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derivatives and (3) C4 derivatives.

The
impacts on these three are different and
will have major Global implications for
players in different parts of the world
led by U.S.

Shale Gas Impact on C2, C3


and C4 Derivatives
Dr. Balaji B. Singh,
Dr. J.N. Swamy
Chemical Market Resources Inc.
Houston, Texas, USA

Most of these impacts may


not
materialize for another five years thus
the market peak may be in 2017. The
petrochemical planning cycle requires 35 years of planning, in addition to the
current shale gas development of 2-4
years. The indirect impacts will be felt
sooner because of potential supply
issue: (1) people announcing and/or
canceling plans, (2) individual plans on
effective utilization, and (3) Global trade
balances.

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Introduction
Shale gas, being popularly called
Game Changer is the magic bullet
needed for U.S petrochemical industry,
The U.S petrochemical industry went
through major downturn in the last
decade and is positioned very well for a
full recovery.

U.S Impact
This article presents the current status
of Shale Gas and how it will impact the
major petrochemical products in (1)
Ethylene Derivatives, (2) Propylene

After a decade of no major investments,


the traditional chemical/petrochemical
industry in the U.S stagnated. The
classic characteristics include: (1) No

Exhibit 1: Global Shale Gas Availability

Source: Energy Information Administration (EIA)

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new major investments, (2) reduction in


number of Global players
and
innovation, (3) Feedstock/Asset light
strategy justifying outsourcing and (4)
moving to value added service
businesses at the expense of potential
liabilities, for short-term profits.
Exhibit 1 presents the Global locations
of shale gas. Exhibit 2 presents the
abundant shale gas locations in the U.S.
The development of Shale gas access

via major developments in horizontal


drilling and fracking methods in the U.S,
have given the U.S a running start in
monetizing shale gas. The companies
are moving forward en masse to capture
the opportunity. Most of the countries of
the World are also assessing their shale
potential and will be ready to play in this
sandbox sooner than later.
The stage is set for this opportunity, as
most companies are cash-rich. Financial

Exhibit 2: Shale Gas Availability in US

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performance in 2011 has exceeded


expectations and lacked investments,
have made companies cash rich. The
petrochemical downturn forecasted to
come due to excess Middle East and
Asian capacity has not occurred thus
not impacting the internal consumption
and export opportunities for the U.S
market.
At the least eight companies that have
either already announced or are looking

Polyethylene will be the dominant


derivative for the shale gas, with EDC,
and to a much lesser extent, EO/EG and
selected alpha olefins as alternatives.
The emphasis on ethylene and
derivatives in the U.S will continue. No
one in the U.S announced plans on
either propylene or C4 Stream
derivatives to keep pace with ethylene
derivatives

Exhibit 3: Announcements for New Cracker Investments & Expansions in US


NewCrackerAnnouncements(Ethylenecapacityintons)
FormosaPlastics
PointComfort,TX
800,000
ShellChemical
Appalachia
11.5million
AitherChemical
Appalachia
TBD
ChevronPhillips
Baytown,TX
1.5million
DowChemical
TBD/USGulf
11.5million
Sasol
LakeCharles,LA
11.4million

2016
2016
2016
2017
2017
2017

Severalothersunderstudy

Expansions&Debottlenecking(Ethylenecapacityintons)
WestlakeChemical
LakeCharles,LA
110,000
2012
BASFTotal
PortArthur,TX
100,000
2012
DowChemical
Hahnsville,LA
400,000
2012
Williams
Geismar,LA
270,000
2013
Ineos
Alvin,TX
150,000
2013
WestlakeChemical
LakeCharles,LA
110,000
2014
LyondellBasell
LaPorte,Channelview,TX
600,000
2014+
DowChemical
Plaquemine,LA/Freeport,TX
500,000
2014+
WestlakeChemical
CalvertCity,KY
TBD
2014+
Source: Chemical Market Resources Inc. based on announcements

at major ethylene and ethylene


derivative expansions (debottlenecking
and new crackers) in North America.
Exhibit 3 presents the current players
who have announced shale gas based
crackers or derivatives.

Impact on Ethylene Derivatives


Due to the presence of large volumes of
ethane in shale gas, ethylene will be the
clear beneficiary. With expectations of a
secular trend of low natural gas prices in
the medium to long-term, cracking NGLs

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will be the most advantageous for the


cracker operators.

portion of the production will


earmarked for the export market.

This trend is evident from the rapid shift


to lighter feedstocks in the last 2 years
due to the shale gas effects on natural
gas prices relative to crude oil. Exhibit
4 presents oil and natural gas prices as
multiples. The oil to natural gas price
ratio is expected to be multiples above
the threshold 6.5 which defines
Natural gas advantage over naphtha for
petrochemical production.

The US Gulf Coast will in some ways


become the next Middle East of the
world with a large amount of exportoriented capacity destined for countries
outside of North America. Since Mexico
will reduce imports substantially with the
start up of the Braskem-IDESA in 2015,
the opportunities for export will be
outside Americas.

With these expectations, the US


petrochemical industry is set to see

be

Internally, the products will have a


logistics advantage to replace products

Exhibit 4: Oil to Natural Gas Price Ratios, 1990-current

Source: Chemical Market Resources Inc

significant investments to monetize the


shale gas advantage.
If and when all the projects come to
fruition, the North American market
cannot absorb all of the additional
derivative capacity. Some or a large

produced on the Gulf Coast. This could


put even greater pressure on the Gulf
Coast plants to export.
There could be some new entrants in
the ethylene and ethylene derivative
business. Reliance, for example, has an

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equity position in three shale gas fields.


SABIC has long been rumored to be
interested in establishing a production
base in the Americas. Braskem has a
clear commitment to North America.
Some of the ethane will be sent to
Canada. NOVA has announced a new
pipeline to transport Marcellus ethane to
Sarnia.
Overall the activity in mid to Northeast
America is poised to change the
dynamics within the U.S.
Given these dynamics, a significant
issue that emerges is whether all of
these capacity announcements are
justified and/or will they come to fruition.
Companies tend to analyze new
capacity in terms of its percentage of
existing capacity. This makes the
numbers appear more acceptable,
especially when overlaid on projected
demand growth.
However a more
critical measure is: what is the new
capacity as a percentage of excess
capacity as measured in relation to
domestic demand and not total sales?
For 2016 startup scenario, three
potential expansion scenarios exist: (1)
The low product expansion case 4
Miilon tons of Ethylene capacity, (2)
Medium expansion case of 6 million
tons per year of new ethylene capacity
and (3) High expansion case of 7.5
million tons per year of new ethylene
capacity.
Exhibits 5 and 6 present the US
Polyethylene Demand and Export
Exposure: Pre-shale and post-shale
under these three scenairos.

In the pre-shale scenario domestic


demand would increase by about 3
million tons between 2010 and 2016
while total exports would decrease by
about 1 million tons. This would require
about 2 million tons per year of
debottlenecking.
Recapturing
lost
exports would add another 1 million tons
to this.
The export opportunity in 2016 would be
1 million tons, 3 million tons and 4.5
million tons for the three respective
scenarios. As the world would have
more than enough capacity to satisfy
demand in 2016 (based on the amount
of new capacity forecast to be in place
and demand growth), the additional US
polyethylene would have to displace the
existing export suppliers which would
lead to turf wars. Extending the
forecast to 2020, assuming that there
will
be
some
additional
ethylene/polyethylene indicates that the
USGC will continue to be exportoriented.
The excess US export volumes (export
exposure) represent 3, 10 and 15
percent of global trade for the three
cases respectively. If the US was the
only country expanding this would be
less of an issue, but there will be other
countries expanding during this period
as well. The export market could
become a battlefield! In addition, having
the ethane advantage does not
necessarily mean that you can capture
its full value.

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Exhibit 5: North American Ethylene Capacity (Base and High Cases), KTA
45,000

40,000

35,000

Ethylene Capacity (KTA)

30,000

25,000

Mexico
Canada
US

20,000

15,000

10,000

5,000

0
1995

2000

2005

2010

2016 - Base case

2016 - Speculative

Exhibit 6: US Polyethylene Demand and Export Exposure - KT


30,000

25,000

PE Demand (KT)

20,000

Exports to Others

15,000

Exports to Mexico
Domestic

10,000

5,000

0
1995

2000

2005

2010

2015 E

2020 E

Source: Chemical Market Resources Inc

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One risk associated with being lowcost, export-oriented is the exposure to


anti-dumping action. Should U. S. export
prices be deemed too low, countries that
have domestic production could institute
anti-dumping action against U. S.
imports (as they have in the past).
Moreover, many existing high-cost
producers (e.g., South Korean) will not
simply walk-away and give up their
export market at least not without a
fight.
An
added
dimension to the
problem is the
relative market
valuation
of
ethane
vs.
methane in the
US
domestic
market The decoupling could be
significant if the flatness in demand for
methane persists forcing the gas
producers to extract more value from
the liquids (mainly ethane). This will
largely depend on the overall scale of
cracker expansions and deserves a
more detailed investigation.

(with greater potential for further


divergence)
the
industry
has
reapportioned its ethylene cracker mix
from 70% ethane - 30% liquids to 87%
ethane - 13% liquids. This has resulted
in a drastic reduction in propylene
production. About 1.5 million tons of
new propylene capacity will be needed
to replace the capacity lost to the NGL
shift. At a 3% growth rate for propylene
derivatives, another 2 million tons/year
of new propylene capacity will be
needed to
meet 2015
projected
propylene
derivative
demand.

.The shale gas will help

Ethylene Derivatives and


Stimulate alternatives for
Propylene.

In summary, the shale gas will have its


large impact on U.S polyethylenes.
Some of the major players wish to focus
on specialty/value added polyolefins
not an easy task. See our Multiclient
Study on Specialty Polyolefins
Markets, Technologies and Trends.

Impact on Propylene &


derivatives
While ethylene has been the clear
beneficiary,
other
petrochemical
streams have had to face a more
difficult and volatile situation. With low
natural gas prices and high oil prices

Exhibit
7
presents the
price of propylene with time.
The
tightness in the US propylene market,
relative to the ethylene supply, has led
to a growing premium for propylene
over ethylene. In Jan 2009, during
recession, propylene prices dropped to
nearly 20 cents/lb. But soon (by Jan
2010) due to the feedstock shift in the
crackers prices rose to about 65-70
cents/lb. For most of 2010 prices were
stable in the 50-60 cents/lb range mainly
due to softer downstream derivative
(PP, PO, AA, etc.) demand which
compensated (or relieved) the supply
tightness. But once the demand started
picking up in 2011, the prices went to
the range 75-90 cents/lb. Now the
demand seems to be picking up more
but the supply is at the same level.
These levels of volatility will continue to
be a characteristic of the US propylene
markets in the short-term.
In the US nearly 50 percent of the
propylene output has come from the

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refineries with the remainder from steam


crackers and some on purpose

Other propylene derivatives such as


acrylic acid, etc. will be in a better

Exhibit 7: Impact of Shale Gas on Propylene Prices (North America)

Source: Chemical Market Resources Inc

production. Aa additional propylene from


refineries is not likely, the on-purpose
propylene production is the only
alternative.
Dow
has
recently
announced a new world-scale propane
dehydrogenation (PDH) plant. Some
companies
are
also
considering
metathesis technology (if they can also
get the C4s).
Understanding PDH,
Metathesis, MTP technologies and the
related
economics
will
become
increasingly important.
The derivatives of propylene will
continue to feel the pinch and feedstock
will
remain
the
major
issue.
Polypropylene accounts for the majority
of the propylene consumption and will
be impacted the most. Polypropylene,
on the other hand will be exposed to
some limited intermaterial substitution to
HDPE, Polystyrene and PET

position with the ability to pass the


feedstock price increases to the
customers,
due
to
no
known
alternatives.
In summary, shale gas developments
will adversely impact the propylene
supply for the future. Of the propylene
derivatives, polypropylene will see the
most impact due to intermaterial
competition. This will also increase the
development of propylene alternative
developments PDH and Metathesis.

Impact on C4 & Elastomers


Shale gas driven shift to lighter cracker
feeds will also impact the C4 and
elastomers
business.
The
effect
tightening butadiene supplies have had
on the US markets is evident in the
pricing. The US butadiene price climbed
to record highs in June 2011 nearly
$2,000/ton (about 60%) above the

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previous record high price set during the


energy run-up of 2008.
Exhibit 8 presents the trends in the
butadiene prices. The situation was
similar around the Globe, with both
Asian and European butadiene prices
hitting record levels as supplies

detailed engineering study of onpurpose butadiene production via


dehydrogenation of Butane. Butane is
an expensive feedstock in the first place
due to limited supply and its alternative
value in gasoline pool
In the short-medium term, butadiene is

Exhibit 7: Butadiene Price Trend in US (Historical & Expected)

3500
3000

USD/Ton

2500
2000
1500
1000
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Chemical Market Resources Inc

tightened. At the time, the tight


butadiene supplies were exacerbated by
a significant run-up in the price of
natural rubber, boosting demand for
synthetic rubber downstream. Even with
that higher demand, US butadiene
derivative production has been scaled
back because of a lack of feedstock
which clearly was elevated by shift in
cracker feeds.
With US butadiene consumers facing
perpetually high prices, production
options once thought unprofitable are
starting to be discussed. In August TPC
Group announced it was performing a

imported both as butadiene and


butadiene equivalents (SBR, PBR, or
even tires) are expected to increase.
The import exposure of US will continue
to increase with one of the major
sources being Korea. Asian producers
will likely move more butadiene into the
US. Additionally, there will be significant
increase in the import of butadiene
derivatives given the logistical difficulties
of transporting butadiene.
With a scale back in production of
butadiene derivatives and also tire
production in the region, North America
in the long-term is expected to remain a

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net importer of these products. Given


the pricing levels of butadiene the
regrind economics have become
attractive, which could also be a small
reduction in the derivatives demand
(SBR and PBR).

Conclusions
The decoupling of natural gas prices
from crude oil, driven by Shale Gas, has
made petrochemical investments in
United States attractive after over a
decade of stagnation.

followers (especially if it deters someone


else).
Other petrochemical streams including
propylene, butadiene and derivatives
will face a more difficult situation which
is already evident in the prices resulting
from the recent shift to lighter cracker
feeds. On-purpose technologies will
become important and will prove to be
economical under high price scenarios.
Propylene will benefit from some the
new on-purpose production projects
announced
or
being
considered.
Butadiene on the other hand will likely
continue to be under pressure and lead
to increasing import exposure of
butadiene and derivatives.

The ethane advantage makes ethylene


the clear beneficiary and polyethylene
will be the number
one derivative to be
..Shale gas, is the
All in all, Shale gas will
produced.
North
have
a
transformative
American markets will
magic bullet needed
effect
on
the
US
not be able to absorb
for
U.S
petrochemical
petrochemical
industry
all of the production
leading
to
new
industry
recovery.,
from these assets
investments, more jobs
and will lead to
and
greater
sense
of excitement in the
significant export exposure.
industry. Irrespective of whether some
or all of the announcements come to
U. S. companies preference to sell into
fruition, the industry will see a better
the domestic market rather than export,
than expected (pre-shale times)
the companies will want to sell as much
of their new production domestically as
For further information and individual
possible, thereby triggering a battle for
organizational strategies in product
market share. Since it is extremely
portfolios and plans contact CMR Inc.
difficult to buy market share, a
We have over 22 years of experience in
downward movement in prices and
product planning and technology
margins is likely to occur.
development for all olefin derivatives
, .
Can companies position themselves to
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do better than their competitors if these
Email:
JSwamy@CMHouTex.com
scenarios occur? The answer is yes. It
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will be based on a combination of
technology employed, product portfolio,
market strategy (domestic and export),
competitive intelligence and timing. As
always, first movers will fare better than

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