US tariffs put downstream capex investments at risk

U.S. plans to impose steel tariffs on imports from Canada, Mexico and the EU could threaten production of natural gas liquids (NGLs) as well as oil and natural gas, a big risk for capital investment, the American Petroleum Institute (API) said.

The metal tariffs on Europe, Canada and Mexico are the latest action targeting foreign countries' trade practices that escalate the chance of a trade war.

The Trump administration announced steel and aluminum tariffs for Canada, Mexico and the European Union on May 31, 2018. Duties of 25% on steel imports and 10% on aluminum imports took effect at midnight on May 31.

US slaps metal tariffs on EU, Canada and Mexico

Trump announced worldwide steel and aluminum tariffs in March but granted temporary exemptions to these trading partners. These exemptions are due to expire on Friday June 1st.

The North America Free Trade Agreement (NAFTA) talks were one factor in the administration's decision to grant exemptions to Canada and Mexico from the steel and aluminum tariffs earlier this year, but those talks are taking longer than officials hoped.

The Trump administration will place quotas or volume limits on other countries such as South Korea, Argentina, Australia and Brazil instead of tariffs, Ross said.

In response, the European Union plans to place up to 7.5 billion in levies on U.S. exports, and Mexico says it plans to impose tariffs that match the levels the U.S. has imposed.

Canadian officials said at a press conference that Canada would enact tariffs on $12.8 billion in U.S exports, effective July 1, to retaliate against Trump's action.

Risk to NGL access

The implementation of new tariffs could disrupt the U.S. oil and natural gas industry’s complex supply chain, compromising ongoing and future U.S. energy projects, which could weaken national security, the API warned in a statement on May 31st.

“Increased prices in specialty steel could threaten the continued domestic production of oil and natural gas and natural gas liquids (NGLs) – which are at their highest levels of production since 1949 – and could raise energy costs for U.S. businesses and consumers, while threatening the nation’s ability to achieve President Trump’s goal of energy dominance,” API President Jack Gerard said in the statement.

The US petrochemical industry depends on many hydrocarbon gas liquids (HGL) including natural gas, natural gas liquids (NGLs) such as ethane, propane, butane, and methane; also, olefins including ethylene, propylene and butadiene.

Steel tariffs could threaten hydrocarbon production by making it more expensive for midstream companies to build pipelines to ship oil, natural gas and NGLs from production basins to customers, the API said.

Crude oil produced in the prolific Permian basin of Texas is already stranded there because companies lack the supply chain and infrastructure to ship it out of the area. Pipelines, truck and rail terminals are needed.

The U.S. is now the world’s largest liquids producer and on track to become the world’s largest oil producer, David Witte of IHS Markit said.

Witte was speaking at the Downstream 2018 conference in Galveston.

“In the Permian Basin of Texas alone, 4 million barrels/day of crude are produced. If this basin were a country, it would be 7th in terms of total production. And with that, comes natural gas and NGLs,” Witte said. “But there is not enough supply chain capacity to move it out,” Witte said.

The tariffs could delay new pipeline projects that are needed to ship oil and gas out of the Permian and allow companies to increase production, the API said. 

The API wants the U.S. government to grant the oil and gas industry product exclusions from the steel tariffs and quotas, Gerard said.

The API also wants the government to provide transparency and flexibility in the exclusion process to lessen the effects that the tariffs could have on oil and natural gas production, refining and transportation.

Trade war poses risk to capital investment plans

The newly announced tariffs are the latest in a series of actions targeting foreign countries' trade practices that escalate the chances of a potentially devastating trade war with major world economies.

A trade war would be a big risk to much of the chemical capital investment happening in the U.S. now as much of the material being produced is intended for export.

For the first time in decades, the U.S. enjoys a competitive advantage in chemicals and plastic production, made possible by affordable domestic natural gas, the industry’s primary feedstock.

Today, American chemical manufacturers account for 14% of all U.S. exports, or $174 billion in 2016, according to the American Chemistry Council (ACC).

“Thanks to America’s shale gas revolution, in a little over a decade the U.S. has gone from being one of the most expensive places to produce chemicals, to one of the world’s lowest cost producers,” ACC President and CEO Cal Dooley told lawmakers.

Approximately $194 billion in new chemicals and plastics production capacity has been announced in the U.S. in the past eight years, according to the ACC.

“Much of the new capacity is intended for export, reflecting investors’ belief that the U.S. is the most competitive platform from which to serve global markets,” Dooley said.

New Capacity

At least 14 million tonnes of additional petrochemical capacity of natural gas-derived chemicals including ethylene, propylene and methanol, is expected to come online from 2018 through 2023, according to IHS Markit.

For 2018, IHS Markit expects the U.S. to add 5.2 million tonnes of petrochemical capacity.

In 2019 and 2020, the U.S. is projected to add a total of 8.7 million tonnes of production capacity, mostly on the Gulf Coast.

This is just what lies ahead.

Between 2011 and 2017, the U.S. added nearly 14 million tonnes of petrochemical production capacity, according to IHS Markit.

In total, IHS Markit expects the U.S. to add 27.9 million tonnes of new natural-gas derived petrochemical production capacity between 2011 to 2020.

By Heather Doyle

US cracker plans

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