EPCA 2015: Energy has entered new era of shale

21:50 PM | October 12, 2015 | —Ian Young in Berlin

Yergin: Europe’s oil-collapse dividend will fade.
Sauquet: Competitive threat from new US crackers.

The advent of shale gas and oil in North America has hugely benefited the world economy, in terms of energy supply and costs, says Daniel Yergin, vice chairman of IHS. Speaking at the European Petrochemical Association’s (EPCA) 49th annual meeting, held recently in Berlin, Yergin said, “The energy position of the globe looks much better” than it did only a few years ago. 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 one year ago. For now, the oil price appears impervious to the many geopolitical dangers around the world, but this could change very quickly, Yergin says.

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, Yergin told EPCA delegates. “We have moved from the defining theme of the oil market being the growth of emerging economies, to being the dramatic growth of shale,” he says.

Yergin points to the robust emerging-market growth in 2004–14. China’s economy expanded by 2.5 times and the world economy expanded 27%, but Europe grew only 10%. This economic expansion drove up demand for oil and petrochemicals, and oil prices rose to about $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 says.

Growing shale-based energy supplies combined with a cooling of the main emerging economies—particularly China—and OPEC’s decision not to cut output have pushed oil prices down “to levels below what many anticipated,” Yergin says. “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 says. The development of fracking technology, initially for gas and then for oil, has almost doubled oil production in the United States since 2008, and lifted natural gas production almost 50% over the last decade, Yergin says.

Geopolitics historically had a huge influence on the price of oil. And the world today faces big geopolitical risks, ranging from flash points in the Mideast, such as Iran, Iraq, Syria, and Yemen, to the migrant crisis in Europe and tensions between the West and Russia. But, because of ample supply, these risks are currently not factored into the price of oil, and are not offsetting the fall in the oil price to its current low levels, although an unexpected turn of events could change this scenario, Yergin says.

Low prices have caused the oil industry to slash costs, with estimated budget cuts averaging 10–15% among the major companies, Yergin says. “Oil projects will be delayed, reviewed, postponed, and canceled,” he says.

Europe also has shale gas potential, but political obstacles prevent its development, Yergin says. IHS research indicates that by the mid-2030s, Germany could be sourcing 35% of its natural gas from domestic shale gas produced from nonsensitive areas, equivalent to the country’s current imports from Norway or Russia.

Cheap, plentiful oil has significantly benefited the worldwide petrochemical industry in 2015, particularly in Europe. The feedstock position of Europe, where naphtha remains the dominant raw material, has improved, but this benefit is likely to erode, Yergin says. “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,” he says.

Shale has spurred many petrochemical projects in North America. “Currently, the impact of US shale gas is pervasive, with big implications for petrochemicals,” Yergin says. He cites IHS Chemical’s estimate of more than $100 billion in scheduled investments in what he calls the “first wave” of petrochemical projects in the United States. “The United States will remain in a very competitive position in petrochemicals for a long time,” Yergin says. A potential “second wave” is being assessed, he adds.

Yergin indicates continued growth for petrochemicals worldwide. He cites IHS Chemical research that forecasts worldwide petrochemical demand to be 40% 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 EPCA delegates.

The buildup of petrochemical capacity in the first wave of US projects, estimated at about 12 million m.t./year, presents a long-term competitive challenge for Europe’s petrochemical industry, mainly in the form of ethylene derivative exports, says Philippe Sauquet, president/refining and chemicals at Total, in a keynote address to the EPCA annual meeting. “The challenge for Europe will be to compete with the new crackers in the United States,” Sauquet says. “We’ll see 8 million m.t./year of new polyethylene [(PE)] capacity in the United States in 2017–18. Part of it will remain in the US, and the balance will go elsewhere, to Asia, and some to Europe.”

Sauquet also highlights that the fall in oil prices during the past year has provided relief for Europe’s naphtha-based petrochemical industry. “The lower oil price environment is reducing the competitive edge of the US projects,” he told EPCA delegates. “Oil at $60/bbl improves Europe’s competitive position compared with oil at $100/bbl—there is a smaller competitivity gap—although cash costs remain an issue since US cash costs are still cheaper.”

The relative profitability of US petrochemical projects that follow the first wave is “less compelling” against a background of low oil prices, Sauquet says. “They are still competitive, but the full-cost competitivity gap is reduced for PE delivered from the United States to Europe,” he says.

Nevertheless, “shale has drastically changed the vision we had 10 years ago,” Sauquet says. “Gas will remain one of the biggest contributors [to the feedstock mix] for the rest of the current century.”