Inside the Petrochemical Boom


When reports began coming in a few months ago on the 2013 surge in U.S. oil demand, we took a look at the numbers and realized that while a significant portion of the increase resulted from demand for gasoline (roughly 300,000 b/d), the other half of the increase originated from increased demand for petrochemical feedstocks: the various compounds that fall under the umbrella categories of natural gas plant liquids and liquefied refinery gasses. This assessment was corroborated by statements from IEA and EIA, pointing to a surging petrochemical industry in the United States riding the wave of the shale oil and gas boom. Of course, the term “petrochemical feedstocks” encompasses a massive range of compounds with overlapping applications that contribute to a wide range of end products. Here is a brief summary of which compounds produced by oil and natural gas are used in the production of various products.   Among the most essential petrochemicals is ethane/ethylene, which forms the basis of a wide range of soft plastics, and can even be used to produce single-celled proteins used to supplement animal feeds. According to EIA, ethane is typically the largest component of natural gas liquids production. Bloomberg data cited by EIA shows that in the past, ethane prices closely tracked other natural gas liquids, but prices have been unusually low in recent years. EIA also reports that prices of all natural gas liquids have trended downwards, again due to the production surge. But ethane prices might not be staying low for long—translating into more good news for the U.S. petrochemical industry. New research from Global Data has found that global demand for polyethylene—the most common plastic—is expected to surge in the coming decade. The most critical input in polyethylene manufacturing is ethylene gas, which—unsurprisingly—comes from ethane. Ethylene yield from ethane cracking is about 78 percent, with the remainder yielding an assortment of other petrochemicals. According to Global Data, polyethylene demand is expected to increase 3.7 percent per year between 2013 and 2018—faster than the record levels observed in the period from 2003 to 2013. Demand will grow 2.4 – 2.8 percent in Europe and the United States, but the strongest demand growth will occur in Asia, at a rate of nearly 5 percent per year. This is not tremendously surprising, given Asia’s status as the manufacturer in chief of consumer goods, many of which are made of simple plastics.
Carmine Rositano, GlobalData’s Managing Analyst covering Downstream Oil & Gas, says: “Lower feedstock costs from U.S. shale gas production are providing the country with a competitive advantage, with increasing investments in its petrochemical plants driving polyethylene demand growth in both domestic and international markets. Although below recent historical levels, demand in Asia remains fairly robust and will continue to boost expansion in the global polyethylene market.”
“As a result, polyethylene capacity is now expected to increase at about 5.3 percent per year between 2013 and 2018, which is higher than the 3.6 percent experienced over the last decade. Capacity additions will be most prevalent in the U.S., given its advantaged cost competitive position, and also Russia, which is augmenting its petrochemical industry to reduce its reliance on imports. New capacity will also continue to come online in Asia, but at a slower-than-historic rate.” Rositano also mentions, “The lower feedstock and fuel costs for U.S. plants,compared with those in Europe, will likely result in future European plant closures and further adjust global polyethylene trade flows.” Investment is already underway. The Houston Chronicle recently reported that industrial natural gas demand is slated to surge from current levels of 19.6 billion cubic feet of gas per day to 23.5 billion, with an injection of $83 billion dollars of venture capital over 144 planned projects. Reportedly, 14 of these projects are ethylene crackers worth a combined $26 billion of investment through 2020. That last point might seem like an afterthought, but there’s actually a lot at stake for Europe from the North American petrochemical business. According to Fatih Birol, the chief economist of the International Energy Agency, a staggering 30 million European jobs are at risk from American industry growth, as manufacturers of petrochemicals, aluminum, fertilizers, and plastics move to the United States. Of course, simply being “at risk” is a far cry from “already gone,” but it’s worth noting just how positive this advantage could be for the U.S. job market.