Emerging markets help feed petrochemical boom
Shale’s bounty also boosting demand as Exxon Mobil joins rush to add production facilities
Cheap, abundant U.S. shale gas soon will find its way to a newmarket — the flood of people moving to dense cities in developing corners of the world.
Ina fewyears, the North American hydrocarbons will reach China, India and Latin America in the form of resin pellets that others will convert into plastic products like food packaging — a key evolutionary link for urbanizing populations as consumers move from farmers’ market produce to preserved foods.
Moving to take advantage of natural gas prices that plummeted when shale production boosted supplies, Exxon Mobil Chemical Co. is one of several major energy companies racing to build plants along the Gulf Coast to break gas molecules into different parts that can be molded into the building blocks of plastic.
The company, Exxon Mobil’s Houston-based petrochemical arm, will announce on Thursday that soon after it got regulators’ OK last month, it began construction on amassive ethane cracker and two polyethylene plants at its existing facilities near Houston. Exxon Mobil did not disclose the projects’ price tags.
“A big breakthrough in the petrochemical industry was when the Saudis decided to harness the ethane from natural gas to create petrochemicals,” said Steve Pryor, president of Exxon Mobil Chemical, in an interview with the Houston Chronicle on Wednesday.
“They really have been the low-cost producers, the fastest-growing exporters, the major export force in the petrochemical world since then. Now, because of shale energy, the U.S. is joining the Middle East.”
Exxon Mobil’s planned ethane cracker in Baytown, 25 miles east of downtown Houston, will be able to make up to 1.5 million tons of ethylene feedstock from ethane every year.
The two polyethylene processing units, now under construction at its Mont Belvieu plastics plant 30 miles east of Houston, will have the capacity to produce 650,000 tons a year of the plastics components. It’s the chemical company’s largest U.S. investment, Pryor said.
The projects, slated to start up in late 2017, are expected to create 10,000 temporary construction jobs and 350 permanent jobs.
The company says the new units will generate
$870 million in economic activity in the region every year, and add $90 million annually to local tax revenue.
The multibillion-dollar cracker and polyethylene plants join nearly a dozen similar Gulf Coast projects planned by Dow Chemical, Chevron Phillips Chemical and Lyondell Basell, most of which are expected to start up between 2015 and 2017.
And Royal Dutch Shell is building a plant near the Marcellus Shale in Pennsylvania.
It’s been more than a decade since the industry built any ethane crackers, and some analysts say it’s unlikely all of the ones proposed will be built.
But all told, the U.S. petrochemical industry has announced about $71.7 billion in new-chemical-related investments since the advent of cheap shale gas, according to the American Chemistry Council.
Chevron Phillips Chemical Co. said late Tuesday it broke ground at Old Ocean, in Brazoria County, on two polyethylene units capable of making 500,000 tons of plastic resin a year.
Tim Taylor, president of Phillips 66, Chevron Corp.’s partner in the chemical company, said in a recent interview that demand for natural gas in North America is expected to remain basically flat, but Asia and Latin America have emerged as primary markets for products made from natural gas liquids including ethane, propane and butane.
Pryor said Exxon Mobil is trying to move while the market is hot.
He said thecompany has some unique advantages: It’s the largest natural gas producer in the nation, so it can integrate production and chemical manufacturing in a way many others can’t.
And the oil giant produces a premium polyethylene that can make stronger and lighter plastics than most products on the market, which means customers pay a premium, he said.
“Whenever you have that kind of wave of investment, it inevitably heats the market in terms of the availability of skilled labor, and that’s what’s driving up construction costs,” he said. “One of the key ways we’re managing it is to be an early mover.”
Still, Exxon Mobil’s project is slated to start up almost a year after thecompany’s original projections — a costly delay.
A-two-year trek through regulatory webs ended last month when the Environmental Protection Agency granted thecompany a permit to build the facilities, after rejecting arguments from two environmental groups that objected to the permit.
Every day a project is delayed, another market player will try to step in and minimize its rivals’ exposure to the high end of cyclical margins, which makes it imperative for companies to use their capital as efficiently as possible, said Robert Sullivan, a managing director and co-lead of the energy practice at AlixPartners.
“It’s a big hunk of money that could be lost waiting for the next cycle,” Sullivan said. “The time value of money for them is huge.”
Plus, cost overruns and construction delays are common for ethane crackers and other petrochemical plants — and the problem is magnified as the wave of construction along the Gulf Coast increases demand for welders, pipe fitters and other skilled tradespeople.
Some companies have had to double or triple their estimates on project costs, said Dennis Cassidy, also a managing director and colead of the energy practice at Alix Partners.
The history of the chemicals industry is cyclical, with waves of new capacity coming online, only to be followed by low-investment periods. But history is changing, too, as the industry shifts from consuming locally to exporting to markets that are expected to keep growing for decades.
The market’s shifty nature is why Exxon Mobil takes the long view on investments and the markets, putting capital only behind projects that have unique advantages, Pryor said.
“In a sense, it’s a good problem to have,” he said. “We’ve been through this many times before, we know how to manage in a heated environment. I’m comfortable with our ability to manage this, but I knowit’s going to get interesting out there.”