U.S. ethane-based petrochemical plants challenged by low crude prices
The Covid-19 pandemic turned the table for U.S. petrochemical companies that saw cost advantages erode for their ethane crackers in relation to those that use naphtha as feedstock.
Plunging oil prices in 2020 turned things around for U.S. crackers that were built to use ethane as feedstock in what seemed until recently a sure bet to produce the world’s lowest-cost ethylene.
“Many of those projects in North America were dependent upon a relatively good oil price,” said in an interview Patrick Kirby, principal analyst, olefins, at Wood Mackenzie, a consultancy that covers industries including chemicals and energy.
Between 2011 and 2014 the average closing price for West Texas Intermediate was over $90 per barrel.
In 2015 and 2016 average prices per barrel remained well above $40. Averages went from over $50 in 2017 to over $65 in 2018. In 2019 that average barrel cost was just under $60.
Lower ethane prices in North America versus naphtha over that extended period have “really driven most of that capital investment into the region through new cracking complexes and ethylene-polyethylene type projects so low oil price really changes the dynamic of that,” Kirby said.
With reduced demand for fuel as much of the world entered a lockdown, WTI prices per barrel fell from $54 on Feb. 20 to under $12 two months later. It traded just under $25 on May 7.
Brent fell from over $68 on Jan. 3 to just over $19 on April 21. It closed under $30 per barrel on May 7.
Westlake Chemical sees U.S. advantage eroded
“In this environment that we are today in $20 to $30 per barrel of crude oil there isn’t really any cost advantage. A large cost advantage is being removed and a large margin and profitability has shifted between the regions through that adjustment,” Kirby said.
Albert Chao, president and CEO at Westlake Chemical Corp., described this profitability change during a first quarter earnings discussion on May 4, according to a transcript by Motley Fool.
“While our ethane feedstock costs have decreased, our competitive advantage versus oil-based feedstock has been eroded,” Chao said.
“Our naphtha-based international competitors are benefiting from these reduced costs,” he added.
“As a result of these lower global production costs, industry consultants expect to see polyethylene prices and gas-based polyethylene producers margins decline,” he said.
“We believe that toward the end of the year, early next year, that oil price will move up, such that U.S. ethane-based ethylene production will be more cost competitive to naphtha-based ethylene production,” Chao added.
LyondellBasell helped by feedstock flexibility
“On the U.S. Gulf Coast, three of our crackers can utilize the full range of feedstocks: ethane, propane, butane, Y-grade mixed NGLs, condensate and naphtha, while the fourth cracker can flex among the most economical NGLs,” said Bhavesh Patel, CEO at LyondellBasell.
“Our cracker system offers distinct advantages relative to newly built crackers that can only run ethane,” he added, according to a Motley Fool transcript of the May 1 call.
Polyethylene margins in North America fluctuated in the first quarter as the advantage “shifted from ethane, propane and butane to naphtha as the price of oil fell during March,” he added.
“We are able to follow the most economical feedstock to maximize profitability,” Patel said.
“In Europe, integrated polyethylene margins in March were the highest we’ve seen since 2015. With significant asset bases in both Europe and North America, LyondellBasell's overall results are less volatile than if our business was reliant upon only one region,” Patel added.
Celanese views U.S. as still competitive
Lori Ryerkerk, CEO and chairman at Celanese Corp., which has been adding downstream capacity for Vinyl Acetate Monomer (VAM) in the U.S to tap low gas prices, said the U.S. remains competitive even with cheaper oil.
VAM helps produce Purified Terephtalic Acid, a precursor to PET bottles and polyester, as well as other products.
“We think the U.S. gas, even at these low oil prices, will continue to be well advantaged. To put that in perspective, if we look at the difference between, say, acid production, between Clear Lake (Texas) and Nanjing (China), our production cost at Clear Lake is half of Nanjing even at low oil prices," Ryerkerk added.
Acetid acid, which goes into VAM, comes from methanol. Most methanol in China comes from coal whereas in the U.S. it comes from natural gas.
Singapore “just comes down slightly below the cost at Nanjing. So you still have a 2:1 advantage at Clear Lake, and that advantage rolls through VAM and VAE and everything else,” she added.
“So while we don't have as much advantage now in the U.S. Gulf Coast versus other producers, it’s still a big advantage,” she said.
Naphtha cracking seen yielding unneeded aromatics
“People that are cracking naphtha or cracking heavier don't have much place for some of the aromatics and some of the off-grades to go,” said James Fitterling, CEO at Dow Inc.
“And so the rubber industry has been slow. Automotive industry has been slow. So that has brought rates down in some other crackers,” Fitterling added, according to a Motley Fool transcript of an April 30 earnings discussion.
“I'll just focus on U.S. Gulf Coast here because that's where the bulk of the flexibility is. I'd say we were in the 75%, 80% ethane cracking through the year. The balance would be propane and butane and very little talk for the back half of the year. It's 0 on naphtha,” he said.
“Naphtha has come down, but honestly, ethane is still the best crack. And so, if ethane gets tight and we start to see prices rise and propane comes into the slate, we'll swing over,” he said.
“We can swing 70% of the capacity over to propane. We've got that flexibility. And I'm optimistic that this is a more resilient gas market than people are estimating,” Fitterling added.
By Renzo Pipoli