Petrochemicals Growing pains for US ethylene

12:48 PM | March 18, 2019 | Clay Boswell

MORE TO COME: ExxonMobil’s 1.5 MMt/y ethane cracker in Baytown, which went online in July 2018.

With midstream investment in the production of feedstock ethane falling short of surging US ethylene capacity, flexible-feed crackers will have to shift to a heavier feedslate, driving up the cost of ethylene production while boosting propylene output.

Five new steam crackers will begin operation on the US Gulf Coast by the end of 2019, pushing US ethylene production capacity ahead of consumption capacity for the first time in decades—perhaps for the first time ever. Derivative units and export capacity are on the way, but so are additional steam crackers, and the ethylene market will tend toward length even beyond 2019. The outlook is further complicated by the recent lag in midstream investment. NGL fractionation and pipeline capacity has not increased as quickly as ethylene capacity, and it will not begin to catch up until next year. As the new crackers start up, the supply of feedstock ethane will tighten, incentivizing the use of propane and butane—alternative feedstocks that yield a much greater share of propylene. That would be a welcome development for domestic polypropylene (PP) producers, whose propylene costs frequently put them at a disadvantage last year.

More than 20 US cracker projects have been proposed over the last decade, of which 11 have received a positive final investment decision (FID). Four are already up and running. Ingleside Ethylene, a joint venture (JV) between OxyChem and Mexichem, started up a new 550,000 metric tons/year steam cracker in Ingleside, Texas, in February 2017; Dow’s 1.5 million metric tons/year (MMt/y) unit in Freeport, Texas, followed in September 2017; CPChem’s 1.5 MMt/y unit in Baytown, Texas, in March 2018; and ExxonMobil’s 1.5 MMt/y unit in Baytown in July 2018.

During ExxonMobil’s quarterly earnings call in February, CEO Darren Woods said a new 650,000 metric tons/year linear low-density polyethylene (LLDPE) plant at Beaumont, Texas, is on track to start up in mid-2019. He also said the company would soon make FIDs regarding a 400,000 metric tons/year Vistamaxx propylene plastomer unit and a 350,000-metric tons/year, full-range linear alpha-olefins (LAO) unit, both of which would be located at Baytown.

The class of 2019

The first of the 2019 start-ups could be Indorama’s 430,000 metric tons/year ethane cracker in Lake Charles, Louisiana, which has been renovated after two decades offline. Commissioning of the unit began in late 2018, but it has taken a longer than expected.

LACC, a joint venture between Lotte and Westlake Chemical (via Axiall), has put start-up of its 1 MMt/y cracker at Lake Charles during the first half of 2019, but commissioning is already underway, and IHS Markit believes commercial production could begin within weeks. Lotte is building a 700,000 metric tons/year ethylene glycol (EG) unit downstream at the same site. IHS Markit expects Shintech, the US vinyls subsidiary of Japan’s Shin-Etsu Chemical, to bring its 500,000 metric tons/year cracker in Plaquemine, Louisiana, online in May. The company plans to expand the unit to 670,000 metric tons/year in 2022.

The other two start-ups have been pushed back several months. Formosa Plastics Corporation (FPC) had planned to start up its 1.25 MMt/y ethane cracker at Point Comfort, Texas, during the first quarter, but that has been shifted to the third quarter, and IHS Markit is forecasting July. A new 800,000 metric tons/year EG unit and a new 400,000 metric tons/year high density polyethylene (HDPE) unit at Point Comfort are also slated to start up during the second half.

Sasol had been expected to start up the 1.55 MMt/y ethylene plant anchoring its $11-billion Lake Charles Cracker Project in February, but the company is now targeting July. “We are disappointed about the LCCP’s schedule delay and increase in the cost estimate,” co-CEO Bongani Nqwababa said last month during the company’s earnings call. “This is our project, built on our site, and we take accountability for the outcome, the good and the bad.”

Sasol cited a range of problems for the delay, including late design revisions resulting from incomplete engineering work; defective carbon-steel forgings for the cracker and ethylene oxide/ethylene glycol (EO/EG) unit; a cumulative month’s work being lost because of heavy rainfall during the fourth quarter; and productivity losses exacerbated by high absenteeism around public holidays. “It becomes much harder to mitigate any issues … near the end of the process because most remaining events directly impact the critical path,” Nqwababa noted.

The LCCP’s 470,000 metric tons/year LLDPE plant delivered its first product in January 2019 and beneficial operation was achieved in February, approximately two months behind schedule. Sasol expects to complete the 420,000 metric tons/year low-density polyethylene (LDPE) plant in August, five months later than planned; the 300,000 metric tons/year EO/EG plant in June, four months later than planned; and an ethoxylate plant in December.

More on the horizon

Two more crackers are scheduled to begin production over the next two years. Bayport Polymers, a JV between Total Petrochemicals, Borealis, and Nova Chemicals, is building a 1 MMt/y ethane cracker at Port Arthur, Texas, that is slated for start-up during the second half of 2020. Two downstream HDPE plants totaling 625,000 metric tons/year of capacity are slated for start-up in 2022.

THE BOTTLENECK: 300,000 b/d of NGL fractionation capacity will begin operations
this year.

Shell Chemical’s Monaca, Pennsylvania, project—far from the US Gulf Coast, but close to the ethane-rich Marcellus and Utica shales—is also well underway. Centered on a 1.5 MMt/y ethane cracker, it includes three 500,000 metric tons/year polyethylene plants, two for producing HDPE and one for producing LLDPE. All four are plants expected online in mid-2021.

Other projects are in various stages of development. ExxonMobil and SABIC are developing a JV project that would include a 1.8 MMt/y ethane cracker as well as two polyethylene units totaling 1.3 MMt/y of capacity and a 1.1 MMt/y EG plant. The partners have acquired land for the project in San Patricio County, Texas, and issued engineering, procurement, and construction (EPC) contracts, but they have not made a final investment decision.

PTT Global Chemical and partner Daelim have obtained all required environmental permits for a project in Shadyside, Ohio, that would include a 1.5 MMt/y ethane cracker, two 350,000-metric tons/year HDPE lines, and two 450,000-metric tons/year lines for producing both HDPE and LLDPE. The project still awaits FID, but the companies have committed $100 million to front-end engineering and design (FEED), and PTTGC has purchased a portion of the land required.

Formosa Petrochemical Corp. (FPCC), a Taiwan-based sister of FPC, has purchased 2,400 acres in St. James Parish, Louisiana, for a $9.4-billion petrochemical complex that will ultimately include two ethane crackers. FPCC plans to build the complex in two phases over 10 years. During the first phase, the company will build a 1.2 MMt/y ethane cracker and downstream PE and EG plants as well as propylene and PP units. The second phase will include an additional ethylene plant, as well as PE and EG plants.

CPChem is meanwhile considering whether to invest in another ethane cracker that would probably be located in Orange, Texas, and Nova Chemicals has proposed a 1.5 MMt/y cracker for Geismar, Louisiana.

Several ethylene export projects have been proposed as additional outlets for the ethylene surplus, but to-date, only one, a JV between Enterprise Products Partners and Navigator Holdings, has gone forward. Construction of the terminal, located at Morgan’s Point, Texas, on the Houston Ship Channel, began in 2018, and the companies expect to begin operations in the fourth quarter of 2019. Two shippers have committed to the project.

“There is some doubt whether more terminal capacity is needed, and certainly over the long-term export shipment are believed to fall as derivatives capacity is built-out to consume more of the excess supply,” says IHS Markit’s World Analysis 2019—Ethylene. “From a global market-balance standpoint, with new ethylene capacity to produce and consume coming, the IHS Markit forecast is for a short ethylene market on a capacity basis over the next five years. The added terminal, via take-or-pay commitments, will allow the relatively long North American region to balance against the relatively tight Asian market. Our assumption is that this terminal will provide structural monomer exports via the take-or-pay contracts peaking in 2020–23, then slowly declining after that.”

Feedstock worries

None of these projects would have been proposed, much less approved, if the boom in US oil and gas production had not also yielded tremendous volumes of inexpensive NGLs, particularly ethane. Growth in the production of NGLs remains strong, says IHS Markit, which expects total NGL production to increase by 410,000 b/d in 2019, and 480,000 b/d in 2020.

However, it is one thing to pull ethane out of the ground as a byproduct of drilling, and quite another to isolate and supply it as a feedstock suitable for steam cracking. Midstream firms typically handle that task, but they have been slow to build the NGL fractionators and pipelines necessary to meet rising demand because it is a secondary activity. Their business is much more dependent on serving oil and gas producers upstream, and when crude oil prices collapsed in late 2014, plans to expand NGL infrastructure went on the back burner. No new fractionation capacity was added in 2017 and 2018.

NEW DAY DAWNING: CPChem’s 1.5 MMt/y cracker at Cedar Bayou went online in
March 2018.

Any slack left in the system was quickly absorbed by the recent surge in demand, and ethane production is now constrained. “It was the ExxonMobil cracker that tipped over the apple cart,” says Todd Dina, executive director/global olefins at IHS Markit. “The Dow, ExxonMobil, and CPChem crackers, when put together, added about 275,000 b/d of ethane pull, which pulled down the inventory to about 23 days of supply.” The market responded with a sharp increase in the price of ethane from an average of 26.14 cents/gal in May to 52.64 cents/gal in September, when prices briefly reached 61.5 cents/gal. Ethane prices have moderated since then, averaging 28.25 cents/gal during the week ending 1 March, but they will strengthen again as new crackers come online.

Although midstream NGL investments have picked back up and numerous fractionator projects have been announced, only two will start up this year, for a capacity gain of 300,000 b/d—well below the nearly 600,000 b/d of consumption capacity represented by the three crackers that have gone online since late 2017 and the five soon to start. The balance should improve dramatically in 2020, when 1.1 million b/d of fractionation capacity is slated for start-up.

“We think ethane supply will be limited at least through the start of 2020, maybe even a bit longer depending on cracker startup and ramp up, so we’ll have to shift to other feeds,” says Steve Lewandowski, global business director/light olefins at IHS Markit.

The new crackers are designed to take ethane only, and with ethane tight, fully supplying them will probably require that existing flexible-feed crackers replace at least a portion of their ethane consumption with propane. Ethane prices will consequently need to rise until propane is competitive. Fortunately, propane is long.

“We have way too much propane,” says Dina. “We are constrained right now on export terminals. That will put pressure on propane prices, particularly as the pipelines are opened for crude in 2019.” Fourth-quarter 2018 figures from AFPM already show heavier feedstock being pulled into the crackers, he notes.

Lewandowski estimates that US flexible-feed crackers could increase their consumption of propane by about 150,000 b/d, and of butane by 30-40,000 b/d. “Then naphtha—we know that relative to history there’s a lot of room to go up,” he says. “We know some crackers revamped for the shift to lighter feeds don’t have those degrees of freedom anymore, but there’s still some capability—maybe not enough for a 600,000 b/d shift, but maybe even half of that is out there. Whether the economics would support that or not is to be seen.”

Reverberations in the propylene chain

Propylene supply will also lengthen this year, owing to the heavier feedslate. Ethane cracking produces only a very small amount of propylene, typically 0.04 metric tons for each metric ton of ethylene, but the yield improves dramatically for heavier feedstocks—0.4 metric tons from propane, 0.43 metric tons from n-butane, and 0.53 metric tons from naphtha.

“When we have that switch [to heavier feedstocks], which we expect in the second quarter, we will get a tremendous amount more propylene coproduction—about [45,000 metric tons] a month additional supply in the market,” Dina says. The figure represents a 13% increase over last year’s average monthly output from US steam crackers (350,000 metric tons) and 4% over the monthly average from all sources (1.2 million metric tons).

The result will be a welcome change for downstream polypropylene producers, who struggled in 2018 with extremely tight supply and high prices that left them vulnerable to imports. Supply improved late in the year amid improved operations at propane dehydrogenation (PDH) plants. Inventory, which had shrunk to 13 days of supply in June 2018, recovered to 18 days in January, and it will rise above 20 days this year, says Dina. “I expect to see production records all throughout the propylene derivative chain [during 2019], and I expect to see records all through the export chain, both on propylene and on propylene derivatives,” he says. “So, the net effect is the competitive market is here to stay, and it’s going to favor moving products all through the propylene value chain.”

However, there will be a dramatic pullback in coproduction when cracker feedslates shift back to ethane in 2020, he notes. Two polypropylene plants are also slated to begin operation next year—Braskem’s 450,000 metric tons/year unit at La Porte, Texas, and FPC’s 250,000 metric tons/year unit at Point Comfort, Texas. The result will be a sharp decline in propylene inventory.

Planned outages offer modicum of relief

This year’s heavy cracker turnaround schedule adds another layer of complexity to the ethylene outlook. “When we look at outages month-by-month, whether planned or unplanned, and then we compare what’s going on relative to a bit of history, 2019 is at a pretty high level,” says Lewandowski.

Ethylene outages scheduled for the remainder of 2019 include BASF/Total’s 1.05 MMt/y cracker in Port Arthur, Texas, for 7–8 weeks; ExxonMobil’s 866,000 metric tons/year cracker at Beaumont, Texas, for 10–11 weeks; Shell’s 584,000 metric tons/year cracker at Norco, Louisiana, for 7–8 weeks; LyondellBasell’s 499,000 metric tons/year cracker at Clinton, Iowa, for 7–8 weeks; and Sasol’s 454,000 metric tons/year cracker at Lake Charles, for 7–8 weeks. Between these and estimated unplanned outages, IHS Markit expects US capacity losses this year to total 1.75 million metric tons, 4.6% of the total, compared with 3.9% in 2018.

US crackers have generally been running well, Lewandowski says, in part because downstream issues have constrained demand and pushed down operating rates, which has in turn facilitated stable operations. “Derivatives continue to be a problem,” he notes. “That said, fourth-quarter AFPM statistics show a fourth consecutive quarter of record ethylene production, up 4% from the third quarter, so we’re making more, consuming more feed, and the very small inventory build means derivatives did in fact run better, and that’s a bit of a bright spot.”

Ethylene supply and demand will shift erratically this year, given the alternating start-ups of crackers and downstream plants, but inventory will be generally high. “Derivatives are coming, but ethylene is a bit behind, so that’s going to have some impact on how we draw down stock, and maybe give some support to ramp up other ethylene assets,” says Lewandowski. “But we still think in general we’re going to be in a longer position on ethylene.”

Unless a producer runs its crackers at surprisingly low rates—perhaps to reduce the working capital of carrying stock—there will be only limited support for ethylene prices this year, and spot values should remain at or near the cash cost of the most advantaged feed, says IHS Markit’s North America Light Olefins—Monthly Market Report. Tight ethane will meanwhile squeeze spot margins. “We forecast ethane cash costs to trend with heavier feedstock cash costs through most of 2019, with little margin for the crackers from a spot feed, spot ethylene-sales perspective,” says the report. “Those operators integrated to derivatives or selling ethylene at net transaction contract price will still have strong margins.”

No rest for the weary

Buyers and sellers will have their hands full this year trying to track all of these variables, but making matters worse, the view will remain obscured by the haze of economic uncertainty stirred up by the trade dispute between the US and China. The US has dropped plans to increase tariffs from 10% to 25% on $200 billion of Chinese products in early March, indicating significant progress in negotiations between the two countries, but the timing and shape of a resolution remains anyone’s guess. Meanwhile tariffs already in place will continue forcing US polyethylene exports to find new markets at a particularly inconvenient time, given the surge in new production capacity.

Chinese tariffs of up to 25% have already pushed significant volumes of US polyethylene out of China and toward Europe. The share of US LLDPE exports sent to the EU28 region increased from 7% in 2017 to 25% in 2018, and the share for HDPE increased from 3% to 7%, according to IHS Markit’s Global Plastics and Polymers—Market Focus. “For the time being we continue to forecast that trade tariffs will be in place through 2019 and thus US exporters will continue to look to other markets outside of China to avoid the additional tariffs,” says the report. “This behavior is expected to continue to put pressure on global prices as the US looks to develop market share in new markets.”

A busy year ahead for US ethylene
Company City Capacity (MMt/y) Derivatives Cracker startup
Indorama Lake Charles, LA 420 back integrate 1H19
FPC Point Comfort, TX 1,250 PE 3Q19
LACC Lake Charles, LA 1,000 EOx, back integrate 1H19
Shin-Etsu Plaquemine, LA 500 back integrate 1H19
Sasol Lake Charles, LA 1,550 EOx, PE, other Aug 19
Bayport Polymers Port Arthur, TX 1,000 PE 1H20
Dow Freeport, TX 500* back integrate 2020+
Shell Monaca, PA 1,500 PE 2021+
*expansion. Source: IHS Markit. © 2019 IHS Markit