Cracker margins strong despite low prices: P66

OREANDA-NEWS. February 25, 2016. Polyethylene margins are set to remain strong for the next several years because of steady consumer demand worldwide, according to Phillips 66 chief executive Tim Taylor.

While polyethylene margins peaked at 42?/lb in 2014 and eased to 33?/lb in 2015, supply and demand is starting to balance, Taylor said at the Credit Suisse Energy Summit in Vail, Colorado.

"We see consumer market are strong, industrial markets are weaker, but CP Chem is primarily exposed to those consumer markets, and we think that is still a pretty good demand business now in the chemical business over the next several years based on supply and demand balance," Taylor said.

The company's 1.5mn t/yr new ethane cracker on the US Gulf coast, which will include polyethylene units, remains on schedule to begin operations in mid-2017, he said. The economics of that project remain competitive worldwide despite lower naphtha prices, he added.

"If naphtha and ethane spreads widen back out, there is considerable upside there with that cracker," Taylor said. "Even where prices are today, it's still good."

Ethylene margins remain well above the cost of capital for the new ethylene cracker, Taylor said.

"Capital costs have come up, but today these are still above cost of capital, I think about 12pc or so," Taylor said. "The longer-term aspiration on that project would be in the mid-teens, but you've got room if that compresses."

Upstream markets are more challenging, and Phillips 66 subscribes to the "lower for longer" outlook for global crude, Taylor said. In the US, NGL midstream operator DCP lowered its breakeven cash flow for NGLs from 60?/USG to 35?/USG.

The partnership, a joint venture between Phillips 66 and Spectra, was hard-hit by lower commodity prices and cut costs to strengthen its balance sheet.

"With the actions now we're looking at 35?/USG breakeven," for NGLs, he said. "If prices recover, when they do recover, you'll see uplift in that business because they will still have that commodity exposure going forward."