CERAWeek 2014 - Changing Fortunes: Impact of Unconventional Oil and Gas Production on the North American Petrochemical Industry

Tuesday morning's Strategic Dialogue "Changing Fortunes: Impact of Unconventional Oil and Gas Production on the North American Petrochemical Industry" opened with brief remarks by host John Connally, Partner, Vinson & Elkins LLP, who emphasized that the unconventional oil and gas revolution in North America has profoundly changed the discussion and outlook for downstream petrochemical investments.

Dewey Johnson, Vice President, Petrochemicals & Feedstock, IHS, briefly summarized the outlook for growth in North American gas supply and the continued pricing differential to oil on an energy-equivalent basis, which has led to a sustained advantage for natural gas. As a result, nearly $120 billion has been committed to investments in new or expanded domestic chemical capacity, with the majority of the funds targeting the olefins chain (44%), followed by chlor-alkali products (20%). Mr. Johnson cautioned that despite expectations for a continued price advantage for natural gas for some time to come, there are inherent risks in potential capital cost escalations in the future

Blake Eskew, Vice President, Downstream Consulting, IHS, agreed that the arbitrage of gas versus oil pricing allows for vast improvements in production capabilities for olefins and chlor-alkali products in North America. Mr. Eskew commented that while there is potential for the development of shale resources elsewhere in the world, the physical and legal infrastructure in other countries is different from that in the North American market, which could constrain rapid progress in these other markets. He concluded by saying that ethane prices are unlikely to remain at their current low levels and a modest escalation is expected after 2020 as sizeable new ethane crackers come onstream.

Mark Lashier, Executive Vice President for Olefins/Polyolefins, Chevron-Phillips Chemical Company, remarked that Chevron-Phillips believes in the resource potential of the unconventional base and is already making strategic commitments to explore it. In addition to a $6 billion ethane cracker being developed in Texas, the company is evaluating other opportunities to make more investments and grow its business, fully realizing that there have to be gains for everybody in the petrochemical value chain. Mr. Lashier anticipates shortages in the skilled labor pool owing to the vast construction activities currently being planned, saying that he believes the primary way for Chevron-Phillips to mitigate this risk is to move forward with its expansion plans and stay ahead of the competition. He cited Chevron-Phillips' experience in developing challenging projects in the Middle East as evidence of the company's ability to handle these potential pitfalls effectively.

Wayne Smith, Member of the Board of Executive Directors, BASF SE, agreed with the positive sentiment on the shale advantage shared by all panelists and added his own views on the potential for lower energy costs for current operations, improved performance and economics of existing assets, and the potential for expansion. He said that he believes the long-term opportunity will continue to be in the methane and ethane streams, as the relative ease of exporting propane to the rest of the world makes it more vulnerable to exposure to global energy prices. BASF has converted (and expanded) an existing naphtha cracker to take flexible feeds and is partnering with Yara on a world-scale ammonia project. Mr. Smith does not foresee a big impact of shale on downstream/derivative capacity in North America and thinks the advantage will largely be captured in the upstream segment. He concluded by noting that the lack of qualified labor is already a reality for BASF.

Dave Witte, Senior Vice President, IHS, pointed out that the shale revolution is also apparent in the changes in domestic crude oil production and its impact on chemicals (aromatics) that rely on oil-derived feeds. Shale gas production in North America has also implicitly facilitated the development of methanol-to-olefins technology in China, as it has lowered prices for coal, he said. He said he believes that many traditional industry relationships are changing rapidly and that chemical producers around the globe have important choices to make based on product and site economics.

The question and answer session further explored the labor shortage problem, and panelists suggested that the best way forward is to not make petrochemical projects schedule-driven and allow flexibility in timing without threatening the economics. Also discussed was the increased difficulty companies are facing in getting necessary environmental permits. Finally, the issue of potential exports of ethane to Europe was raised and the possibility that these product flows might change the feed slates of petrochemical facilities there. Mr. Smith explained that BASF's European facilities must maintain the existing value chain based on naphtha, so for his company using ethane in Europe is not an option.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.