US chemicals capex to rise over 7% a year in 2016-2018
Capital spending in the US chemical industry surged 18.4% in 2015 to $42.6 billion and is expected to increase by more than 7% a year on average through 2018, according to Kevin Swift, chief economist and managing director of the American Chemistry Council (ACC).
Capital spending in basic chemicals – including plastic resins, organic and inorganic chemicals, and others – rose 19.2% in 2015 to $26.7 billion and is projected to increase 8.3% in 2016, according to the ACC.
Swift expects capital spending in the current wave of "shale-gas or energy competitiveness-induced projects" in the United States to peak in 2016-2017 based on the pipeline of committed construction projects, capacity expansions and planned maintenance work.
Source: Petrochemical Update. Data: American Chemistry Council.
Though the drop in crude oil prices has forced most integrated producers to slash capital budgets for oil & gas exploration & production, the expected 40% drop in upstream spending in 2016 will be partly offset by positive growth in refining, petrochemical, LNG and natural gas transmission projects.
Capital spending in the US petrochemical sector in 2016 is projected to rise from $6.7 billion in 2015 to $7.7 billion in 2016, up 15% year on year, while capital expenditure in refining and marketing is projected to go up 8% year on year – from about $13.5 billion in 2015 to $14.6 billion in 2016 – according to the Oil & Gas Journal (OGJ).
Overall, total US capex for upstream, midstream, downstream and corporate activities will drop 25.4% in 2016 to $136 billion, following a 36.1% drop in spending in 2015, the OGJ said.
OGJ’s projections assume oil prices of about $35 per barrel for Brent and West Texas Intermediate in 2016.
Brent crude oil prices are expected to average $40 per barrel in 2016 and $50 per barrel in 2017, according to the Short-Term Energy Outlook published by the US Energy Information Administration (EIA) on January 12.
With crude oil prices over the last year falling from about $60 per barrel to $35 per barrel, the US petrochemical industry has lost some of its advantage, and some of the projects announced when crude was over $100 per barrel are currently being re-evaluated.
The six ethane crackers currently under construction in the US are expected to be completed by 2018, but the prospects for the other 14 announced ethane cracker projects could change.
The methanol sector has followed a similar path, with four planned projects — Natgasoline’s project in Texas, G2X Energy’s facility in Louisiana, South Louisiana Methanol’s plant in Louisiana and Yuhuang Chemical’s facility in Louisiana — expected to begin production in the next four years out of a total of 15 announced facilities.
US ethane cracker margins fell significantly in 2015 due to a narrower differential between crude oil prices and US natural gas prices. The outlook for petrochemicals in 2016 will depend largely on economic growth, particularly in Asia, and related feedstock prices, which will closely follow crude oil prices.
US petrochemical producers continue to be some of the most competitive in the world, however, and over the long term, growing demand and recovering margins could drive a resurgence of capital expenditure in the sector.
Production costs for US high-density polyethylene (HDPE) producers are still among the lowest globally, according to Swift (see graph below).
HDPE production cost comparison
Source: American Chemistry Council.
Even though margins for US ethane crackers remain favorable against oil-based naphtha plants and project spending in the US is still robust, many large petrochemical projects are not moving as fast as planned, some companies have rowed back on proposals for new cracker plants and other projects are likely to be smaller than originally anticipated.
According to Swift, in 2014 there were on average about nine new project announcements per month for "shale-gas or energy competitiveness-induced projects." The rate slowed appreciably in 2015, averaging less than two project announcements per month.
Though the number of projects has continued to advance, project announcements in 2016 so far are averaging less than one per month, several projects have been delayed, and one methanol project - Valero’s proposed $700 million, 1.6-mtpa methanol plant at St. Charles Parish, Louisiana – was shelved indefinitely on March 7 due to low energy and methanol prices, and the company’s inability to find an investment partner.
“When a bubble forms, we always see companies that come to the table with a proposal. In a healthy environment, 50% of those projects will move forward,” said Michael Bergen, vice president for Research Global Oil & Gas at market intelligence provider Industrial Info Resources (IIR).
In 2015, some 297 major capital and maintenance projects in chemical processing, valued at $12.1 billion, broke ground in the 11 metropolitan areas in the US Gulf Coast, out of a total of 367 projects (valued at $30.26 billion) scheduled for construction kick-off during the year, according to IIR’s North American Industrial Project Spending Gap Index, which calculates the difference between planned and actual industrial project spending during a year.
This represents a realization rate of 40% and a fall out rate of about 60%, based on total investment value. Most of the difference came from adjustments in project schedules, where construction start was pushed back to 2016 or beyond, or by projects being placed on hold or cancelled, Bergen said.
Petrochemical producers’ 2015 full-year earnings statements give an early indication of changes in capital budgets in 2016.
Planned new ethane crackers in the US
Source: Petrochemical Update.
Shell said during an investor call on February 4 that it expects a step-up in spending on downstream projects in 2016, predominantly in petrochemicals, even as it plans to cut total capital investment by $3 billion.
On March 7, Sasol announced that based on a “lower-for-much longer” oil price scenario, it plans to re-phase several units at its ethane cracker and derivatives complex in Lake Charles, Louisiana.
A detailed review of the project is under way and is likely to be completed by mid-2016. The company said that “the [beneficial operation] of some smaller derivative units will move into 2019 and the overall end-of-job project cost estimate will remain under pressure.”
On March 2, ExxonMobil said it plans to cut 2016 capital expenditures to $23 billion, down 25% from 2015. The cuts will come mainly from oil and gas production, with a slight decrease expected again in 2017, partly from its chemical operations.
In the methanol sector, G2X Energy broke ground in January on a greenfield $1.5 billion, 1.4 mtpa gas-to-methanol plant in Lake Charles, Louisiana, scheduled for completion in 2019.
Meanwhile, Methanex Corporation expects to spend $80 million on capital projects in 2016, with most of the work related to completing the installation of its Geismar II methanol plant, which was recently relocated from Chile to Louisiana. The company said during an investor call earlier this year that it is unlikely to greenlight any new major capital spending in 2016.