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The challenges ahead

Hydrocarbon Engineering,

Many specialists consider that now is the right time for European companies to define, prepare and put in place their future strategies. This will include developing and focusing on their specific attributes: innovation, better value capture, implementing efficient processes, respecting environmental constraints and developing the skills set needed to remain competitive.

Current climate and trends in Europe

Economic concerns continue to cloud the outlook for the European chemicals sector, at least in the short term. Looking ahead it is clear that important changes will need to be implemented to rectify the situation.

One of the issues is the region’s falling competitive global feedstock position and this will require innovative solutions. In short the big issue is feedstock costs. The cost curve is bad for anyone producing petrochemicals from liquids. Shale developments globally will impact this but Europe’s reserves are relatively small compared to North America, the Middle East and China.

For the foreseeable future the European chemical sector will face continued challenging operating conditions. Falling demand from the key downstream end users due to the Eurozone financial instability has caused many operators in Europe to lower operating rates, and this trend could well continue.

The difficult European market conditions has seen some companies take action by sanctioning reductions in staff and in some cases closing European assets. Recently, SABIC, the world’s biggest petrochemicals group, announced plans to shed approximately 1050 jobs in Europe and also close some operations; the reason given being the rather gloomy business outlook in Europe.

The company relies heavily on gas to power its plastics, fertiliser and chemicals businesses and therefore is turning its attention across the Atlantic Ocean to much cheaper supplies from the US where a shale gas boom has cut prices to half European levels.

All doom and gloom?

Fortunately no, despite the economic uncertainty there has been some encouraging signs of late and it was recently announced that the Austrian oil and gas group OMV is to invest e 230 million in a project to boost and upgrade its production of key plastics intermediate butadiene.

OMV is planning to expand its butadiene production capabilities by building a new butadiene plant in Germany at its Burghausen refinery. In addition, it has announced plans to upgrade an existing unit at Schwechat, Austria; all part of OMV’s strategy in responding to butadiene’s significant growth worldwide.

Both projects will be online in the not too distant future; with the revamp of the existing butadiene plant at Schwechat scheduled to start up in June 2014 and the new plant in Germany slated for second quarter of 2015.

The US shale gas boom

The recent shale gas boom in the US has been well documented and its benefits to the US economy has been evident; the cheap and abundant supply of ethane derived from the shale gas the US chemical industry has been given a good boost and this has left Europe in a somewhat precarious position.

Will Europe also turn to shale gas to unlock competitive feedstocks?

It is a possibility. Shale gas developments are being considered in many countries as a viable alternative to traditional fuels. Shale and other unconventional gas resources have been identified in France, Germany, Hungary, Italy, Netherlands, Poland, Romania, Spain, Sweden, Switzerland and the UK.

Land and license acquisition and early stage exploration is already underway or foreseen in a number of these countries. The results from these test sites and other efforts will help to determine the real potential for shale gas use in the European continent.

However, despite these significant volumes of unconventional gas deposits, shale gas developments are running many years behind their counterparts in the US. But why is this? There are a number of factors to help explain this trend.

  • Geology: The geology of the regions is deemed less favourable for commercial development.
  • Tax incentives: Unlike the US no tax incentives have been implemented in Europe for shale gas development.
  • Environmental issues: Europe as a whole has much more stringent regulations in place with regards to the environmental impact.
  • Public opinion: In the US many of shale gas developments are situated in low populated areas. If one compares population densities one can see that this will be more difficult to achieve in Europe (US: 30 habitants/km2: EUR: >100 habitants per km2).
  • Early negative feedback: Many politicians in Europe have been quick to condemn the exploration of shale gas. Last September new French president Francois Hollande said his government would maintain the country’s ban on the process of hydraulic fracking, the most important technology for obtaining shale gas.

The European country most committed to unlocking its shale gas reserves remains Poland, despite rumours that its plans could be curtailed by the European Commission due to questions over possible health risks to populations and to the environment. However, both Germany and the UK have maintained their support of shale gas developments. Europe has abundant shale reserves, and the technology now exists to exploit them. It has been estimated that Europe has approximately 24.0 billion m3 of technically recoverable shale gas.

The outlook for the European petrochemical industry

Clearly, the European petrochemical industry is in transition. It was once a strong pillar of European business, a key player for economic prosperity at home and abroad. This position is now under pressure, however much of the strengths of the European petrochemical industry remain in place; well integrated facilities, specific skills, knowledge and experience; experienced and specialised suppliers, services providers, and producers; highly developed infrastructure; demanding consumers.

So, in light of these challenging times what opportunities are there for the European petrochemical sector?

Two clear aspects seem to come to the fore when discussing the European petrochemical sector:

  • Feedstock cost: There is the issue of differing cost level with regards to feedstocks throughout the regions.
  • Plant modernisation: How to best modernise and run efficiently the existing plants in Europe, many of which are now oversized and ageing.

With regards to the issue of feedstock cost, shale gas exploration in the US has led to a substantial reduction of prices for natural gas and ethane. In addition, the Middle East has benefited from the new large petrochemical plants coming onstream. These capacities' additions are mainly based on associated gas from oil production and this has led to an advantage in the cost position.

With this development the majority of US cracker operators have taken the route of processing lighter feedstocks to improve their competitiveness and results. As natural gas availability will remain limited in Europe the same trend is not expected to materialise.

With this turn to lighter feedstocks in the US, there has been a resulting lower production of higher olefins. This can be seen as an advantage for the European plants, as propylene and crude C4, are important factors for the competitiveness of naphtha crackers. The existing supply shortage linked with the high demand for C3 and C4 are increasing prices and therefore the profitability of naphtha crackers.

It is expected that naphtha will be the main source of feedstock for crackers in Europe so the shortage in C3 and C4 should not be as strong as in other regions.

Looking at the Europe’s petrochemical sector and comparing it with other regions it can be considered to be ‘old’ and in need of modernisation. This is not necessarily a negative but it does mean that certain measures need to be taken in order to continue to be competitive: Increase maintenance and invest in optimisation measures and tools.

On the plus side many of the plants in Europe are well integrated with advanced energy integration and usually well located i.e. short distances from clients, suppliers, etc. In comparison, products from Middle East and the US have often to be transported over long distances. This has an impact on cost of logistics.

If the European naphtha crackers are well integrated into high value downstream products such as butadiene then it should not be too great a challenge to achieve competitiveness.

Other identified opportunities for the European petrochemical industry include:

  • Process and product innovation.
  • Supply chain integration opportunities.
  • Workforce ability and flexibility. 


To summarise, it is clear that the European petrochemical sector cannot continue to apply the ‘business as usual’ model. New competitive strategies must be developed to succeed in global competition. As this article has shown, there are solutions available, different avenues to explore and more importantly a willingness to maintain European petrochemical competitiveness.

Written by Stefan Chapman, EPC, UK.

The full article from EPC can be found in the July issue of Hydrocarbon Engineering.

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