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US shale gas changing dynamics in petrochemical industry of Asia, Latin America, Middle East

US shale gas changing dynamics in petrochemical industry of Asia, Latin America, Middle East

12-Sep-14

The abundant supply of shale gas in North America has reenergized the North American petrochemical industry, unleashing a wave of capital investment in new facilities. Since many shale fields contain, in addition to oil and natural gas, large quantities of natural gas liquids (NGLs) such as ethane, propane and butane, major new supplies are entering the market at low costs. This low-cost feedstock has already shifted profit pools from gas producers and processors to petrochemical manufacturers, as per bain.com.
Both naphtha and LPG are produced by refining crude. A barrel of crude typically has a 3% LPG yield while for naphtha it is more than 10%. LPG is also obtained in the process of extracting natural gas. Asian petrochemicals firms, traditionally using naphtha as a raw material, are now switching to LPG. They are building tanks and retooling plants to store and process liquefied petroleum gas imported from the United States, counting on a flood of supply from the shale boom to replace costlier naphtha as a raw material, as per Reuters. Petrochemicals firms in South Korea, Japan, Taiwan and Thailand have increased their use of LPG since June as the gas has cost at least US$50/ton less than naphtha. Samsung Total Petrochemical, LG Chem and Royal Vopak are among a number of companies in Asia expanding import terminals or retrofitting plants over the next one to two years as they buy more LPG. The gas is used by petrochemicals firms to make a broad range of consumer and industrial plastics. A looming rise in tanker supply from next year will also help cut US-Asia freight costs. The LPG buying will help the United States trim an expected surplus of the gas and give the shipping industry more business at a time when global trade is still recovering from the aftermath of the financial crisis. By 2019, the nation's surplus of the gas will double to 550,000 barrels per day (bpd) from 270,000 bpd in 2014, said US-based consultancy firm ESAI.
A cutback in naphtha use will hit key regional suppliers of the fuel such as India's Oil & Natural Gas Corp (ONGC) and Kuwait Petroleum, who are already being forced to cut the premiums they charge on naphtha sales. Rising supplies of LPG - a compressed mix of propane and butane, also used for heating and transport - have widened the price gap between LPG and naphtha. In June, the average price of the gas was US$916/ton versus naphtha's US$972, a spread of US$56. In the same month of last year, gas was US$17 cheaper than naphtha, data from Ginga Petroleum showed. Asia now accounts for more than a quarter of all U.S. LPG exports and that is set to rise steadily this decade. Exports to Asia could rise to 230,000 bpd by 2019 from 70,000-90,000 bpd this year, said Vivek Mathur, senior analyst at ESAI.
Supplies from the Middle East will also grow but exports may not rise as much as US shipments. US LPG is available now for loading below US$600/ton compared to the US$760-780 for the gas from the Middle East. Even with current freight rates from America to the Far East higher compared to rates from Middle East to Asia, US LPG works out a cheaper option for Asian users. The design of petrochemical plants in Asia, though, constrains how much LPG can replace naphtha. Typically, up to 15% of naphtha can be replaced. Even within that limit, plants in Asia have room to raise LPG use, which may mean more imports of the gas. The situation will worsen for them when new tankers are ready and the Panama canal expansion is completed by end-2015. Some 36 new LPG tankers are scheduled for delivery in 2015 and another 38 in 2016 vs 5 this year, said a Southeast Asia-based LPG trader, potentially helping lower freight rates.

According to IHS, growing demand for chemicals, plastics and durable goods in Latin America is elevating the region as a strategic market for North American petrochemical producers. At the same time, the North America petrochemical renaissance, which is being driven by low cost shale feedstocks, is reshaping the Latin American petrochemical industry, including investments and projects in Brazil, Mexico, and other countries in the region. Rina Quijada, senior director, Latin America, for IHS Chemical, commented: “This is a critical time of change and opportunity for the Latin American petrochemical industry. On the one hand, we have steady economic growth in the region, which is driving demand for chemicals and finished goods, and at the same time, we have significant surplus chemical capacity coming from North American producers, who are now viewing Latin America as a long term strategic partner”. According to IHS economic analysis, Latin American GDP performance is expected to slightly outpace global GDP growth by 2018, with Brazil accounting for 40% of the region’s total GDP growth. To meet increased regional consumer demand, competitively priced finished products will be produced by sourcing resins from low cost sites in North America and converting them into plastics and other high value chemicals. The US has announced approximately 10 million tons of ethane based ethylene capacity. That is significant capacity expansion, and since their production will exceed domestic demand, they will have to export excess production. Latin America represents an attractive export option, due to geography, economics, demand, and attractive netback for North American producers.
Before the North American shale energy revolution, numerous petrochemical projects were planned in Latin America that were naphtha based, but all those plans are now under reevaluation. On the other hand, the Braskem-IDESA ethylene/polyethylene project in Mexico, called Etileno XXI, is the first site to come onstream in Latin America by the end of 2015. IHS holds that these market challenges are creating both challenges and opportunities for domestic and state owned petrochemical producers. Additionally, for the industry to grow in the region, capital investments in infrastructure must be made. Limited access to hard currency makes it challenging for some countries in Latin America to remain competitive in a global market. Unless additional capacity is added in the region to meet growing demand of end use products, countries will have to rely even more on imports, which are risky due to exchange rate fluctuations. The market is changing, so companies are now adapting to change.

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