3.3 billion lb/year each are good, six must be three times as good, and eight even better. After all, what could go wrong? USGC chemical companies knew they were moving into the best of times.

New plant startups

After beginning commissioning activities in June 2017, newly formed DowDupont put its 3.3-billion lb/year LHC 9 ethylene plant in Freeport, Tex., into commercial service in December as part of Dow Chemical Co.'s previously announced $6-billion USGC investment program in Texas and Louisiana on projects to use low-cost and advantaged US shale gas feedstock (OGJ Online, Sept. 21, 2017). Of the five new plants scheduled for commissioning during second-half 2017, this was the only plant to reach startup before the end of December. No new polyethylene plants targeted for startup by yearend entered service.

During first-half 2018, however, ChevronPhillips Chemical Co. LP and ExxonMobil Chemical Co. will commission new 3.3-billion lb/year ethylene plants at Cedar Bayou, Tex., and Baytown, Tex., respectively (OGJ, Sept. 4, 2017, p. 82). By yearend 2018, Petral Consulting expects total USGC operable ethylene capacity will increase by about 14 billion lb/year, with an equal volume of new polyethylene capacity to start during the same period.

Ethylene production

Petral Consulting tracks US ethylene production via a monthly survey of operating rates and feed slates. Results of the monthly survey showed ethylene production steadily rising during first-half 2017 from 140-150 million lb/day in 2014 and 150-160 million lb/day in 2015-16. In first-quarter 2017, production was 166 million lb/day before increasing to 170-175 million lb/day during the second quarter (Table 1).

Hurricane Harvey disrupted area plant operations, which included 19 units with a combined capacity of 44 billion lb/year.

Most hurricanes do extensive damage to electric power grids and disrupt production from all ethylene plants and derivatives units in any given area. While Harvey did limited damage to the electric power grid, the storm dumped 25-50 in. of rain in both Harris and Chambers Counties, Tex., in 3-4 days. Record rainfall resulted in extensive flooding and damage to plants on the Upper Texas Gulf Coast, with Mont Belvieu and the surrounding area receiving 50 in. of rain in 3 days.

Flood damage was asymmetrical. All five ethylene plants (totaling a combined capacity of 13.1 billion lb/year) located within the 15-mile radius of Mont Belvieu experienced major downtime in September-October, but not all suffered extensive damage. Plants in the Beaumont-Port Arthur-Orange area also experienced extended downtime and production losses.

The story of second-half 2017 centered on industry actions before and after Harvey's landfall. In late 2016, ethylene producers determined that all-out ethylene production was necessary in the two quarters preceding planned startup dates for new polyethylene plants, originally scheduled to come on stream before new ethylene plants (OGJ, Nov. 6, 2017, p. 42). Texas ethylene plants produced 115-125 million lb/day in February-July vs. 110 million lb/day the previous 6 months. If ethylene production from plants in the Upper Texas Gulf Coast in September had occurred at March-August rates, the industry would have accumulated as much as 5 billion lb of supply to use for commissioning new polyethylene plants. Instead, Texas ethylene production rates fell sharply in August to 18-40 million lb/day (15-40%) less than the second-half 2016 average during September-October. Polyethylene plants, however, didn't reach startup as planned. Petral Consulting estimates ethylene production losses were 2.5-3.0 billion lb (Table 1).

Fig. 1 shows trends in ethylene production.

Ethylene production costs

Ethylene production costs are determined by raw material costs and coproduct credits. Based on variations in yield patterns for the various feeds, coproduct volumes vary widely between the three categories of plants (ethane-only, LPG-only, and multifeed plants). Raw material costs are determined by each feedstock's price and its conversion to ethylene. Similarly, coproduct credits are determined by spot prices and production volumes for each coproduct.

A few ethylene plants can upgrade all coproducts to purity streams and sell all coproducts at market prices. Most ethylene plants produce a few purity coproduct streams but produce most coproducts as mixtures and sell mixtures at discounted prices. Cash production costs are determined by simple addition of raw material costs and coproduct credits (see accompanying box).

Prices for most feedstocks moved consistently higher in second-half 2017 alongside higher prices for West Texas Intermediate (WTI) crude. WTI prices were $45/bbl in June and increased every month in second-half 2017 to reach $60/bbl by late December for an average of $58/bbl. Prices for heavy feedstocks increased steadily in second-half 2017 and were 35-40% higher in December vs. June. Spot prices for propylene and benzene also increased, but only by 28-30%.

Supply-demand considerations were bullish for both natural gasoline and gas oil in second-half 2017. Feedstock pricing increased more than coproducts, with production costs for natural gasoline rising by 72% and gas oil by 150%.

Production costs for natural gasoline and light naphtha of similar quality were 21¢/lb in third-quarter 2017 (up 2¢/lb vs. third-quarter 2016) before jumping to 26¢/lb in the fourth quarter, 2.3¢/lb higher than the same quarter in 2016.

Propane made a dramatic transition beginning in July. In June, production costs were competitive with ethane at 12.7¢/lb. Cash costs increased to 17.4¢/lb in July and continued to rise in August and September to 28-30¢/lb, making propane the highest-cost feedstock for the last 4 months of 2017. Propane's cost surge was driven by a belated realization among NGL traders that time had run out for the seasonal increase in inventory to reach a reasonable level ahead of winter 2017.

Table 2 shows production costs for major ethylene feedstocks.

Ethylene pricing, profit margins

Spot prices for ethylene generally fluctuate within a range defined by cash costs for the higher-cost feedstock. The low end of the range is determined by the cash cost for high-cost feedstock with margins in a range of -5¢/lb to +5¢/lb. The high end of the range is determined by cash cost plus margins of 10-15¢lb. During 2012-16, margins for high-cost feeds exceeded 15¢/lb in only three quarters (first-quarter 2013, third and fourth-quarters 2014) and were less than zero in only one quarter (fourth-quarter 2015).

While natural gasoline and refinery-sourced light, paraffinic naphtha of similar quality were the high-cost feedstocks in second-quarter 2017, a sharp price jump for propane in July consistently left it the highest-cost feedstock during second-half 2017. Cash production costs based on propane were 28-30¢/lb during September-December.

According to PetroChem Wire price reports for all fixed-price trades in Texas and Louisiana, and consistent with historic price-cash cost relationships, spot ethylene prices averaged 26.4¢/lb and varied from 19.5¢/lb in July to 28-30¢/lb in September-December. Before propane costs surged, margins based on propane feed were 14¢/lb in second-quarter 2017 and collapsed to 1.5¢/lb in the third quarter and -1.3¢/lb in the fourth quarter.

Ethylene producers settled net transaction prices (NTP) within a range of 29-35¢/lb in second-half 2017, with prices averaging 31.9¢/lb in the third quarter. As production costs based on propane increased, NTP settlements increased to 33.75¢/lb during fourth-quarter 2017. Profit margins based on NTPs and propane production costs were 8.6¢/lb in the third quarter and 4.5¢/lb in the fourth quarter. By contrast, profit margins for ethane (consistently the low-cost feed) were 19¢/lb in the third quarter and 21.5¢/lb in the fourth quarter.

Fig. 2 shows historical trends in ethylene spot prices and NTPs.

Olefin-plant feed slate trends

Petral Consulting's monthly survey of plant operating rates and feed slates showed industry demand for fresh feed averaged 1.51 million b/d in third and fourth-quarters 2017. Consistent with widespread downtime in the Upper Texas Gulf Coast in the months following Hurricane Harvey, demand in second-half 2017 was 162,300 b/d (9.7%) less than in first-half 2017 (Table 3).

Ethane demand-typically accounting for 70% of total fresh-feed demand-averaged 1.15 million b/d in second-half 2017, down 87,300 b/d from the first half of the year. Ethane demand was 1.24 million b/d in July before falling to a low of 893,000 b/d in September. By December, demand for ethane had recovered to 1.3 million b/d.

During first-half 2017, propane demand was 325,000 b/d before falling to 252,000 b/d in the last 6 months of the year, averaging only 204,000 b/d in September-October. Demand for propane during second-half 2017 was weaker than in any previous two-quarter period since the global financial crisis from fourth-quarter 2008 to first-quarter 2009.

Demand for heavy feeds (naphtha, condensate, and gas oil) during first-half 2017 was 187,700 b/d. As various plants worked to repair flood damage in second-half 2017, heavy feed demand fell to 153,900 b/d and accounted for 10.5% of fresh feed in first-half 2017 and 9.6% in the second half. Within the heavy feeds category, demand for natural gasoline and refinery naphtha was 130,000 b/d in first-half 2017 before falling to 117,000 b/d in the second half. Demand for refinery gas oil was 57,000 b/d in first-half 2017 and 37,000 b/d in the second half. Gas oil demand in second-half 2017 was 20,000 b/d (36.3%) less than first-half demand amid plant downtime and an increase in gas oil's ethylene production costs.

Monomer exports

The most important markets for ethylene and propylene are as raw material feeds for production of polyethylene and polypropylene. Historically, US chemical companies focused almost exclusively on finding export markets for ethylene and propylene derivatives such as polyethylene, ethylene glycol, PVC, polypropylene, and acrylonitrile. The emphasis on derivatives exports allowed USGC producers to export minimum volumes of ethylene and propylene monomer. Export terminal capacity was very limited, while transportation costs were viewed as prohibitive.

Chemical companies may remain reluctant to make capital investments in export-terminal capacity for ethylene and propylene monomer, but major midstream companies don't share this reluctance. Enterprise Products Partners LP (EPP), Targa Resources Corp., and Sunoco Logistics Partners LP each expanded LPG export-terminal capacity. EPP and Sunoco also separately developed cryogenic waterborne-ethane export terminals to take advantage of substantial and persistent ethane supply surpluses. The increase in LPG terminal capacity enabled chemical companies to increase exports of propylene monomer beginning in 2015.

Until 2017, ethylene monomer exports were sporadic and small. According to US International Trade Commission (ITC) statistics, US ethylene monomer exports in 2010-15 never averaged more than 0.8-0.9 million lb/day and were only 15,000 lb/day in 2012 and 18,000 lb/day in 2014. In January and May 2017, exports jumped to almost 2 million lb/day so that ethylene monomer exports averaged 1.29 million lb/day in first-half 2017.

Historically, two companies have had joint ownership of the only ethylene-export terminal in the USGC, controlling waterborne-ethylene exports. At least two midstream companies, however, are now considering developing new terminals dedicated to ethylene-monomer exports.

During third-quarter 2017, monomer exports fell sharply to average 0.44 million lb/day, down 0.86 million lb/day (66%) from first-half 2017. In fourth-quarter 2017, however, exports surged to 1.39 million lb/day for an average of 0.92 million lb/day during second-half 2017. For the first time ever, US full-year ethylene exports averaged more than 1.0 million lb/day in 2017.

Polyethylene exports

According to US ITC statistics, US exports of polyethylene-including high-density polyethylene (HDPE), low-density polyethylene (LDPE), and linear low-density polyethylene (LLDPE)-rose quarterly between fourth-quarter 2014 and second-quarter 2016 for a cumulative increase of almost 9 billion lb. The largest increases occurred in first-half 2015 and fourth-quarter 2015.

After second-quarter 2016, US polyethylene exports declined for two consecutive quarters. Exports spiked to 26.7 million lb/day in first-quarter 2017 but then declined for the next three quarters. Polyethylene exports were 18.9 million lb/day in third-quarter 2017, down 7.8 million lb/day (29.3%) from the first quarter. In the fourth quarter, exports were down 9.3 million lb/day (34.9%) from first-quarter 2017 to 17.4 million lb/day.

Polyethylene exports to Canada and Mexico were 9.37 million lb/day in second-half 2017, down 0.54 million lb/day (5.7%) from the first 6 months of the year. Exports to all other destinations (rest of world, ROW) averaged 9.28 million lb/day in second-half 2017, or 4.83 million lb/day (34.2%) lower than first-half 2017.

The slide from a record high in first-quarter 2017 (26.9 million lb/day) to 17 million lb/day in fourth-quarter 2017 was consistent with the domestic polyethylene balance. Even though Hurricane Harvey caused extensive downtime for polyethylene plants as well as ethylene plants, US polyethylene producers met their contract obligations to domestic consumers and the nearest export destinations. Exports to ROW destinations bore the brunt of the decline in polyethylene availability (Fig. 3).

Polyethylene prices and gross margins vs. ethylene prices provide insight into what may occur in 2018 as new capacity comes on stream. Spot prices for HDPE (free on board, FOB, Houston) were 45-50¢/lb in first-half 2017 and 47-52¢/lb in second-half 2017. Gross margins-based spot HDPE prices and spot ethylene prices were 15-20¢/lb in first-half 2017 and 22-25¢/lb in second-half 2017. Stronger prices and margins during second-half 2017 resulted from reduced production rates at Upper Texas Gulf Coast plants following disruptions caused by Hurricane Harvey (Fig. 4).

Propylene supply

Olefin-plant coproduct supply. Coproduct propylene supply depends primarily on the use of propane, normal butane, naphtha, and other heavy feeds. In second half 2017, the monthly survey showed demand for LPG feeds (propane and normal butane) was 65,000 b/d (16.9%) less than in first-half 2017. Likewise, demand for heavy feeds was 26,500 b/d (14.7%) less than in second-half 2017.

Coproduct supply was about 18.9 million lb/day in second-half 2017, down 3.1 million lb/day (14.1%) from first-half 2017. Coproduct supplies from light feeds (ethane, propane, and normal butane) during second-half 2017 fell 1.9 million lb/day (12.8%) from the previous 6 months to 13 million lb/day, while coproduct supply from propane accounted for 58% of supplies from light feeds in second-half 2017 vs. 64% in first-half 2017 (Table 4).

PDH plant supply. Based on PetroChem Wire's daily reports, Petral estimates propylene production from propane dehydrogenation (PDH) plants at the USGC. Two plants with a combined capacity of 8.4 million lb/day were operational in second-half 2017, with production averaging 5.5 million lb/day (65% of nameplate capacity), or 0.54 million lb/day (10.9%) higher than first-half 2017. While this simple comparison indicates PDH plants made a larger contribution to propylene supply in second-half 2017, propylene buyers were anticipating EPP's new 1.65-billion lb/year Mont Belvieu plant would be operating in fourth-quarter 2017, before startup was delayed to December. From this perspective, then, propylene supply from PDH plants was 2-3 million lb/day less than buyers expected it to be in July-August. While all sources of propylene supply are variable and, to some extent unreliable, PDH plants seem to be the least reliable of all supply sources.

The future in which ethylene and polyethylene remain in balance is a future of less coproduct propylene supply, opportunity for more PDH supply, tighter supply-balances, less monomer surplus, and stronger prices for polymer-grade propylene. The future in which all ethylene and polyethylene plants operate at full rates means more coproduct supply, more surplus-monomer supply, and more monomer exports.

Refinery supply. Refinery propylene sales into the merchant market are a function of:

• Fluid catalytic cracking unit (FCCU) feed rates (most important variable).

• FCCU operating severity (important but not directly measurable).

• Economic incentive to sell propylene rather than use it as alkylate feed.

Variations in FCCU feed rates generally are the most important parameter determining refinery-grade propylene supply. Economic factors that may result in changes in operating severity are generally of secondary importance.

Statistics from the US Energy Information Administration (EIA) show US refineries operated FCCUs at 5.06 million b/d in third-quarter 2017, a decrease of 42,300 b/d (0.8%) from second-quarter 2017 rates. Based on EIA monthly statistics for October 2017 and weekly statistics for November-December, Petral Consulting estimates FCCU feed rates in fourth-quarter 2017 declined by 20,000-25,000 b/d (0.8%) from the third quarter.

Regionally, EIA statistics showed feed rates for FCCUs in the USGC and Midcontinent were 3.43 million b/d in third-quarter 2017 and 3.49 million b/d in the fourth quarter, accounting for 68-70% of total US fresh feed to FCCUs.

Refinery-grade propylene supply from USGC and Midcontinent refineries was 45.5 million lb/day in third-quarter 2017 before rebounding to 49.6 million lb/day in the fourth quarter. Merchant sales in third-quarter 2017 were 0.25 million lb/day (0.55%) more than in third-quarter 2016. Merchant sales in the fourth quarter were 49.5-49.7 million lb/day, or 3.2-3.4 million lb/day (7.3%) more than in fourth-quarter 2016. Production-feed ratios for USGC and Midcontinent refineries in second-half 2017 were 15.25-15.50 lb/bbl and 6.5-6.7 lb/bbl, respectively (Table 5).

US production. EIA statistics for refinery-grade propylene and Petral Consulting estimates for coproduct supply and PDH plant production show total US propylene supply was 69 million lb/day in third-quarter 2017 before increasing to 74-75 million lb/day in the fourth quarter. Third-quarter production was 3.35 million lb/day lower from third-quarter 2016, while fourth-quarter production was 1.1 million lb/day less than fourth-quarter 2016.

If PDH plants had run at 90% of capacity, total supply in second-half 2017 would have exceeded first-half 2017 production by 3-4 million lb/day.

Fig. 5 shows trends in coproduct supply, PDH plant production, and refinery merchant sales of propylene.

Propylene economics, pricing

Two factors greatly influence propylene pricing. Refinery-grade propylene supply tracks seasonal variations in refinery crude runs and FCCU feed rates. Seasonal variations in refinery crude runs and FCCU feed rates are reasonably predictable, and propylene supply-demand balances are usually tighter in winter than in summer. When tropical storms or hurricanes in the Gulf of Mexico disrupt refinery operations in Texas and Louisiana, refinery crude runs during the third quarter of the year are less than in the second and fourth quarters.

Propylene price relationships vs. unleaded regular gasoline vary directly with seasonal variations in the propylene supply-demand balance as well as with seasonal variations in gasoline prices. More importantly, as long as refinery-grade propylene prices maintain nominal premiums vs. conventional unleaded regular gasoline prices in the USGC and Chicago, refineries usually will deliver maximum practical volumes of refinery-grade propylene into the merchant market.

Propylene inventory in reportable USGC storage also influences refinery-grade propylene prices. Under normal market conditions, reportable propylene inventory in USGC storage varies by ±25% of the midrange of long-term historic inventory levels. When inventory falls below the lower end of the historic mid-range, spot prices for refinery-grade propylene tend to strengthen and discounts vs. unleaded regular gasoline swing to premiums.

On July 1, propylene inventory in reportable USGC storage was 616.6 million lb before increasing to 879.8 million lb on September 1, according to EIA statistics. As refineries in the Upper Texas Gulf Coast struggled to recover from flooding and other damage inflicted by Hurricane Harvey, inventory fell to 733 million lb on November 1. EIA weekly statistics and statistics in EIA's Petroleum Supply Monthly were in good agreement as to inventory levels during first-half 2017, with weekly statistics showing 611 million lb on July 1 but only 415 million lb on September 1 and 675 million lb on November 1.

EIA's weekly statistics in July through September were less reliable as early indicators for inventory statistics published in the Petroleum Supply Monthly 2 months later. EIA weekly statistics regained reliability in October, however. Considering all the extraordinary activity in August-September and the number of people directly involved in repairing and rebuilding flood-damaged homes, the divergence between weekly and monthly statistics in third-quarter 2017 comes as no surprise.

According to PetroChem Wire, spot prices for refinery-grade propylene averaged 23.8¢/lb in July and were about 1¢/lb less than unleaded regular gasoline prices (¢/lb basis) in the USGC pipeline market. Spot prices for refinery-grade propylene increased by 10¢/lb in August-September to average 34.5¢/lb in September. Propylene premium to unleaded regular gasoline prices were 6.5¢/lb in August and 8.1¢/lb in September, consistent with propylene's bullish fundamentals and economic trends.

Spot prices for refinery-grade propylene were again steady in October and November, averaging 35¢/lb and increasing to about 37¢/lb in December. Premiums to unleaded regular gasoline were 6.0-9.5¢/lb in fourth-quarter 2017.

Monthly contracts for polymer-grade propylene settled higher in each month of second-half 2017. July's contract settled at 39¢/lb, with contract settlements for third-quarter 2017 averaging 41.67¢/lb. Prices increased by 0.5-1.5¢/lb per month except in September, when contracts settled 7¢/lb higher at 46.5¢/lb. Polymer-grade contract prices maintained premiums of 12-15¢/lb in third-quarter 2017 and 13-14¢/lb in the fourth quarter. Late in December, contracts settled at 50¢/lb. Based on persistent spot pricing at 48-49¢/lb, Petral Consulting expected the contract price to roll unchanged into January 2018; however, PetroChem Wire reported two of the USGC's three PDH plants began experiencing operating problems in December. According to PetroChem Wire daily reports, spot prices for polymer-grade propylene jumped to 53¢/lb on the first trading day of the month and then to 62¢/lb on Jan. 10.

With 8 years of cumulative observations of PDH plant unreliability and a persistence of operating problems, the USGC propylene community's sustained and strong bullish reaction came as no surprise. By mid-January, spot prices were almost 70¢/lb, or 22¢/lb (43%) above mid-December levels. Petral Consulting expects propylene monomer exports in first-quarter 2018 to fall at least 2 million lb/day below third-quarter 2017 volumes.

Propylene, polypropylene exports

Before 2014, propylene monomer exports were an insignificant element of USGC propylene supply-demand balance. In 2014, however, propylene marketers began using exports to manage increases in production from PDH plants and resulting jumps in inventory to avoid creating surpluses that would inevitably cause prices to crash.

Monomer exports increased for three consecutive quarters in 2017, reaching a record high of 3.83 million lb/day in third-quarter 2017. With the decline in coproduct sales and refinery merchant sales in September-October, exports fell to 2.39 million lb/day in fourth-quarter 2017, or 1.48 million lb/day (38.4%) less than the third quarter.

According to US ITC statistics, US exports of polypropylene were 9.1-9.3 million lb/day for three quarters (second-half 2016 through first-quarter 2017) before dropping sharply in second-quarter 2017 and remaining weak through yearend. Exports in second-half 2017 were about 6.5 million lb/day, or 2.7 million lb/day (29%) less than average exports in second-half 2016 and first-quarter 2017.

First-half 2018

If the 'Tale of Two Futures' has not already begun, it will begin in first-half 2018. The outlook for 2018, however, is clouded by a few key considerations:

• When will the various new ethylene and polyethylene plants reach full capacity?

• Will ethylene monomer exports become a significant element of the USGC ethylene supply-demand balance?

• If polyethylene exports to ROW destinations quadruple as forecasted, how much impact will the surge in exports have on polyethylene and ethylene prices?

While we should learn answers to the first questions in first-half 2018, answers to the remaining questions will not be forthcoming until second-half 2018 or 2019.

When all new polyethylene plants reach nameplate capacity rates, and if all existing polyethylene plants continue to run at capacity rates, US polyethylene exports will increase by 45-49 million lb/day. In fourth-quarter 2017, exports were 17-18 million lb/day, while exports to destinations other than Canada and Mexico were 9-10 million lb/day. By yearend 2018, US polyethylene exports will reach 58-62 million lb/day if all plants run at 90-100% of nameplate capacity.

An alternative scenario is possible. As new ethylene and polyethylene plants come online, US ethylene producers may reduce production from existing capacity to offset 25-50% of new capacity, spreading out the surge in US polyethylene exports over a period of 5-7 years. This scenario will smooth the transition and minimize the bearish impact of the surge in US polyethylene exports on global polyethylene pricing.

The future in which ethylene and polyethylene remain in balance and grow with global market demand is a future of less coproduct propylene supply, opportunity for more PDH supply, tighter supply-balances, less monomer surplus, and stronger prices for polymer-grade propylene. The future in which all ethylene and polyethylene plants operate at full rates means more coproduct supply, more surplus monomer supply, more monomer exports, and weaker prices for polymer-grade propylene.

Ultimately, we will all wake up one fine morning in 2021 to realize that one possible future didn't come to pass while the other did. The 'Tale of Two Futures' will resolve itself into present day reality as it always has.

The author

Daniel L. Lippe ([email protected]) is president of Petral Consulting Co., which he founded in 1988. He has expertise in economic analysis of a broad spectrum of petroleum products including crude oil and refined products, natural gas, natural gas liquids, other ethylene feedstocks, and primary petrochemicals.

Lippe began his professional career in 1974 with Diamond Shamrock Chemical Co., moved into professional consulting in 1979, and has served petroleum, midstream, and petrochemical industry clients since. He holds a BS (1974) in chemical engineering from Texas A&M University and an MBA (1981) from Houston Baptist University. He is an active member of the Gas Processors Suppliers Association.