Yergin: Energy has entered 'new era of shale' with big benefits for petrochemicals

IHS Vice Chairman, Daniel Yergin gave the keynote address at the European Petrochemical Association's (EPCA) 49th annual meeting in Berlin, 5 October 2015, where he discussed how the petrochemical industry could benefit from shale gas.

“The energy position of the globe looks much better" than it did only a few years ago, Daniel Yergin noted in terms of energy supply and costs. The emergence of shale was one of the main triggers of the collapse in oil prices since mid-2014, which has also improved the feedstock position of the European petrochemical industry in ways that were not anticipated a year ago.

He argued that ‘the world has entered a new era in energy terms, with growing global supply surpassing demand from emerging economies as the main influence on markets’, commenting: "We have moved from the defining theme of the oil market being the growth of the emerging markets to its being the dramatic growth of shale.”

He pointed to the robust emerging market growth in the 2004 to 2014 timeframe—China's economy, for example, expanded by 2.5 times while the world economy expanded 27% and Europe, by only 10%. This economic expansion drove increased demand for oil and petrochemicals. Oil prices rose to levels of approximately US$100/bbl in the early part of this decade. These factors fed fears of a shortage and made rising costs a major issue for consumers. "But, during that period, shale was coming, and it has transformed the energy scenario," Yergin said.

Growing shale-based energy supplies, combined with a cooling of the main emerging economies (particularly China), together with OPEC's decision not to cut output, have pushed oil prices down "to levels below what many anticipated. […] Right now, there is a historic shift from limited supply and strong demand to ample supply and weaker demand, partly because of a disruptive technology (fracking for shale oil and gas)," he said. The development of fracking technology, initially for gas and then for oil, has resulted in an almost doubling in oil production in the US since 2008, and an almost 50% hike in natural gas production over the last decade.

Discussing the effects of geopolitics on the price of oil, the speaker argued that because of ample supply, geopolitical risks are currently not factored into the price of oil, and thus are not offsetting the fall in the oil price to its current low levels, although an unexpected turn of events could cause this scenario to change.

Low prices have caused the oil industry to slash costs with estimated budget cuts averaging 10% to 15% among the major companies, Yergin said, and added: "Oil projects will be delayed, reviewed, postponed and cancelled”, but cheap, plentiful oil has brought big benefits to the worldwide petrochemical industry in 2015, particularly in Europe.

Europe has shale gas potential, but political obstacles prevent its development. IHS research indicates that by the mid- 2030s Germany could be getting 35 of its natural gas from domestic shale gas produced from non-sensitive areas, equivalent to current import levels from Norway or Russia.

“Currently, the impact of US shale gas is pervasive, with big implications for petrochemicals," Yergin said. He cited IHS Chemical’s estimate of the more than US$100 billion in scheduled investments in what he called "first wave" of ‘petchem’ projects in the US: "The US will remain in a very competitive position in petrochemicals for a long time.” The potential “second wave” is going through a process of assessment.

The petrochemicals feedstock position of Europe, where naphtha remains the dominant raw material, has also improved with the fall in oil prices, but this benefit is likely to erode over time, Yergin continued: “The oil collapse dividend for petrochemicals in Europe will be an asset that fades over time versus natural gas-based petrochemicals in the United States.”

But, overall, he pointed to continued growth for petrochemicals worldwide. He cited IHS Chemical research that forecasts that the worldwide petrochemical demand will be 40 percent bigger overall in 10 years than it is today. “The world needs what the petrochemical industry makes and it will need much more in the future,” he told the EPCA delegates.

Edited from press release by Angharad Lock

Read the article online at: https://www.hydrocarbonengineering.com/petrochemicals/07102015/yergin-energy-has-entered-new-era-of-shale-with-big-benefits-for-petrochemicals-1552/