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Demand for naphtha decreases as gas based chemicals increase

A rapid swing in chemicals feedstock use is set to upturn refinery operations worldwide

Rising shale gas and oil output has transformed the US’ chemicals industry – but with consequences for refiners worldwide. As US low-priced, gas-based chemicals production goes up, the demand for naphtha – a chemicals feedstock in much of the rest of the world – is set to decline elsewhere.

At the same time, rising tight or shale oil and gas production in the US is bringing more naphtha to market, turning a once-scarce stream into a substantial surplus.

Only eight years ago, the chemicals industry in the US was generally believed to be on its last legs as local feedstock costs were high and rising while facilities in the Middle East profited from heavily subsidised gas. But the US is now one of the world’s lowest-cost producers. 

For the production of ethylene – the building-block from which many chemical products, such as plastics, are made – US costs are only about a quarter of those in most other regions. Investment is flooding in: there are seven ethane-based ethylene crackers under construction and more planned. With most of the new capacity focused on export markets, the likely outcome is that more and more of the world’s ethylene will be produced from the US, while capacity based on naphtha declines.

US naphtha production is rising because shale oil is generally rich in it. Shale oil output growth has been spectacular: according to the US Energy Information Administration, production of “tight” oil exceeded 4.5m barrels/day (b/d) in April, compared with less than 500,000 b/d in 2008.

A study by consultants IHS earlier this year forecasts that by 2020 the US will surpass the Middle East to become the world’s largest exporter of light naphtha. The worldwide surplus of light naphtha – last year’s production was 367m tonnes while demand was 363m tonnes – could widen to 14m tonnes in 2020, IHS says.

Worldwide, refiners have grown used to the chemicals industry being a ready market for their surplus naphtha. Some grades can be run through a reformer to become a gasoline stream but its other uses are limited. So prices will fall and cut refining margins overall – although, as prices fall, the shift away from naphtha-cracking might be checked. Investments in intensive reforming might become attractive, to upgrade more naphtha to gasoline standard.

Flat in ’14

Worldwide, the chemicals industry experienced market challenges in 2014 and production and business performance were almost the same as in 2013. The Eurozone economy failed to develop, while Japan and South America saw minor growth at best.

Chemicals performance

World chemicals production – excluding pharmaceuticals – went up by 4.0% in 2014, down from the 4.5% of 2013, with much of the growth coming from Asia. The US saw a 2.7% rise in output – the same as in 2013 – but the EU achieved only 1.2%, with the UK, France and the eastern countries doing the best. Japan’s and South America’s chemicals production shrank by 0.8% and 2.0% respectively. Production in Asia (excluding Japan) grew by 7.8%, although this was below the previous year’s 9.1%.
 
Business conditions were challenging. Manufacturing capacity for high-volume basic petrochemicals and intermediates has gone up and a number of operators report that gains in volume sales have been offset by cuts in prices. Reflecting this, Petroleum Economist’s assessment of the sector’s returns on assets declined slightly from the 10.0% of 2013 to 9.6% last year (see Figure 1).

Germany’s BASF – the world’s largest chemicals company, by a substantial margin – is forecasting a moderate increase in worldwide chemicals production for 2015, and further growth for the coming two years. The firm foresees production (excluding pharmaceuticals) increasing by 4.2% this year, with US growth accelerating to 3.5% and Japan and South America returning to positive territory with growth of 1.0% and 1.3% respectively.

But BASF is still gloomy about the EU, which “continues to be subject to intense international competition.” The firm forecasts EU growth of 1.5% this year. Growth in Asia (excluding Japan) is seen as slowing a little to 6.9%.

BASF’s outlook to 2017 envisages a small acceleration in chemicals production worldwide, to 4.3%. But the EU is seen as staying static at 1.5% growth, while the US eases to 3.2%. The largest change is seen for South America, which is forecast to accelerate to an annual growth of 2.7%. The forecast for Asia (excluding Japan) is 7.0%, Japan slipping to 0.9%. 

Feedstock swings

Slow growth in the EU is particularly disappointing for producers who had benefited from a feedstock bonus last year. They mainly use naphtha for ethylene and last year the lower oil price led to lower naphtha prices. The price averaged $837/tonne last year, down from the $902/tonne of 2013 (see Figure 2).

As is typical, the naphtha price swung wildly through the year, with a low of $492/tonne in December and a high of $953/tonne in June. Although there is a basic linkage to the price of Brent crude, the naphtha price also responds to cracking margins and the price of gasoline. An early-summer spike in gasoline prices will, as last year, divert suitable grades of naphtha from the cracker to the reformer, where it will be upgraded into reformate, a high-octane blendstock for gasoline.

US producers, whose main feedstock for ethylene is ethane extracted from natural gas, saw higher feedstock prices last year, although they are still far lower than world levels. The US gas price increased to an average of $4.37/m Btu in 2014, up from $3.73/m Btu the previous year and marking 2012 as the low-point for prices. But gas prices in competing chemicals manufacturing countries are much higher, with the exception of the Gulf states.

The US has plenty of ethane to attract new ventures, although the American Chemistry Council argues that new gas pipelines are needed to distribute it effectively. Investments in new chemical plants, expansions and re-starts totalling $140bn had been announced by May, the council says. That sum – almost half the value of the US industry’s existing fixed assets – is described as the largest-ever wave of investment for US chemicals.

Ethylene feedstock prices

US production of ethane rose sharply last year to 1.071m b/d – a rise of 10.4% from 2013, and growth of over a half since shale gas production began to rise in 2008, according to the US Energy Information Administration. But, with ethane crackers running at full capacity, much ethane has to be left in the gas stream, instead of being extracted for feedstock use. Because there are limits to the amount of ethane which can be left in gas, there are warnings that gas production could eventually face constraints, if chemicals investment does not grow quickly enough.

But while its chemicals renaissance seems set to give the US a rising share of world ethylene production, the naphtha-cracking Europeans still have cards to play. Cracker yields differ considerably between the two feedstocks: ethane gives a high yield of ethylene with few other products, while naphtha gives a large proportion of heavier hydrocarbons – valuable for conversion into plastics and other materials. These so-called by-product credits are an important consideration in ethylene economics.

 Feedstock yields Ethane  Naphtha 
 Ethylene  81  25
 Propylene  2  13
 Butadiene  3  5
 Benzene, toluene, xylene  1  11
 Other hydrocarbons  13  46

 

As the US shifts to ethane – 10 years ago about 30% of US ethylene derived from naphtha-cracking, but very little does now – its output of cracker by-products is declining. That suits the Europeans, which have a larger market for their propylene (used to make polypropylene plastic), butadiene (used to make synthetic rubber) and benzene, toluene and xylene (used to make plastics and other materials).

Producers in Asia are potentially more vulnerable to the new US competition than the Europeans. As in Europe, naphtha-cracking predominates but, in contrast to Europe, Asian capacity is concentrated on cracker-products and their first-step derivatives. In the chemicals chain, value generally increases as products move several steps away from the cracker, so Asian producers will be disadvantaged.

Middle East producers, with gas made available at subsidised prices – and as low as $0.75/m Btu in Saudi Arabia – are potentially competitive with the US for ethylene, but Middle East construction and operating costs are high. Accordingly, producers are likely to be challenged in export markets. There is a move towards naphtha for recent investments, with the aim of capturing the higher-value products yield.

In Saudi Arabia, the Sadara venture between Saudi Aramco and Dow, due on stream this year, is based on naphtha, as is Petro Rabigh 2, the venture between Saudi Aramco and Sumitomo, which is due to start up next year. Saudi Aramco’s and Total’s Satorp refinery and petrochemicals venture at Jubail, where petrochemicals production started last year, also uses naphtha.

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