Will the Shale Gale Lift Petchem's Sails in Europe?
As the authors of a study detailed in a Rigzone article Thursday indicated, Europe boasts massive unconventional natural gas deposits. Should exploration and production companies overcome significant regulatory, technical and economic hurdles, the region could enjoy significant benefits. Not only would shale gas produced in Europe give the region greater energy independence from Russia and the Middle East, but the clean-burning fossil fuel offers a more environmentally correct alternative to coal-fired and nuclear-generated electricity.
Aside from the advantages European shale gas might offer in terms of energy security and power generation, what could it mean for the region's petrochemicals sector? Reviewing the U.S. petrochemicals industry's response to the influx of shale gas presents a largely positive scenario.
In the United States, increasing production of liquids-rich shale gas from geologic formations such as the Marcellus has dramatically brightened the outlook for petrochemical producers. Once reliant on costly, heavy crude oil-based feedstocks, domestic petrochemical manufacturing plants can now leverage "home-grown" light natural gas liquids (NGLs) to make products that are more cost-competitive on the world market.
"Abundant and inexpensive natural gas and derivatives create a feedstock cost advantage for U.S. chemicals," said Tom Dohrmann, Director Corporate Finance with Fitch Ratings in New York. "It also enabled a status change of the industry from being a net importer to a net exporter."
"Over much of the past decade, U.S. petrochemicals were often described as a shrinking, less competitive industry due to a high costs (for crude-oil based feedstock)," recalled Dohrmann, who is Fitch's lead analyst for North American Chemicals. "The emergence of light feedstock increased the competitiveness. Companies announced capacity expansion, approximately 20 percent over today's nameplate capacity for ethylene, which includes debottlenecking and even the construction of new world-scale steam crackers in the U.S."
Had the abundant supply of NGLs from shale gas plays not become a viable feedstock option, Dohrmann is convinced that the outlook would be far less promising for the U.S. petrochemicals sector. "The industry would be at a cost disadvantage and exposed to cheaper imports, mainly from the Middle East," he explained. "Consolidation and capacity shut downs would be likely."
Too Late in the Game?
With their reliance on heavy feedstock, European petrochemical producers must bear higher raw material costs than their peers in the U.S. and Middle East. "Against the backdrop of a recessionary economic environment, consolidation, capacity idling or shutdowns become more and more likely," said Dohrmann.
Compounding the feedstock cost disadvantage are regulatory hurdles and Europe's relatively tight population distribution limiting access to the natural gas in the ground. "First, approval to tap the European shale gas reserves are not yet secured," said Dohrmann. "The process may take a long time, particularly, if the deposits are near densely populated areas." In addition, he noted there would be limited room for additional capacity following a round of plant expansions in the U.S.
"Profit margins would be a lot slimmer with more capacity and this makes the economics of investment in feedstock flexibility in Europe less compelling," continued Dohrmann. "So in summary, taking advantage of cheap feedstock is certainly worth an investment but it also comes down to timing, especially against the backdrop of the general economic cycle and also the specific supply/demand dynamics of petrochemicals."
Given the issues of timing and other significant variables, industry officials are reluctant to predict whether some semblance of a petrochemicals boom the U.S. sector is entering can be replicated in Europe. "It is very early days for the industry here, however, so it would not be appropriate to comment on the implications for associated industries," said Richard Scrase, spokesman for ExxonMobil in the U.K. and Ireland.
Time for a Niche?
"Europe seems to be in the center of a potential recession," said Dohrmann. "Any adverse economic developments will likely reduce demand for petrochemicals products and could lead to capacity reductions as part of restructurings. That is independent on what happens with the U.S. industry."
Should the broader economy stay healthy, Dohrmann expects European petrochemicals manufacturers to focus on carving a niche for themselves. "The capacity reductions are severe but European companies will likely focus on more R&D-driven, high-value-adding products in view of the cost advantage of U.S. and Middle Eastern production," he concluded.
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