Ethylene: going global

The full version of this article can be read in the April 2011 edition of Hydrocarbon Engineering.

The ethylene industry behaves in a cyclic manner that can coincide or slightly deviate from the normal business cycles of regional and global economies. Periods of high industry profitability (and high utilisation rates) tend to alternate with times of poor profitability (and low utilisation rates), leading to subsequent periods of over and under investment in new capacity. Long construction lead times of three to four years typically result in waves of capacity additions toward the end of the expansionary phase, thus exacerbating already weakening market conditions. The ensuing severe cyclical downturn and low profitability tends to rein in capital spending, leading to an extended period of very slow capacity growth that generally coincides with rapid demand growth during the economic recovery phase. This in turn tends to create very tight market conditions.

US ethylene view

The biggest surprise for the North American ethylene producer in 2010 was the magnitude of the demand rebound, especially in the US. After declining in 2009 from 2008, domestic consumption came roaring back in the US. With 2010 GDP growth rates only in the 2% - 3% range, this level of increase certainly was surprising. As most ethylene derivative consumption is consumed in non-durable applications and is related to consumer spending, this level of growth at a multiple of GDP usually reflects the type of growth seen in a developing economy and not a mature one as that in the US. However, US consumers stopped ‘sitting on their wallets’ and started to spend in a big way as evidenced by retail sales, which jumped an annualised 14% in the fourth quarter. For all of 2010, retail sales rose 7.9%, which is the largest level of increase since 1999. With this demand growth, the need to export derivatives was drastically reduced. In 2010, producers were able to export whatever level of derivative volume needed to keep the market supply/demand balance very tight. While this level of domestic growth is not expected to continue into 2011, producers will continue to be in a position to export whatever volume is necessary in order to again keep the supply/demand balance tight. In order for this scenario to continue, costs (and prices by extension) will have to remain low relative to those in target export markets. In addition, the demand for imports also has to be available and not filled with supply from other regions. The capacity build started a couple of years ago in Asia and the Middle East will largely be in place in 2011, and so competition for export business will likely increase. North American producers in 2010 were largely shielded from the increasing level of competition for Asian exports as exports to China were reduced dramatically and exports to South America increased.

In 2011, it is expected that further increases in ethane consumption into steam crackers will take place. This includes the feedstock consumed by the December restart of the Chevron Phillips Sweeny #22 unit, which is a purity ethane steam cracker. In order to feed this increased appetite for ethane, supply will also have to increase. Purity ethane production capacity in 2010 was approximately 850 000 bpd but will be boosted by the start up of new fractionation units by Enterprise in December 2010 and Targa in April 2011. Additionally, Oneok is expanding their Sterling pipeline, which brings purity natural gas liquids (NGLs) from Medford, Oklahoma to the Mont Belvieu market. Thus, ethane production capacity is expected to grow to between 890 000 and 910 000 bpd. With forecast consumption levels just over this range, this potentially leaves a balanced to tight ethane feedstock market for 2011.

Going forward, there are a number of additional projects targeted to bring more ethane to the market in the Gulf Coast region, as Enterprise plans to start another new unit, Gulf Coast Fractionators is debottlenecking their current frac, and new pipelines are being built to bring additional supply of NGL feed to the existing Formosa fractionation unit at Point Comfort. Additionally, Dow has announced that they are looking for a joint venture partner to develop a new fractionation project in the Gulf Coast. The continuing allure of ethane as an ethylene steam cracker feedstock is further highlighted by the number of new fractionation projects announced in both the Bakkan (North Dakota) and Marcellus (Northeast US) shale plays. Added to this list are announced plans to develop additional new unconventional natural gas deposits in the Southwest and Rocky Mountain regions of the US and in Western Canada. This growth in gas production should help to keep natural gas prices low relative to that of crude oil, but more importantly to the petrochemical industry, assures growth in the production of ethane, propane and butane. Even if the ethane supply and demand balance struggles through periods of tightness that result in higher prices, ethane is forecast to remain significantly cost advantaged relative to other feeds over the long term and should remain the feedstock of choice in North America.

The full version of this article can be read in the April 2011 edition of Hydrocarbon Engineering.

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