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Chemicals players set sights on Marcellus

With the petrochemicals business in an up cycle and gas prices low, oil majors and chemicals firms are looking to boost US ethylene capacity

IN A sign of growing downstream interest in unconventional gas, petrochemicals producers are assessing ways to move up the value chain, particularly in liquids-rich shale plays such as the Marcellus.

Shell’s June announcement of plans to build a world-class facility in the US Appalachian region to crack ethane molecules into ethylene – a primary building block for plastics – represented a significant step to address a pressing issue for producers in the Marcellus Shale. The largest natural gas play in the country is rich in ethane and, to a lesser extent, other natural gas liquids (NGLs), which command considerably higher prices than dry natural gas.

Several companies, including MarkWest Liberty, Magnum Hunter Resources and Caiman Energy, have launched, or recently completed, processing plants to strip NGLs from shale-gas production. In addition, several pipeline projects have been proposed, or initiated to move these liquids to chemicals hubs on the US Gulf coast and in Canada.

Cracking capacity

Although the US northeast is a big market for ethylene, the region has no cracking capacity. Yet demand for this petrochemical feedstock is strong. A report late last year by financial services firm Morgan Stanley forecast the strongest worldwide ethylene demand-growth in two decades. With global capacity growing by just 2.3% in 2011-14, it said, “utilisation rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally.”

One reason is that ethane-based ethylene costs substantially less to produce than ethylene made from oil-based products, such as naphtha. As natural gas prices in North America have plummeted, the gap between the alternative feedstocks has grown. The continent now ranks as the world’s second-lowest-cost ethylene producer after the Middle East.

Profits remain strong and are expected to grow. According to Morgan Stanley, US cash margins in the next chemicals-sector up-cycle should be 2.4 times the average of the past 20 years.

LyondellBasell, North America’s second-largest ethylene producer, said 35 new world-scale crackers will be required to meet burgeoning global demand. Not surprisingly, chemicals companies are jumping on the ethylene bandwagon with plans to build new plants and expand existing facilities. Most of these projects are proposed for the Gulf coast – home to more than 90% of US ethylene production.

Dow Chemical, already North America’s largest ethylene producer, is finalising plans to build a world-scale plant on the Gulf coast, and aims to restart an idle ethylene cracker in Louisiana by the end of next year. It also expects to increase the ethane-feedstock flexibility of its crackers in Plaquemine, Louisiana, and Freeport, Texas, by 2014 and 2016, respectively.

To supply feedstock for these facilities, Dow plans to tap abundant NGLs supplies in the Marcellus and Texas’s Eagle Ford Shale. The company already contracted Range Resources to deliver ethane from the Marcellus for its Louisiana operations. It is also exploring a possible joint venture to build its own NGLs fractionator in Texas.

In early April, Westlake Chemical said it would boost output at its ethane cracker in Lake Charles, Louisiana, by up to 110,000 tonnes a year (t/y) by 2012. In addition, Chevron Phillips Chemical, a joint venture of Chevron and ConocoPhillips, has begun a study to assess the feasibility of a large ethane cracker and derivatives plant at an existing Gulf coast facility to process ethane from shale plays. The study is scheduled for completion by year-end.

Time to capitalise

Chevron is in a unique position to capitalise on its Marcellus production capacity. In February, it bought Atlas Energy, which has 622,000 acres in the region, for $4.3 billion and it will add another 228,000 net leasehold acres when it closes its acquisitions of Chief Oil & Gas and Tug Hill later this year.

Although ConocoPhillips has no significant acreage position in the play, it has about 20 rigs drilling in the Eagle Ford Shale and liquids-rich North Barnett and Bakken shales in Texas, Montana and North Dakota.

Shell, like Chevron, has a vested interest in finding markets for Marcellus liquids production; it secured 650,000 net acres in the play in May last year with its $4.7 billion purchase of East Resources.

Other efforts to increase ethylene production capacity closer to the Marcellus could bring more good news for the play’s NGLs producers. The Allegheny Conference on Community Development has reportedly approached chemicals producers about building an ethane cracker in or near western Pennsylvania, the centre of Marcellus drilling activity.

Bayer, which reportedly buys about 90,000 t/y of ethylene oxide from Gulf coast plants, is said to be in talks about building a cracker at one of its sites in West Virginia, another Marcellus state. West Virginia has set up a task force to determine the possible economic benefits of attracting ethylene-production plants to the state.

Boom and bust

If there is any bad news to come from this building boom, it’s this: the chemicals business is highly cyclical, with peaks occurring every five to seven years and troughs in between. The industry has a history of overbuilding capacity when margins are high. It could be setting itself up for oversupply when the cycle, inevitably, trends downwards again. 

Petroleum Economist’s annual survey of the global petrochemicals industry is now available:

Strong upturn for chemicals business 

Chemicals sector cycling up

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