Owners cautious about project spending in the face of uncertainty

Not all North American petrochemical, oil and gas projects are starting planned construction projects in 2019, as the industry begins the year with a greater level of economic uncertainty.

Deferred Projects

About $51 billion worth of deferred project activity is on the books so far this year, Trey Hamblet, Industrial Information Resource's (Industrial Info) vice president of Chemical Processing Industry research, said at the company's January 23 Market Outlook in Houston, Texas.

The industry is starting the year with a greater level of uncertainty, and considerable indecision on whether to proceed with major projects, Hamblet said.

"In each of the last couple of years we have begun the year with a $9 to $12 billion spend in the highest part of our probability range. We're starting out with half of that this year,” Hamblet said.

Chemical project activity in North America has been more than robust in the past couple of years, amounting to nearly $17 billion in 2018, and more than $19 billion in 2017, according to Industrial Info.

However, many projects are deferred year after year, sometimes by five or more years, Hamblet said.

Hamblet attributed the delays to too much of a good thing… too many capacity projects planned for the same product in the same area at the same time.

Nevertheless, Industrial Information is still predicting that the U.S. and Canadian chemical industry could see construction starts for more than $17 billion in projects in 2019.


Image: Industrial Information

Economic Factors

Unemployment has been low in the U.S., but automotive sales have plateaued, and home sales hit a three-year low in December, all major factors to chemical demand.

"But on the global side of things we have some industry drivers that keep motivating some of the biggest projects and provide a home for many of the things that we are building," Hamblet said.

At least three ethylene export terminals are being considered along the Gulf Coast, which will make room for some of the additional ethylene capacity coming, he added.

So far, 11 billion pounds of new ethylene capacity has started production in the last two years, and an additional 9.5 billion pounds of capacity is now in the construction phase that will be online in the next two years. In addition, there's another 17.5 billion pounds of capacity that is still planned and proposed, according to Industrial Info.

Meanwhile, spending cuts are already being announced. Large natural gas producers EQT Corp, Gulfport Energy and Antero Resources have announced they are scaling back their spending plans for 2019 amid a decline in natural gas prices and pressure from investors on returns. EQT announced a spending cut of $700 million relative to 2018.

Government Shutdown

Contributing to the uncertainty has been the U.S. shutdown. The 35-day partial government shutdown, the longest in U.S. history, has ended—though just for a little while—as President Trump signed a three-week stopgap funding bill after the Senate and House approved the measure.

The Congressional Budget Office (CBO) estimated the shutdown that began December 22 lopped 0.1 percentage points ($3 billion) off gross domestic product in the 2018 fourth quarter and 0.2 percentage points ($8 billion) in the first quarter of 2019.

Most of the lost economic activity is likely to be recovered in future quarters, the CBO said.

The re-opening is temporary. If the two sides do not reach a deal by February 15, then the government could shut down again.

Funding for the rest of fiscal year 2019 for shuttered agencies isn’t certain and centers on another part of the shutdown-ending deal, a new House-Senate conference committee to decide funding levels for the Dept. of Homeland Security.

The new continuing resolution will allow full operations to resume at the Dept. of Transportation, Environmental Protection Agency and other shuttered federal agencies, but only through February 15.

Full 2019 funding for DOT, EPA and the other agencies subject to the shutdown then also would be cleared.

Industry officials cautioned that newly reopened agencies aren’t likely to quickly clear the backlog of requests for infrastructure project funding or project approvals that may have built up over the past month.

Shutdown and the Chemical Industry

The partial shutdown had already caused several disruptions to the chemical industry, according to ICIS news.

It delayed the release of economic statistics that measure the performance of key end markets, such as the housing and agriculture.

It delayed the completion of mergers and acquisitions, such as the one pending between Linde and Praxair. Both produce industrial gases.

The shutdown halted progress on resolving the opposition of U.S. regulators to Tronox's proposed acquisition of fellow pigment producer Cristal.

In addition, other analysts question if the shutdown could impact the many new chemical projects in the U.S.

There have been nearly $202 billion in new projects announced in the U.S. since 2010. Of those, only 31% are complete. The remaining are under construction, planned or delayed.

Many of these are mega projects involving multiple federal agencies.

The government shutdown has put all of these projects into a fog of uncertainty, said Randy Peterson of Homesite Company.

The future

The CBO also issued its 10-year Budget and Economic Outlook.

In the outlook, the economy expands more slowly over the next decade than it did in 2018, averaging annual growth of 1.7 percent over the 2020– 2029 period. The slowdown begins in 2019 as the positive effects of recent tax legislation on business investment are expected to wane and federal purchases under current law are projected to drop sharply starting in the fourth quarter of the year.

Over the longer term, growth is below its historical average, primarily because the labor force is expected to grow more slowly than it has in the past.

 Data: CBO

Alternative Views

Not everyone is seeing the slowdown and uncertainty, however.

The Wall Street Journal reported that railroad executives recently played down concerns about a cooling U.S. economy, saying the economy remains on solid footing. Growing shipments of grain, oil and e-commerce packages offset broader worries over trade policy and volatile stock markets.

The chief executives of CSX Corp. and Union Pacific Corp. said conversations with their shippers, which represent a broad cross-section of industries from agriculture to chemicals, generally show optimism about the coming year.

Deloitte’s Duane Dickson said in his ‘2019 Oil, Gas and Chemicals Industry Outlook’ that even with a possible slowing of emerging market growth, and a shift to more reuse of plastics, the chemicals sector in the U.S. looks reasonably well-shielded from significant downside risk.

“In the chemicals sector, at this stage of the capital cycle, major new capacity in base chemicals is expected to be commissioned now or soon. An area of risk may be whether this might lead to lower margins by getting ahead of demand trends,” Dickson wrote in the report.

“However, the sector could well avoid anything more than a mild downturn by phasing in ramp-ups in the new capacity, selling to the North American market, which is still quite robust, and taking advantage of improved US port facilities to export more efficiently to international markets,” Dickson said.

By Heather Doyle