As Seen In. November 18/25, IHS Chemical Week. chemweek.com. Shale brings petrochemical investment back to US

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1 November 18/25, 213 As Seen In IHS Chemical Week Worldwide news and and intelligence for the for chemical the chemical industry industry chemweek.com Shale brings petrochemical investment back to US

2 cover story Shale sparks US petchem renaissance The US unconventional oil and gas supply surge is moving downstream as investments ramp up, providing a boon for US chemical makers. The margin benefit is already being felt. The supply impact is modest today but will accelerate as projects come onstream the next few years. C heap energy and feedstocks have quickly reset the competitive balance for US petrochemical makers. With natural gas available at a fraction of the cost of its oil equivalent, the United States is again one of the world s lowest-cost petrochemical producers. Manufacturers can make ethylene in the United States for less than half of what it costs in Europe, Asia, and Latin America, says Stephen Pryor, president of ExxonMobil Chemical. The advantage has reversed the fortunes of US chemical makers, he says. Although petrochemicals, particularly ethane-based ethylene and its derivatives, are some of the strongest beneficiaries, the impact will be felt across the US economy. The impact of unconventional energy, in the form of new supplies of shale oil and gas, is expected to add %/year to US GDP through 225, ac- chemweek.com cording to a study from IHS. The rate of GDP increase builds rapidly and peaks at 3.2% in 216. In the context of a $13 15-trillion US economy, this 216 peak equates to an increase in GDP of $5 6 billion, IHS estimates. While the GDP growth rates and capital investment peak early, gains in chemical production and broader industrial production will continue unabated through the forecast period. By 215, lower natural gas prices and higher activity will lift industrial production by 2.8%. By 225, industrial production will be 3.9% higher, according to IHS. Chemicals will outperform thanks to their energy intensity and use of natural gas feedstocks. IHS estimates that unconventional energy lifted organic chemical production by 1.5% in 212. That figure ramps up to 4.9% in 215, 7.1% in 22, and 9.5% in 225. The figures for resins are 1.7% in 212, 4.4% in 215, 7.1% in 22, and 8.1% in 225. A massive wave of new petrochemical capacity with investment exceeding more than $1 billion will support this growth. Chemicals investment activity is expected to peak in 217 and will represent one of the largest expansions to ever occur in North America, says Russell Heinen, senior director/chemical technology and analytics at IHS Chemical. Direct petrochemical investment between 213 and 23 for a group of 2 products impacted by shale will total $123 billion, Heinen says. The figure in constant 212 dollars is roughly $9 billion. US spending peaks near $1 billion in 217. Ethylene investment alone accounts for 34% of the spending over the period. While the US has not added a cracker since 2, industry has continued to build elsewhere. Between 28 and 213, global ethylihs Chemical Week, November 18/25, 213

3 cover story ene capacity increased by about 25 million m.t./ 21. It was over three years ago that we start- right in our back yard. year, mostly in the Mideast and Asia, bringing ed to get a sense that this was real, says James CPChem and the US chemical industry had the total to 154 million m.t./year. For 213 Fitterling, executive v.p./feedstocks and perfor- been hit hard by the 28 9 recession, and 18, IHS Chemical projects another 37 million mance plastics for Dow Chemical. At that time, the company had idled some capacity, includm.t./year of ethylene production capacity will there was enough information to know that gas ing a smaller ethylene unit at Sweeny, TX. be installed. There s continued growth in the would be available [from Marcellus and on the Hurricanes in 28 and 29 were also semiddle East, although not at the same rate as in US Gulf Coast], and people were starting to talk verely harmful and set the United States back. the past, Nick Vafiadis, senior director/global about activating pipelines. Since those initial By summer 21, however, it was clear that polyolefins and plastics at IHS Chemical says. considerations, and Dow s announcement of a fortunes were shifting in the United States If you look at Asia, we re seeing more and more planned cracker in April 211, other shale pro- even though industry was still coping with the impacts of the recession. of that capacity being skewed toward US ethane-based capacity was the coal-to-olefins technology. But the competitive again, and the combig change here is the return of North pany decided to restart an ethamerica to the scene. ylene plant at Sweeny that had Total US capacity added because of been idled. It had a pretty sizshale is close to 1 million m.t. for the able advantage even though it 2 products tracked, Heinen says. The was our highest-cost and smalllikely peak, now estimated in 218, is est cracker, Corn says. We 18 million m.t. of additional capacity, far started thinking, Maybe this is exceeding the previous peak in North the next place to build. Corn America, Heinen says. notes that ethane was 7 8 Upstream and midstream investpryor: US production FITTERLING: Confident Corn: Started reevaluating cts/gal, well above the mid-2ments are also surging, so feedstock costs very competitive. in US advantage. US prospects in 21. ct range today. The scale of the supply should not be a constraint, with US natural gas liquids (NGLs) supply set to duction areas such as Bakken in North Dakota advantage wasn t yet obvious from a pricing double by 22. Since 28, US NGLs produc- and rest of the liquids fairway down the US standpoint, Corn says. You could see what tion from natural gas processing has increased Rocky Mountains through Eagle Ford in south was coming, however, because of what US midstream activity was starting to look like. by over 5, bbl/day, reaching about 1.8 Texas proven more productive than expected. million bbl/day, according to IHS. Because The US sits today with a propane export Sooner or later, it would affect NGLs supply of the ongoing development of shale gas and terminal in operation, gas prices have dropped and pricing in a more substantial way. CPChem tight oil resources, US NGL production is ex- below $4/million Btu, and ethane is in com- also notes activity in its own midstream busipected to continue expanding rapidly over plete rejection, Fitterling says. You add all ness, including a pipeline that gathers and colthe next decade, IHS says. By 22, total of those dynamics together and it is clear that lects NGLs in western Texas and New Mexico. unconventional NGL production from natural this real, Fitterling says. We are very con- In 25 and 26, we had trouble keeping it gas processing is expected to reach about 3.8 fident in these investments and it is all sys- full, Corn says. By 29, it was full. The decision to build a cracker now looks million bbl/day, which represents an increase tems go. The company expects to secure final of 1% over current levels. permitting in first-half 214 for a planned so simple, but it was pretty radical at the Shale has created an abundance of indus- 1.5-million m.t./year Freeport, TX cracker time given the turmoil industry had just been try s principal feedstocks in the United States and meet an expected first-half 217 start through, Corn says. One of the questions I and has quickly reset competitiveness, Pryor up. Everything looks like it is falling right in asked my boss [in 21] was, Do you think we ll get fired if we suggest this? The prosays. Just five years ago, the United States line, he adds. was losing ground in the export market. The Ron Corn, currently v.p./corporate plan- posed cracker project received strong immedicountry was on the verge of becoming a net ning and development for Chevron Phillips ate support all the way to the CPChem board. Corn says it is difficult to assess just how importer of chemicals. But today, chemicals Chemical (CPChem), says company officials are once again America s single biggest ex- started noodling around with the idea of a long the United States will be advantaged, but it the advantage is likely to be durable. port larger than agriculture, automobiles, US cracker in July 21. and aerospace. Since 2, CPChem s spending had been Many have been humbled trying to predict ExxonMobil Chemical has announced plans focused on the Mideast, where the company the future in energy, Corn says. If you look to build a 1.5-million m.t./year cracker at its built three major projects. The final proj- at current trends and hydrocarbon potential, Baytown, TX, site and two 65,-m.t./year ect came online in early 213. As planning however, you have to be encouraged. The United States likely has a long runway polyethylene (PE) plants. We re confident started to wind down on Mideast projects in in positive permit decisions and expect con- 28 9, Corn says CPChem looked around on shale development, he adds. Developstruction to begin 214, with target comple- the world for the next big project. We ment of competing resources is not advancing tion late 216, Pryor says. looked at the Middle East, South America, as rapidly, Corn says. There is a variety of There are now nine announced crackers in the and Asia, but we didn t come up with any- reasons for that, including issues around land United States, with several more under consid- thing that fully met our standards, Corn rights, water availability, and trickier geology. eration (p. 23). The trend is now undeniable, but says. We kept looking, however, and, lo and But, even in some high-profile areas, such as the idea just started to form in the second-half of behold, one of the best opportunities was Poland and China, shale exploration efforts IHS Chemical Week, November 18/25, 213 chemweek.com

4 cover story are not proceeding as quickly. Corn says that CPChem sees some possible potential in aromatics but that assessment more complex. There is likely to be a supply of C6s through C1s needed to support an aromatics project from regions such as Eagle Ford, but a decision on aromatics is much more complex than ethane and ethylene. Do you take the higher cuts to a splitter for export, use in [fuels], or do you think about taking it though benzene, styrene, and para-xylene projects in the US? The big markets are in Asia, so almost output would have to be exported unlike ethylene in the US. It s a bigger mystery, but we are intrigued and watching very closely. tirees, Corn says. We have to make sure we have a skilled workforce, Corn says. Richard Meserole, v.p./construction for Fluor s energy and chemicals business group, says US petrochemical projects will require companies to maximize local labor resources $12 US chemical capex to surge 1 (spending in billions of constant 212 dollars)* United States 2 Mexico Canada *Spending includes 2 products tracked with direct impact from unconventional gas. US: $81 billion Mexico: $4 billion Canada: $4 billion Petrochemical capacity swells (in millions of m.t.)* US Mexico Canada % increase forecast in US *Spending includes 2 products tracked with direct impact from unconventional gas as well as draw in from other regions of the United States. Extensive recruiting and training will also be needed. He draws parallels with 26 1, when Fluor was responsible for several megaprojects as part of a US refinery construction boom. The company was able to attract 25, craft workers to five megaprojects it was involved in, he says. We re confident we can do it again. Fluor, which is involved in several of the US cracker projects, is encouraging off-site prefabrication and modularization where possible. Off-site fabrication can achieve significant time and cost savings, support fast-track project schedules, and reduce risks related to weather conditions and labor shortages. It can remove labor from [tight] local markets and also helps provide some cost certainty, Meserole adds. Growing exports Dow s Fitterling says that Dow expects Mitigating resource constraints Companies say they are focusing on careful planning and execution to mitigate any possible impact. Fitterling says that the company is carefully phasing projects to manage potential constraints in labor. Dow s plans include the Freeport cracker; two propane dehydrogenation (PDH) units; and PE, elastomer, and derivative investments spread across sites in Louisiana and Texas. The company has started constructing its Freeport PDH unit. As we start up PDH, we can then roll resources over to the cracker, says Fitterling. We have also split the PE investment between sites in Louisiana and Texas. We are taking a strategic and long-term approach, Fitterling says. CPChem is also investing heavily in recruiting and workforce development to attract and retain the needed talent. Producers and analysts expect the timing of some projects to slip as activity peaks and constraints materialize. It is fairly clear that six to seven US projects cannot be completed in a month time frame, Corn says. The experience of the Mideast in the 2s, where costs escalating and timing slipped, underscores the importance of being first. It is definitely better to be first, Corn says. We covet our first-mover position. The situation also reflects a broader demographics challenge that CPChem and other chemical makers are facing. US chemical industry employment peaked in the early 198s and has generally been in decline since, according to US Department of Labor statistics. Shale is reversing that trend, and industry employment will increase over the next few years, according to ACC forecasts. CPChem currently has 5, employees and expects to need to hire 2,8 people over the next 1 years to support growth as well as replace remost of its output will remain in the Americas, including exports to Latin America. The need to export to Asia should be fairly small. Even though the US advantage will allow us to export anywhere in the world, supply chain efficiencies are best if we export to Asia and Europe from the Middle East, he says. Americas demand should soak up most US output from Dow s projects. The last increment that leaves the Americas will be relatively small, Fitterling adds. It is likely below 1%, and maybe even 5%. It s not going to be a big issue. There is some concern about trade barriers. As US petrochemical exports are ramped up, these lower-cost American exports will put pressure on local producers in Latin America, Asia, and Europe regions that rely on more expensive, oil-based feedstocks, Pryor says. Countries are becoming more insular, and there is some pull back on globalization, Fitterling says. As in the US, political issues drive and sometimes overwhelm trade issues, which is not a surprising development in a slow-growth environment, Fitterling says. The case for trade liberalization is a difficult sell in a tough economic environment with high unemployment, producers acknowledge. There is a period of time here that we that we will have to get through, Fitterling says. A little bit more GDP growth would take some of the wind out of the sails and help even this out. ACC says it expects additional supply to boost US chemical consumption. ACC s current forecast calls growth of 3.5%/year growth through 217, says Martha Moore, economist with ACC. The council has tracked more than 17 downstream plastics processing projects across the United States, an indication of confidence in US markets. Specialty makers are also encouraged. The impact is not just limited to what is happening in petrochemicals, says PPG Industries chairman and CEO Charles Bunch. We re a low-cost manufacturing region. Energy costs and chemical manufacturing are such important components of our industrial base that I see this shale revolution as a boon to our economy. There are obvious impacts; oil and gas are certainly strong markets for our coatings right now, Bunch adds. But I m more excited about the rebirth of manufacturing that I see gradually coming. That benefits all markets that PPG plays in and is going to be paying dividends for our region for years to come. Robert Westervelt chemweek.com IHS Chemical Week, November 18/25, 213

5 cover story New North American crackers come online beginning in 215 For the first decade of this century, it was easy to say how many ethylene projects were under development in North America because there were none. Now, however, it is easy to lose track. The number could change at any moment, as the recent announcement by Odebrecht shows. On 14 November, the Brazilian engineering and construction firm said that it may build an ethane cracker and three polyethylene (PE) plants in West Virginia, a project the company calls the Appalachian Shale Cracker Enterprise, or Ascent. Odebrecht would operate the utilities, while its affiliate Braskem would manage production and sales. At CW press time, Hanhwa Chemical confirmed that it plans to participate in a US cracker. Hanwha Chemical brings to ten the number of announced cracker projects in North America. Several others are under consideration. Behind this surge in capacity is, of course, the shale gas revolution. With ethane prices in North America at historic lows, margins for ethane crackers have risen to record highs, notes Nick Vafiadis, senior director/ global polyolefins and plastics at IHS Chemical. Right now, if you re using ethane, it costs about cents/lb to make a pound of ethylene very, very low, Vafiadis says. Only the Mideast has lower costs. With so many new ethane crackers coming online, the cost of production in North America will increase considerably, but the region s advantage over Asia and Europe will remain significant and sustainable, says Vafiadis (graph). The project slate Ironically, cheap feedstock will be a windfall for North America s first new ethylene plant, Braskem Idesa s Etileno XXI. The $3.2-billion project, which includes a 1.5-million m.t./year ethane cracker and three PE plants, was approved in 28, before the shale gale struck. Construction began at Coatzacoalcos in 212. Braskem says the project is about 5% complete, with production to begin in 215. Other projects have not yet broken ground. Chevron Phillips Chemical (CPChem) is well along, having received its greenhouse gas permit from EPA in January and air permits from TCEQ in August. The project includes a 1.5-million m.t./year ethane cracker at its Cedar Bayou facility, at Baytown, TX, and two 5,-m.t./year PE units at Old Ocean, TX. CPChem committed financing in October. In July, the company hired a joint venture between JGC and Fluor to handle the engineering, procurement, and construction (EPC) of North America s advantage (Ethylene cash cost, in $/m.t.) $1,6 1,4 1,2 1, Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan US Gulf Coast - purity ethane Southeast Asia - naphtha Western Europe - naphtha the ethane cracker, and, in September, CP- Chem hired Gulf Coast Partners, a partnership between Technip and Zachry Industrial, to manage EPC for the PE facilities. ExxonMobil aims to build a 1.5-million m.t./year ethane cracker in Baytown that will feed two new 65,-m.t./year PE lines at its nearby Mont Belvieu Plastics Plant. The New cracker projects in North America in thousands of m.t./year Company Location Capacity Onstream Braskem Idesa Coatzacoalcos 1,5 215 CPChem Baytown, TX 1,5 217 Dow Chemical Freeport, TX 1,5 217 ExxonMobil Chemical Baytown, TX 1,5 216 Formosa Plastics Point Comfort, TX 1,2 H1 217 Odebrecht/Braskem Parkersburg, WV 1,5 NA OxyChem/Mexichem Ingleside, TX 55 Q1 217 Sasol Lake Charles, LA 1,5 217 Shell Chemicals Monaca, PA 1,5 NA NA: not announced Source: Companies, Chemical Week company filed for permits from EPA and TCEQ in May 212 and hopes for a positive decision by early 214. Assuming all goes well, the company will begin construction in 214 and start the plant up in 216. Six projects 6.25 million m.t./year of ethylene capacity aim to start up in 217. Dow Chemical was another early mover, in April 211 presenting plans for a 1.5-million m.t./year ethane cracker as part of its $4-billion US Gulf Coast investment plan. Both the cracker and a propane dehydrogenation (PDH) unit are to be built at Freeport, TX. Dow says it is in the final stages of permitting and expects to begin construction in the second quarter of 214. Fluor is managing construction. In February 212, Formosa Plastics committed to a $2-billion project for Point Comfort, TX, that includes a roughly 1.2- million m.t./year ethane cracker, a PDH plant and a low-density PE plant. Permitting is still in process with both TCEQ and EPA, says a spokesperson. The company hopes to begin construction in late 214, and to begin operations in early 217. OxyChem and Mexichem (Tlalnepantla, Mexico) began studying a 55,-m.t./ year cracker project in early 212. On 31 October, they announced a 5-5 jv, Ingleside Ethylene, to build the plant at Oxy- Chem s Ingleside, TX, facility. OxyChem has completed front-end engineering and design (FEED), received draft permits from TCEQ, and applied for permits from EPA. The company expects to award EPC by year s end, with construction to begin in mid-214 and operations in the first quarter of 217. Oxy- Chem will run the cracker, and Mexichem will use the product to make vinyl chloride monomer at existing facilities. Sasol is in the FEED stage of a $5 7-billion cracker project that will be built at Lake Charles, LA. The 1.5-million m.t./year ethylene plant will be part of a mammoth $16 21 billion investment that includes not only the downstream production of ethylene oxide, alcohols, ethoxylates, octene, hexene, and PE, but also a world-scale gas-to-li quids facility. All of these crackers are destined for the US Gulf Coast, but the productivity of the Marcellus Shale region in the Northeast has created unusual opportunities for investment. The Odebrecht project, set squarely atop the Marcellus Shale, is one example, but it follows in the footsteps of Shell s project, a 1.5-million m.t./year cracker and three 5,-m.t./year PE units announced in 211. Shell has chosen a site at Monaca, PA, and begun taking bids for ethane supply. The company has hired a Linde-Bechtel alliance for FEED, which is expected to begin in early 214. CLAY BOSWELL chemweek.com IHS Chemical Week, November 18/25, 213