Global Plastics Issue: Plastics producers talk shale gas developments

By Heather Caliendo
Published: December 18th, 2013

A revolution. A game changer. Just one of the many descriptions given to the North American shale gas boom.

Horizontal drilling and fractionation of shale gas basins in North America is having quite an impact. You'll be hard-pressed to find a chemical or plastics conference that doesn't mention North American shale gas.

For instance, at the K 2013 preview, Josef Ertl, chairman of the German Plastics Industry Federation (WVK), said the U.S. has emerged as a very serious competitor lately, as its manufacturing operations can now use "exceptionally" cheap shale gas as an energy source.

"The United States of America are thus developing into a new global hub for petrochemicals," he said. "Many people are talking of the reindustrialization of the U.S. This could also have a lasting effect on the plastics landscape."

Or what about at the IHS World Petrochemical Conference (March 19-21; Houston, TX) when Stephen Pryor, president of ExxonMobil Chemical Co., said in every country he visits, the conversation quickly turns to one topic: shale gas and its impact on the chemical business.

"Without question, the reversal of fortunes of the American chemical industry is one of the most remarkable stories flowing from the growth in unconventional oil and gas," Pryor said.

At ANTEC, Dwight Tozer, VP of the adhesion industry business of ExxonMobil Chemical, said that abundant U.S. shale gas supplies are revitalizing the plastics industry. ExxonMobil's outlook for energy indicates that the chemicals subsector of industrial energy consumption will be the fastest-growing area over the next 25 years, with demand expanding more than 50%, largely due to increased demand for plastics and other advanced products.

A study by American Chemistry Council says that plentiful and affordable natural gas supplies have transformed America's chemical industry from the world's high-cost producer five years ago to among the lowest-cost producers today.

The ACC believes that new supplies of natural gas from previously untapped shale gas deposits are one of the most "exciting domestic energy developments of the past 50 years."

Through the end of March 2013, nearly 100 chemical industry investments valued at $71.7 billion had been announced. The majority is being made to expand production capacity for ethylene, ethylene derivatives (polyethylene, polyvinyl chloride, etc.), ammonia, methanol, propylene, and chlorine.

"The U.S. is poised to capture market share from the rest of the world, and no other country or continent has as bright an outlook when it comes to natural gas," the ACC stated.

If all production goes as planned, it could be interesting times for North American chemical production.

Major impact in 2017

Robert Bauman, Polymer Consulting International, told PlasticsToday that shale gas is particularly abundant in the U.S., helping and that North America is become the second lowest cost ethylene producer in the world, which has led to major expansion activity.

There have's been plenty of announcements made regarding North American ethylene investments. As of now, there are seven new cracker projects planned for the U.S., which include Dow Chemical, ExxonMobil Chemical, Chevron Phillips Chemical, Shell, Formosa Plastics, Sasol and Occidental Chemical and MexiChem. Most of these are slated for completion by 2017.

"Generally, what I've found is that when you have a low- cost feedstock, a lot of companies want to go in and capitalize - either do it now or be forced to wait eight years," Bauman said.

If the expected projects proceed, the total new ethylene capacity will reach about 17.7 million tons per year, a 40% increase from current ethylene capacity, according to research by Polymer Consulting. Polyethylene will account for about 80% of new ethylene capacity.

With the large amount of new polyethylene capacity being built, Bauman said that producers will target domestic customers before exporting. At this point, Bauman believes that most of the projects will go forward. But he said that polyethylene oversupply could be substantial if all expected projects do proceed. Prices could drop dramatically in the worst-case scenario where everyone proceeds, which means some polyethylene production will have to be exported.

Impact on PP

As far as propylene, Bauman predicts it will remain in tight supply through 2015 with growth impeded by supply and price. Most of the new propylene capacity will be for the merchant market and for polypropylene.

As there will be under-utilized polypropylene capacity, he said there could be an immediate surge in polypropylene production and there is likely to be some additional new capacity to meet available supply.

"The surge in supply will result in lower prices and could result in polypropylene re-capturing demand lost to other polymers," he said.

Bauman said that until the new capacity starts up, polyethylene and polypropylene will be tight and faced with increasing prices.

"There is shale gas around the world, the only difference is globally very few countries are as advanced as the U.S," he said. "It's really a structural change in the industry, something that will not go away. People calling it a game changer, a new frontier - there is a change going on."

Chevron Phillips focus on jobs

David Morgan, VP of polyethylene, olefins and polyolefins for Chevron Phillips Chemical Co., said that Chevron was the first chemical company to announce plans to build an ethane cracker and derivatives facilities on the Texas Gulf Coast when they announced its feasibility study back in March 2011.

The company is on track to build a 1.5 million metric ton/year ethane cracker and two polyethylene units along the U.S. Gulf Coast as part of its USGC petrochemicals project. If approved later this year, expected startup is 2017.

This project will create 10,000 construction and engineering jobs and 400 long-term positions.

Secondly, Chevron Phillips is also building a 1-hexene plant capable of producing up to 250,000 metric tons per year at its Cedar Bayou Chemical Complex in Baytown, TX. The company is in the midst of construction and completion is expected in 2014. 1-hexene is a key component to making polyethylene resins.

Companywide, Chevron anticipates hiring more than 2500 people in the next five years or so to support its growth plans and replace retiring employees.

"There is no question that this is a significant time for the petrochemical industry in the U.S.," Morgan said. "Just look at the recently announced investments here in the U.S. driven by shale gas and liquids production. Chevron Phillips Chemical's announced investments may be just the beginning. Our owners support an aggressive growth strategy and we plan to deliver."

If this new investment exceeds the demand growth in the U.S., Morgan believes the U.S. will grow its position as a net exporter of olefin derivatives. Chevron estimates that global demand growth for ethylene over the next 10 years could support the equivalent of four to five new crackers per year. 

In addition, new resin technologies will continue to provide new opportunities for products and packaging, creating new markets and accelerating growth.

Shale gas resources have certainly contributed to the industry's growth and have created great challenges and opportunities for Chevron Phillips Chemical especially in the workforce area, he said.

"Right now, we are opportunity long and aggressively pursuing new team members to be part of an exciting time for the plastics industry," he said. "I've been in the industry for 34 years, and this is the most exciting time of my career as we build new facilities, implement new technologies and people build careers in this sector of the economy."

Canada beating the U.S. to the punch?

Also in 2011, NOVA Chemicals announced plans for growth of its ethylene and polyethylene assets to serve North American markets. The plan, called NOVA 2020, lays out the strategic direction and vision of the organization.

"We have a goal to evolve our asset base to support our polyethylene market leadership strategy," a spokesperson said. "That goal has challenged us to discover possibilities that not only help deliver more capacity to our customers, but also maximize the value generated by the business."

Some of the projects include Gas Phase LLDPE expansion in Alberta, Canada. Construction is currently underway and the spokesperson said the company is moving forward quickly to commission this facility by the end of 2015. NOVA is spending $900-million in capital costs for this project; including operating and start-up spending, the total amount will be close to $1 billion.

"With construction already underway, we expect our facility in Alberta to begin operations in late 2015 - well ahead of most other North American polyethylene projects which are being considered," the spokesperson said.

The company expects to have the first new linear-low density polyethylene line to come on-stream in the U.S. and Canada since NOVA Chemicals' Advanced SCLAIRTECH unit more than ten years ago.

"NOVA Chemicals is investing to add value to ethane, which will benefit plastics converters and consumers in the United States, as well as support the E&P investment/gas development today," the spokesperson said. "As we continue to take advantage of new feedstock sources, we believe our portfolio of new feedstock projects will dramatically improve our supply position and the cost-competitiveness of our Ontario facility. We like the position NOVA is in today and are excited for the future."

Development in Mexico

Founded in 2010, Braskem Idesa SAPI is a joint venture, formed by the Brazil's Braskem S.A., the largest producer of thermoplastic resins in the Americas, and Grupo Idesa, a Mexican petrochemical company.

Braskem Idesa is developing the Ethylene XXI project, a petrochemical complex for the production of ethylene and polyethylene in the state of Veracruz, Mexico. This project is expected to require a fixed investment of $3.2 billion (CAPEX) and a total investment of approximately $4.5 billion.

"For Braskem, the whole shale gas revolution happening is quite positive," said Cleantho Paiva Leite, commercial and business development director of Braskem Idesa. "Whatever is going to be good for producers in the U.S. gulf coast, will also be good for producers of Mexico."  

When fully operationally by 2015, Braskem Idesa will have annual installed production capacity of 1 million tons of polyethylene.

Paiva Leite said that Mexico has a very large deficit of plastics so when the plant is up and running, the company is looking forward to supplying the Mexican market to help with that deficit. Some of the production may be exported to South America, and if necessary, they could supply to the U.S. as well. But he said the main objective of this project is the Mexico market.

"It will have an important impact on the Mexican economy and on the Mexican plastics market," he said. "We will serve the customers with a very short supply time with a constant flow of volume and also provide technical assistance. Mexico needs a large PE plant, there is a major deficit and both the government and plastic converters are very happy to see this project come through."

Generally speaking, Paiva Leite said that converters should be pleased with all the new development taking place in North America.

"There will be plenty of supply from various sources, and that will substitute some of the imports of finished plastic goods that are coming from places like Asia," he said. "It will have a positive impact on the whole value chain, not only on petrochemical companies making the investments in additional capacity, but we also feel a good part of converters will look forward to investing in their own product lines. Markets will be well served locally by plastic converters and that is all very good."

If U.S. is the bright spot; what about the rest of the world?

For Bill Sanderson, VP of downstream research and consulting for energy insight at IHS, the U.S. is a "bright spot" when it comes to the global energy outlook.

"For the first time in the U.S. in three decades, production is being brought back here rather than the Middle East," he said at the World Petrochemical Conference (March 19-21; Houston, TX). "Similarly, the Middle East and Asia will now have to invest in the U.S."

The Middle East does appear to be at a crossroads.

For instance, Exxon Mobil will work with Qatar Petroleum International on a $10 billion natural gas liquefaction facility in the Gulf Coast port of Sabine Pass. In addition, QPI has invested in North American oil and natural gas assets with the $1 billion acquisition of Canadian assets from Suncor Energy, which includes some shale gas potential.

In an open letter published on May 13, Saudi Prince Alwaleed bin Talal warned that U.S. shale gas development could hurt the Saudi economy.

The letter, which was addressed to Oil Minister Ali al-Naimi and other ministers, stated, "demand for oil from OPEC member states was in continuous decline."

He said Saudi Arabia's heavy dependence on oil was "a truth that has really become a source of worry for many," and that the world's biggest crude oil exporter should implement "swift measures" to diversify its economy, according to Reuters.

Moayyed Al-Qurtas, vice chairman of petrochemical giant Tasnee, which is also one of the largest industrial companies in Saudi Arabia and the Middle East, said that the country needs to diversify its revenue through the use of heavier feedstocks and the production of more "sophisticated" products.

Specifically, he said the area must diversify beyond typical ethylene and propylene derivatives and various initiatives are in place to promote more downstream industries.

Al-Qurtas believes the region could be a good base for selected intermediate, specialties chemicals and export oriented downstream plastics.

Tasnee, for one, is now producing PP, LDPE, HDPE, acrylic acid, butyl acrylates, super absorbent polymer, butyl acetates, in addition tocompounding. Sadara, which is a Dow Chemical and Aramco project that is slated to start in 2014, will produce TDI, MDI, polyols, LDPE, LLDPE, PG, PO, DNT, glycol esters, amines, elastomers, aniline and formalin.

Still, the GCC petrochemicals industry is projected to continue a growth pattern over the next five years, but at a lower growth rate compared with the past five years due to constraint in gas supplies, he said.

"We must keep looking into new projects and technologies," Al-Qurtas said. "Some view us as 'fly over land' and don't pay attention to the potential."

At the same time, not everyone believes North America shale gas development is a concern for the Middle East. In June, a forum at the London Business School in the Dubai International Financial Center, agreed that the impact of America's shale gas "revolution" is good news for the Middle East.

"While the American abundance of natural gas may be seen by some as a threat, it also presents opportunities for Middle East talent in the energy sector," according to Arab News. 

Recruitment experts now predict a talent exchange between the Middle East and the U.S.

"The region will become an exporter of talent," said Danny Leinders, senior client partner for Korn Ferry International. "We will now move talent from the region into North America as the demand for energy expertise grows over there."

As the global pattern of energy supply and demand shifts due to U.S. shale gas, experts at the forum noted that the Middle East needs to reassess its own energy policy.

"The Middle East should first address what is happening locally before fretting about America," said Harry Bradbury, chairman of Five Quarter Energy. "Middle East players should consider what routes they can take to guarantee gas supply. There is a need for greater manufacturing opportunities here, and technology, which is an enabler."

Matthew Lynn, a financial journalist based in London, said in an article on Marketwatch that the Middle East will be hit "very hard."

"Countries such as Saudi Arabia can try and diversify into new industries, but in truth, if that were easy they would have done it by now," he wrote. "Iran will be in a lot of trouble, and so will Libya, and Gulf states such as Qatar. You wouldn't want to bet too much on Dubai prospering if it is not the financial hub of one of the world's wealthiest regions any more."

Europe, not on the same level playing field - yet

Graeme Burnett, senior VP of refining and petrochemicals for the Americas for Belgium-based Total, believes that European demand for most polymers has reached a mature stage. As a result of shale developments, North America will become a major exporter of ethylene derivatives, first targeting South America and then Asian and European markets.

"The bottom line is that today, Europe is not able to play on the same level playing field with others," he said. "We have to adopt and differentiate through process and product innovation."

For instance, he recommends a refining and chemical strategy of expanding in Asia and the Middle East to leverage growth in emerging markets and access large dedicated oil and gas feedstocks.

When it comes to the European customer, he said the company is focused on developing value-added markets,with a particular focus on "sustainable packaging, downgauging and end-of-life."

In a recent report, the Institute of Directors (IoD), a non-party political organization in the UK, stated its belief that shale gas development should happen in Europe. The report said that shale gas could create tens of thousands of jobs, reduce imports, generate significant tax revenue and support British manufacturing.

"If we don't go and proceed, U.S. shale gas could be quite damaging," Corin Taylor, senior economic adviser at the IoD, told PlasticsToday. "Damaging as in more risk for price violation and a less secured supply. I think if we don't do it, Europe will get squeezed by competitive America."

The IoD report states that of a potential production phase, investment could peak at $4.9 billion a year, supporting 74,000 jobs - not just for geologists and drilling specialists, but for construction workers, truck drivers, cement manufacturers, water treatment experts, and people working in local retail and service industries. Shale gas production, with tax rates of up to 62%, could generate significant tax revenue, helping to offset a predicted future tax gap of 1.25% of GDP from lower Fuel Duty and North Sea receipts, IoD stated.

Despite the potential, there are plenty of barriers to overcome.

The planning and permitting regime involves four agencies, and two public consultations are needed to drill and fracture one exploration well. 

Taylor said that the national agencies - DECC, the Environment Agency and the Health and Safety Executive - should sign off on the sub-surface drilling and fracturing processes, and the local Minerals Planning Authority should concentrate on the surface impacts, including truck movements.

For a production phase, planning permission should be given for all potential activities on a site, rather than covering each well - otherwise it would be like needing a separate planning application for each turbine in a wind farm, he said. A National Policy Statement should be drawn up, making clear that shale gas developments are part of the UK's nationally significant energy infrastructure.

In addition, local authorities should receive a share of the gains from shale gas development in their area. Allowing them to keep 100% of the business rates for shale gas sites is a good option, Taylor said. Community benefit schemes must be flexible and spent on locally determined priorities. 

"UK is different from the U.S. as far as the land owner doesn't get a royalty," he said. "So they wouldn't get a royalty, but making sure there is some financial benefit for those that live in and around the wells."

While Taylor doesn't believe the UK will experience the same kind of "revolution" as U.S.'s shale gas development, he said a good scenario is slowing developing the production, which will still have quite a big impact.

"A key test will be if local communities are willing to accept it in their area," he said. "We still have quite a long way to go, but are moving along. While it will help manufacturing in the UK, the bigger unknown is whether it will lower prices like it has in the U.S. Even if it doesn't, there are major manufacturers in chemical who want to see shale gas in the UK. We might not see big manufacturing boost that is happening in states, but there will be some benefit as well."

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