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Lower oil prices help petrochemical companies improve margins
Although some upstream oil operators have posted results that have missed expectations, their derivative segments and other petrochemical businesses are seeing the upside of the oil price erosion.
The year 2015 could become a bright spot in the books of many petrochemical companies as falling international crude oil prices have alleviated the pressure on their margins.
As quarterly and annual financial results start to surface in the energy and petrochemical industries, it is becoming apparent that the profit margins of many of the chemical majors have improved quite considerably, mainly due to the halving of oil values during 2014.
However, many upstream operators will likely go with the safe option and cut back expenditure as their falling incomes will not be able to support any new expansions. Take Royal Dutch Shell as an example: on January 29 it announced investment cuts of more than $15 billion over the next three years because crashing oil prices saw its Q4 profits miss forecasts.
Shell was the first oil major to report results, missing expectations. In addition to the $15 billion of cuts in planned spending over three years, Shell warned there could be more to come should crude prices remain relatively low. The company will now review spending on about 40 projects worldwide. Although Q4 profits, excluding one-time items and inventory changes were $3.3 billion, up from $2.9 billion a year earlier, they were still below analyst estimates of $4.1 billion.
However, not all is doom and gloom for Shell. It emerged that Iraqi Industry Minister Nasser al-Esawi and Shell signed an agreement to construct a new petrochemicals complex in Iraq within the next decade. According to the ministry, the deal is worth $11 billion, but Shell refused to confirm this. The plans outline the building of a petrochemicals complex in the southern oil hub of Basra. According to the minister, the new plant could produce 1.8 million t/y of petrochemical products, without going into detail what. The news comes after Shell and Qatar Petroleum called off plans to build a $6.5 billion petrochemical plant in the emirate, quoting that the Al-Karaana project venture was no longer commercially viable. The Iraqi project remains at a very early stage, and the company refused to comment on when construction works will begin.
On the other hand, companies, such as Dow Chemical, announced that falling oil values have positively impacted their results, reporting better-than-expected fourth-quarter earnings. This is because lower oil and natural-gas costs have helped improve margins at its plastics business. Performance plastics benefited as prices fell for oil-based raw materials in Europe and gas liquids in the US, helping to overcome lower product sale prices. Dow said stronger plastics demand also contributed to the fifth consecutive quarter of improved operating rates at its factories worldwide.
Although there have been some good news in recent weeks, there have been equally as many, if not more bad, as the drop in oil prices have put the future of many derivative plants in jeopardy. In light of the negative oil price growth, Sasol has decided to delay the final investment decision on its large-scale GTL plant in Louisiana. The plant was expected to produce, among other things, GTL naphta, an important feedstock for the petrochemicals industry. The decision has been put back until “progress has been made at their world-scale ethane cracker and derivatives complex and prevailing market conditions and other strategic investment opportunities justify its construction”.
Major ethylene players and their derivatives in North America
However, the US is not the only market with major plans in the petrochemical industry north of the Panama Canal. Braskem and Grupo Idesa also embarked on a major project called Etileno XXI in Veracruz, Mexico. Their facility will produce 1 million t/y ethylene with an integrated downstream polyethylene plant and is expected to come on stream in 2015.
In Canada, Nova Chemicals is planning to expand its Corunna, Ontario and Joffree, Alberta, complexes, adding 1 million t/y of polyethylene (PE) units at each site by 2017.
Where this extra ethylene will be used is not clear as downstream PE expansions in North America are far fewer. Exporting ethylene is not a viable option as it is a dangerous product and there are very few vessels that can transport it. So the only real option is to convert it into another derivative, which can then be shipped off to overseas markets.
On the domestic front, Formosa Plastics, Shell Chemical, Chevron Philips and ExxonMobil have announced PE plant expansions at the tune of 3.94 million t/y by 2017, but even at that rate there will still be a surplus of about 6-7 million t/y ethylene in the market (the production of 1 t PE requires 1.05 t ethylene).
Current US ethylene capacity is estimated at around 27 million t/y, which will increase to well over 35 million t/y with the additional capacity expansions in the pipeline. There are several ethylene plants in the line-up for construction in the US, bringing an additional estimated annual ethylene output of 10 million t/y to the market once all of them are fully operational.
Demand expectations continue to be strong
According to Shell, global demand for ethylene has grown by almost 5% each year over the past 25 years, a level of growth which is over three times higher than the increase in demand for crude oil.
This translates to over 140 million t/y ethylene demand according to Technip estimates. According to the company, the average capacity of steam crackers has risen from 300,000 t/y in the 1980's to over 1 million t/y now.
Falling oil prices are not all that bad for everyone, though. On the contrary, the slowdown may be positive news for those companies that have already embarked on construction works. As demand for skilled workers drops with the scrapping or delaying of major projects, the wages they can demand may also drop. This will eventually lead to lower costs for the industry, providing companies with some breathing space.
The big question that now hangs over the market is what effect lower oil prices will have on the current petrochemicals investment frenzy. Will it deter more companies like it did in the case of Sasol, or will they go full steam ahead?
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