North American Petrochemical Outlook Looks Bright

North American Petrochemical Outlook Looks Bright

Jan 9, 2017
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Key near- and long-term themes to watch for ahead in the North American petrochemical sector are mostly related to impacts of U.S. shale gas activity, according to industry observers.

Notably, in the next couple of years, the industry is about to witness the impacts of more than $50 billion of completed investments in chemical production units that can take advantage of cheap feedstocks related to shale gas, according to Steve Zinger, senior vice president, chemicals, for Wood Mackenzie.

“There will be a large wave of new capacity starting up in 2017 to 2019 in the ethylene, propylene, ammonia and methanol value chains,” Zinger told Hart Energy.

However, Zinger observed that three main challenges exist for these new investments:

  • Ongoing high capex costs, despite recent declines in the upstream oil exploration and production sector;
  • A tight market for skilled labor with specific experience building and operating chemical plants; and
  • An increasing dependence on international export markets as far away as China, since the domestic U.S. markets for these chemical chains are growing too slowly to absorb new capacity.

“Longer term, the potential of a second and third wave of major chemical investments beyond 2019 will heavily depend on the relative prices of natural gas [U.S. producers can convert cheap natural gas and NGL into cost-competitive chemicals] and crude oil [most other global chemical producers convert crude oil to naphtha to chemicals],” Zinger said.

“When global crude oil prices fell into the $30/bbl range in early 2016 this slowed or stopped future investment decisions in natural gas-based chemicals in the U.S. because of concerns about global competitiveness. At current global crude oil prices of $45/bbl to $55/bbl, U.S. natural gas-based chemical projects are competitive again but not nearly as much as they were when crude oil prices were over $100/bbl before 2015.

“U.S. chemical producers that use natural gas or NGL as feedstocks will welcome higher crude oil prices to help justify more waves of chemical investment, but the recent volatility of crude oil prices will likely result in a smaller second wave of investment as chemical producers seek to lower their risk profiles in a lower-for-longer crude oil price environment,” Zinger continued.

Meanwhile, as petrochemical production capacity increases—not just in North America, but globally as well— demand for chemicals will be closely linked to GDP growth in developing countries such as India as well as emerging markets and growth in non-OECD markets.

“What’s happening to chemical producers is actually a period in where they’ll grow faster than GDP because their drivers are more linked to this shifting in living standards and that tends to bring a disproportionate upshift in the consumption of consumer goods, such as plastics and so forth, which are derived from chemicals,” Andy Steinhubl, principle, strategy leader in the Energy & Natural Resources division of KPMG LLP, told Hart Energy.

Because chemicals are a globalized business, Steinhubl expects prominent chemical companies to enhance existing or establish new partnerships within the countries to which they intend to export their chemical products to invest in infrastructure that can handle increased volumes of chemical trade. Another trend he sees is additional merger and acquisition (M&A) activity. He pointed to the Dow/DuPont merger that occurred in late 2015 as an example of this.

“You’re seeing a lot of other M&A activity around the same sorts of objectives. Companies are trying to scale and improve their market leadership positions so that they can play on a global basis because the game has now changed,” Steinhubl said.

 

 

Bryan Sims can be reached at bsims@hartenergy.com and @bsimshart