The IHS Chemical Crude Oil Turmoil and the Global Impact on Petrochemicals Special Report, which investigates the crude oil price recovery period in the petrochemical industry, predicts that a five years or more recovery period for crude oil prices might result in a ‘Back to the Future’ experience for petrochemical producers.
Author of the report and Vice President of Technology and Analytics for IHS Chemical, Don Bari, commented: “The long-term recovery case, should it come to fruition, has the most significant implications for the market. Since oil dynamics drive marginal production cost and price setting mechanisms for many chemicals, plastics and fibers, a prolonged oil-price recovery could shift the feedstock advantage from ethane and back to a more cost-competitive naphtha. Much like the DeLorean time machine from the 1985 film, Back to the Future, naphtha would be the conduit taking us ‘back to the future’, similar to the industry experience of the late 1980s”.
Regarding long-term oil price recovery, the IHS report predicts ‘moderate economic growth for several years’ and technological advancements are predicted to reduce oil production costs, and increase supply.
The outlook resulting in a longer-term oil price recovery is not particularly rosy, and the short-term view is also complex. In the near-term, energy experts at IHS say economic and geopolitical risks continue to challenge oversupplied oil markets, and crude oil prices are posed to drop further.
It was noted that global oil production has increased: aggregate production from the US, Saudi Arabia, and Iraq has increased by 2 million bpd.
The report stated that the first major impact on the petrochemical market would be on the production of natural gas liquids (NGLs) and the production of ethylene in the US: extended lower oil prices would slow NGLs production and ethane cracker capacity expansions, which could create a tight market. This would push operating rates higher, increase prices, and consequently introduce more market volatility.
Said Bari, “Ethylene cracker operating rates would be driven to near-record highs, since the second wave of ethylene capacity additions wouldn’t come online until 2025, and global ethylene demand growth will be strong. According to our IHS analysis, in the long-term recovery case, ethylene demand is forecast to grow at an annual rate of 4.5% and nearly 4% during 2015-2020 and 2020-2025, respectively, while the nameplate capacity is forecast to grow at an annual rate of more than 3% and less than 1% respectively, during the corresponding time periods. In the long-term recovery case, ethylene demand grows at a higher pace than supply during the 2015 to 2020 timeframe, which will lead to severe supply shortages similar to late 1980’s.”
Europe and Asia are expected to experience a second macro trend as naphtha returns to economic favour. Naphtha crackers are predicted to run at high rates, and in response, more naphtha based crackers could be manufactured in China.
Regarding the impact on the plastics industry, Bari said: “We found that low oil prices stimulate demand for virgin plastics by reducing economic incentives to recycle plastics. As less plastic is recycled, demand for ethylene further increases, which leads to more co-product production of propylene and butadiene.”
IHS found that US ethane would remain advantaged during a long-term oil price recovery, as oil prices cycle and LNG and ethane export and shipping infrastructure is added. Whereas China coal would lost their advantage during a long-term oil price recovery, and coal based petrochemical investments would lose favour in China as the spread between oil and coal tightens.
In the case of long-term recovery, methanol projects with advantaged feedstocks are predicted to do better than the coal based units found in China. Methanol projects targeting energy applications, such as gasoline and DME, would also be the losers in this outcome, along with North American methanol projects targeting methanol-to-olefins (MTO) and methanol-to-propylene (MTP). While methanol capacity additions will still occur in locations with advantaged feedstocks, the speed of these additions would be significantly delayed and rationalisations also would be likely.
The global polyethylene and polypropylene markets would also be affected by a long-term recovery with polyethylene production rates expected to grow to meet the growing global demand.
IHS predicts that a low oil price would shrink producer margins for North America ethylene based PVC, but expects naphtha based Western European PVC producers’ margin to improve.
Edited from source by Angharad Lock