According to a report by the US EIA in June last year, shale oil and gas resources formed 29% of total US crude oil production and 40% of US gas production in 2012. Considering that in 2008 shale barely featured in US crude demand at all, such growth over four years is staggering and is attributable largely to the relatively low cost and high volumes available from shale fields in North America. The effects of this change do not only affect domestic US gas and oil producers however, but have had and will continue to have an ever greater influence on global chemical markets, in particular those in Europe and Brazil.
The United States of ethane
According to a report from Bentek, the production of NGLs due to shale gas development in the US is expected to increase by more than 2.8 million bpd in 2016, representing an increase of 40%.
Shale tends to have a high NGL composition, where on average 75% is methane, ethane accounts of 16%, propane 5% with the remaining 1% butane, hexane and other gases. However, as methane is then sold at natural gas prices, primarily for use as fuel, and considering that natural gas reached a 10 year low in 2012 of US$ 2.27/million Btu, the incentive to continue exploration simply for methane is low.
Ethane is a different story though, primarily because of its use as a feedstock for ethylene: between October 2011 and June 2013, the cost of ethane dropped dramatically. By contrast, the price of ethylene grew to approximately US$ 1250/t in June 2013, meaning that the ethane cracker margins rocketed, while naphtha cracker margins oscillated around the zero point. Such low ethane prices combined with its domestic availability means that the financial motive for using ethane to produce ethylene is obviously much clearer and is the reason behind ethane becoming the feedstock of choice for many US producers.
Ethane in Europe
While Western Europe is estimated to house a variety of shale formations, the EIA estimates approximately 800 trillion ft3 of technically recoverable resources, hydraulic fracturing (‘fracking’) is still an extremely political and controversial topic. Fracking as a technology has not yet shaken off its image as water table contaminator and destroyer of greenbelt areas in Europe, to an extent that few politicians are willing to stick their necks out and endorse it. That said, British Prime Minister David Cameron announced on January 13th 2014 his support for shale development in the UK only days after the Financial Times reported that Total would become the first major producer to invest in British shale. France's President François Hollande meanwhile has supported a ban on the use of fracking technology.
Additionally, as Europe's infrastructure was built around cracking naphtha, (directly linked to the price of crude oil) the 2013 average of US$ 108/bbl for Brent crude has caused some significant suffering for European petrochemical companies. Dwindling of North Sea reserves and the Eurozone crisis have taken further toll on an industry already struggling in the face of American competition.
It is perhaps not surprising then, that companies such as Ineos Europe AG, Italy's Versalis and Austria's Borealis are jumping on the bandwagon and trying to arrange contracts with US producers to import ethane for feedstock. However, legislation currently pending in Congress could limit LNG exports from the US as many fear that exports will raise domestic prices and harm manufacturers: essentially aiming to preserve their competitive advantage. Even if European imports of ethane go ahead and begin to address margin shortfalls, the amount of investment needed to ensure feedstock availability, security and to renew ageing infrastructure over the long term is still lacking. Current estimates state that by 2015, 33% of crackers in Europe will become uneconomical, prompting majors such as Shell to sell some European assets in order to avoid crippling construction and maintenance upgrade costs.
At the same time, those downstream companies using ethylene to make other materials such as polyethylene and polyvinylchloride (PVC) are struggling to adjust to the ethane impact. In Brazil for example, PVC producers are in competition with US companies who are able to use ethane from shale as their feedstock. Even with the cost of export, transportation and duty on imports, those US producers can still compete with Brazilian ones, which is forcing them to either reduce their margins or lose market share. As neither of those options are appealing, companies in Europe and Brazil alike must squeeze their fixed cost base and optimise their production processes in order to remain competitive.
The above factors may seem to paint a rather dire picture for the European petrochemicals market, but the impact of propylene on European success must not be forgotten. As mentioned above, using ethane to make ethylene is highly efficient if ethylene is the end product required. However, as ethane use has increased, it has simultaneously caused a decrease in propylene availability, formed as a coproduct of naphtha cracking. The ethylene only expansions mentioned above could further frustrate propylene supply, demand for which is estimated to be growing at a compound annual growth rate (CAGR) of 4.6% globally, spurred mainly by Asian consumer growth. The supply shortage has already provoked an increase in prices, prompting a number of on purpose propylene projects in the US, alone capable of reducing the demand gap to 750 000 tpy.
Onwards and upwards
The above developments in the global chemicals markets mean that at present, it would be logical for a number of European producers to invest in their existing assets and play the long game. Ethane is extremely difficult to transport due to its low boiling point and high vapour pressure, meaning it must be kept either extremely cold or pressurised, placing a significant brake on its current transportability. By contrast, naphtha availability in Europe is still high and much easier to transport across long distances.
However, the pace of change that America´s shale play has started will no doubt increase over the coming years, and producers in Europe must ensure that they remain at the forefront of new technological and logistical advances and higher added value products if they want to remain a piece of the energy puzzle at all. In the face of such competition, the shale game can only be played to win.
The full article can be found in the April issue of Hydrocarbon Engineering.
T.A. Cook will be further discussing the shale industry and the global petrochemicals sector in the Special Reports section of Energy Global later this month.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/01042014/the_shale_puzzle_shale_processing_series/