Platts: to build, or not to build, that is the question with ethane crackers

OREANDA-NEWS. September 28, 2015. US is experiencing a renaissance in petrochemicals due to the abundance of ethane from shale gas. As a result, we saw many announcements of ethylene capacity expansions and ethane based projects in the US to utilize more of the shale gas based ethane. Why? Ethane based crackers sit low on the ethylene production cost curve.

So what do you do if you are a naphtha cracker high on the cost curve producing in Europe and Asia?

You have three options: do nothing and hope for change, shut down, or invest. Investments can vary in either building new world scale plants, reconfiguring existing plants, or investing in adopting a new technology.

In Europe and Asia we saw all three situations. In Western Europe we did not see any new announcements for new capacity, but we did see many companies signing deals to import US shale gas-based ethane to use as feedstock for their crackers.

In China, we saw many announcements of new coal-to-olefins and methanol-to-olefins units as a result of the high production costs for producing ethylene using naphtha as a feedstock in the region prior to the price drop during the second half of 2014. Production costs during that time were significantly lower than a naphtha based cracker in China when oil prices were above \\$90/bbl during the period mentioned above.

According to Platts Petrochemical Analytics, if we discount the current market price of coal in China by 50%, then CTO units still hold an advantage over China naphtha crackers. However, if we discount the coal price by 20-30%, which may be closer to feedstock costs according to some sources, then the production costs for CTO units is slightly lower than a naphtha cracker, which may not be enough to justify the extremely high capital investment in a CTO unit. The price of naphtha has increased recently and therefore, the production cost for a naphtha cracker has risen above the \\$600/mt level. As a rule of thumb, MTO units are typically higher on the cost curve than CTO units.

According to Platts Analytics, many CTO and MTO units have been delayed and are now at risk of being shelved indefinitely. Our data indicates that many units have been delayed by 2 years, while some, like the Sinopec Zhijin in the Guizhou province, have been shelved. It was reported recently that MTO units that have begun operations were experiencing negative margins.

However, despite the loss of competitiveness the coal-based projects have seen this year, the Chinese government is likely to push ahead with many of these projects, in an attempt to free up refinery-based feedstocks for the transportation, heating and industrial sectors.

Ethane crackers

Platts Petrochemical Analytics believes that those plants scheduled to come online within the next few years may face delays but will likely come to fruition. It is the announced projects scheduled to come online from 2019 through 2021 that are at risk of possibly being shelved. Many of these projects are still in the front-end engineering design stages, if that. The total known capacity of these projects that are at risk is approximately 7.5 million mt, but could be well above 8 million mt once we hear the announced capacity for the PTT Global Chemical proposed cracker in Ohio.

Oil prices and forecast

The price of Brent crude oil, according to the US Energy Information Administration’s Short-Term Energy Outlook (STEO) for September 2015, is forecast to stay below the \\$60/bbl until the middle of 2016. By 2017 we can look back and see which of the three options was the best approach: doing nothing, shutting unprofitable plants, or investing. In the meantime, we will continue to analyze the investment approach: To build, or not to build, that is the question.