Posted on 06/19/2014 4:57:47 AM PDT by thackney
Cheap, abundant U.S. shale gas soon will find its way to a new market: The flood of people moving from the countryside to the dense cities of developing countries.
In a few years, the gas will arrive in China, India and Latin America as resin pellets that will become plastic products like food packaging, a key component for urbanizing populations as consumers trade farming markets for preserved foods.
It’s a huge, hungry market.
Shortly after U.S. gas prices collapsed a few years ago, a half-dozen energy companies raced to build plants along the Gulf Coast that can break natural gas molecules into parts that can be molded into the building blocks of plastic.
Among them was Exxon Mobil Chemical Co., which will announce Thursday it began constructing a massive ethane cracker and two polyethylene plants at its existing facilities near Houston last month, soon after regulators gave it the OK. Exxon Mobil did not disclose the project’s cost.
“A big breakthrough in the petrochemical industry was when the Saudis decided to harness the ethane from natural gas to create petrochemicals,” said Steve Pryor, president of Exxon Mobil Chemical, in an interview with FuelFix on Wednesday. “They really have been the low-cost producers, the fastest-growing exporters, the major export force in the petrochemical world since then. Now, because of shale energy, the U.S. is joining the Middle East.”
Largest US investment
Exxon’s planned ethane cracker in Baytown, 25 miles east of Houston, will have an annual capacity to make up to 1.5 million tons of ethylene feedstock from ethane. Its two polyethylene processing units, now under construction at its Mont Belvieu plastics plant, 30 miles east of Houston, will be able to produce 650,000 tons a year of the plastics components. It’s the chemical company’s largest U.S. investment.
It’s expected to create 10,000 temporary construction jobs and 350 jobs in Baytown. And the company claims the project will generate $870 million in economic activity in the region and add $90 million to local tax revenues.
The multibillion-dollar cracker and the polyethylene plants join nearly a dozen similar projects in the works by Dow Chemical, Chevron Phillips Chemical, Royal Dutch Shell, and LyondellBasell, most of which are expected to start up between 2015 and 2017, along the Gulf Coast or, in Shell’s case, near the Marcellus Shale in Pennsylvania.
It’s been more than a decade since a company has built an ethane cracker, and industry observers say it’s unlikely all will be built. But in total, the U.S. petrochemical industry has announced about $71.7 billion in new chemical-related investments since the advent of cheap shale gas, according to the American Chemistry Council.
Chevron Phillips Chemical Co. said late Tuesday it broke ground in Old Ocean, Texas on two polyethylene units capable of making 500,000 tons of plastic resin a year. The multibillion-dollar units are expected to start up production in three years.
A new market
Demand for natural gas in the North American market is expected to remain basically flat, but Asia and Latin America have emerged as primary targets for products made from natural gas liquids like ethane, propane and butane, said Phillips 66 President Tim Taylor in a recent interview.
Inexpensive shale gas allows petrochemical companies to “really push that advantage into a new market,” Taylor said.
The trouble is that it’s not clear how long the market will remain highly profitable. Exxon Mobil is trying to move fast before the market gets too hot — which has already begun to happen, Pryor said.
But Exxon Mobil, he said, has some unique advantages: It’s the largest natural gas producer in the nation, and is able to integrate both businesses in a way many others can’t. And the oil giant produces a premium polyethylene that can make stronger and lighter plastics than most products on the market, which means customers pay a premium, he said.
“Whenever you have that kind of wave of investment, it inevitably heats the market in terms of the availability of skilled labor, and that’s what’s driving up construction costs,” he said. “One of the key ways we’re managing it is to be an early mover.”
Rising project costs
Exxon Mobil is on track to complete its plants by late 2017, but that’s almost a year after the company’s original projections. A two-year trek through regulatory tangle webs ended last month when the Environmental Protection Agency granted the company a permit to build the facilities, after rejecting arguments from two environmental groups that objected to the permit.
Every day a project is delayed, another market player will try to step in and minimize their competitors’ exposure to the high-end of cyclical margins, which makes it imperative for companies to use their capital as efficiently as possible, said Robert Sullivan, a managing director and co-lead of the energy practice at AlixPartners.
“It’s a big hunk of money that could be lost waiting for the next cycle,” Sullivan said. “The time value of money for them is huge over time.”
Plus, cost overruns and construction delays are common for ethane crackers and other petrochemical plants, as welders and pipe fitters become almost impossible to find as more projects get built on the Gulf Coast. Some companies have had to double or triple their estimates on project costs, said Dennis Cassidy, a managing director and co-lead of the energy practice at AlixPartners.
The history of the chemicals industry is cyclical, with waves of new capacity coming online, only to be followed by low-investment periods. But history is changing, too, as the industry shifts from consuming locally to exporting to markets that are expected to keep growing for decades. That’s why Exxon Mobil takes the long view on investments and the markets, putting capital only behind projects that have unique advantages, Pryor said.
“In a sense, it’s a good problem to have,” he said. “We’ve been through this many times before, we know how to manage in a heated environment. I’m comfortable with our ability to manage this, but I know it’s going to get interesting out there.”
This administration will do anything it can to prevent new, high-paying jobs.
Invest opportunities?
yes
I keep hearing all about the US Energy boom, but I’m still paying over $3.50 at the gas pump.
Can anyone explain that to me?
There is little climb in the world's oil production outside the US lately.
The world demand for oil continues to climb right along with production growth.
Also, the US production growth is coming from the shale fields, which are far more expensive to produce and have a faster decline rate than the old traditional fields.
Are traditional wells dead in the US?
Mostly tapped out. Naturally, the industry went after the cheap easy stuff first. Not much of it left. A few places that were put off limits like ANWR still should contain those fields.
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