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COVER STORY

REBIRTH

LyondellBasell is planning a new metathesis unit to produce more propylene at its Channelview, Texas, complex.

LYOND ELLBASELL

PETROCHEMICALS
The SHALE BOOM is in full swing for the North American petrochemical industry, and producers think it will last
ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU SHALE IS FORCING North American

petrochemical executives to unlearn much of what they thought they knew about their industry. And given that they are near the beginning of what is likely to be a long, prosperous period, they are more than happy to change their outlook. Experiences early in the previous decade taught the regions executives that their reliance on raw materials derived from natural gas to make ethylene put them at a cost disadvantage to the many other areas of the world that use petroleum-derived naphtha. Now ethane is so cheap that only the Middle East can produce ethylene more cost-effectively than North America can. And while petrochemical companies in other regions, notably Europe, are struggling to turn a profit, North American firms are raking in substantial returns. Executives are learning to invest in

North America again. A decade ago, executives thought that the investment of capital in domestic petrochemical plants would be limited mostly to maintenance. But since last spring, five companies Chevron Phillips Chemical, Dow Chemical, Formosa Plastics, Sasol, and Shell Chemicalshave disclosed plans for new multi-billion-dollar complexes making ethylene and derivatives such as ethylene oxide and polyethylene. Theres a good possibility that more companies will unveil such plans in 2012. Beyond large projects, nearly every producer of ethylene or derivatives is contemplating expansions to take advantage of low raw material costs. Shale is also beginning to underpin chemical deals. For example, the rosy North American outlook was important to Indoramas $795 million purchase of an ethylene glycol plant in
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Clear Lake, Texas, from Old World Industries last month. Chemical executives can be forgiven for having to get up to speed in short order. Until 2005, shale depositswhich lie beneath a wide swath of the countrywere an eccentric source of natural gas. That was about the time that exploration companies perfected horizontal drilling and hydraulic fracturing techniques to liberate gas that was tightly locked into shale. Shale has since become the source of more than one-quarter of the natural gas produced in the U.S. The new output has driven U.S. natural gas prices below $3.00 per million Btu for the first time in more than a decade. At more than $100 per barrel, oil is more than five times as expensive as natural gas on an energy content basis. The main feedstock for North American

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petrochemical facilities is natural gas liquids, a mixture of ethane, propane, butane, and other hydrocarbons that is extracted from natural gas and then usually separated into its components. The remaining dry natural gas, primarily methane, is then piped to the industrial and home heating market. Cheap natural gas liquids put U.S. producers at a big advantage over European and Asian chemical producers that primarily use petroleum-derived feedstocks such as naphtha. This advantage of natural gas liquids over naphtha is enormous. According to Carlo Barrasa, director of natural gas liquids and cracker economics at the consulting group IHS Chemical, the cash cost of making ethylene from ethane is 18 cents per lb. The cash cost of using light naphtha as a feedstock, in contrast, is about 46.5 cents per lb. Ethylene sells for about 68.5 cents per lb, IHS says.
ETHYLENE CRACKERS normally have

According to John Stekla, director of olefins studies at IHS Chemical, U.S. production of ethylene increased 2.0% in 2011, including a large buildup of inventories at the end of the year. However, exports of derivatives fell by 10%, Stekla says, as suppliers kept product at home to serve local customers. Overall, the net effect was a 0.4% increase in derivative demand for U.S.

producersnot bad considering the U.S. doesnt have a lot of spare ethylene capacity. Profitability is now bouncing back. Brian Ames, Dows vice president of olefins, aromatics, and alternatives, says prices reached a low point in December. Since then, he has observed continual improvement as sales volumes crept back up and feedstock costs plummeted.

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some latitude to change feedstock slates to react to changing market conditions. In recent years, they have been cracking as much ethane as they possibly can. Many crackers originally set up to take in heavier feedstocks such as naphtha have been retrofitted to allow them to crack more ethane. Dow, LyondellBasell Industries, Nova Chemicals, and Shell have undertaken such initiatives. In 2004, Barrasa notes, only about 45% of U.S. ethylene production was based on ethane. Today, that figure stands at about 70%. That just speaks to the fact that the cost advantage is so great, he says. Cracking ethane instead of heavier feedstocks does mean that ethylene plants arent making as much propylene, butadiene, and aromatics as they used to. Those cracker coproducts are in short supply and are becoming increasingly costly. Although cheap shale gas is now the dominant driver of the U.S. petrochemical industry, the global financial turmoil is still making itself known. In particular, the possibility of a Greek debt default last summer caused uncertainty in financial markets and economic slowing. North American producers felt the impact through some slippage in prices and volumes at a time when ethane costs were temporarily spiking. In the second half of the year we saw things slow down a little bit, says Grant Thomson, president of olefins and feedstocks at Nova. The second half of the year was still pretty good, but it wasnt as good as the first half.

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COVER STORY

Stekla notes that profit margins for ethylene on the spot market are now the highest they have been since 1988. Spot prices have been extremely high, even though demand is relatively tepid, he says. Observers expect the growth in North American output to be similar this year to what it was in 2011. Novas Thomson expects North American output of polyethylene, the largest-volume ethylene derivative, to rise 1.52.0%. Although North American companies have been enjoying good profits for some time, the rest of the world is still near the trough of the petrochemical business cycle. In North America, the industrys nameplate operating ratethe percentage of overall ethylene capacity that is up and runningstands at about 90%, according to IHSs Stekla. The global average, in contrast, is about 87%. If you look at the global industry operating rate in 2011, were pretty much in the trough, Dows Ames says. Yet with its higher relative profitability, the U.S. industry looks to be further along in the upswing of the business cycle.

Trough conditions are particularly evident in Europe, which must contend with a relatively high cost structure, economic woes over sovereign debt, and proximity to plants that opened in the Middle East in 2009 and 2010. According to IHS, Western European operating rates are about 84%. During a conference call with analysts last month, LyondellBasell Chief Executive Officer James L. Gallogly disclosed that his companys European olefins output fell by 13% during the fourth quarter while profit margins slipped to nearly break-even levels. We continue to aggressively pursue restructuring in this region, he told investors, noting that the company plans to close two small polypropylene production lines in Wesseling, Germany. Similarly, Ineos is evaluating the future of the smaller of its two ethylene crackers in Grangemouth, Scotland. Gerd Lbbert, executive vice president of polyolefins at Austrian petrochemical maker Borealis, acknowledges that the situation in Europe is dire. Profitability has eroded in line with demand and has been below sustainable levels, he says. Lbbert

COMPETITIVENESS U.S. natural


gas and ethane prices have tumbled relative to oil prices.
Price index (rst quarter of 2007 = 1.0)
2.5 2.0

Oil
1.5 1.0 0.5 0.0

Ethane Natural gas 2007 08 09 10 11

SOURCES: Energy Information Administration (oil and gas), Oil Price Information Service (ethane)

adds that the benefits European crackers enjoy from producing lucrative coproducts such as propylene dont sufficiently offset the increasing European disadvantage versus gas-based production in the U.S. and Middle East.
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from a decade ago, when U.S. executives thought that the disadvantages they faced versus naphtha-cracking counterparts in Europe and Asia would last forever. Now they believe that their relative advantage, if it isnt permanent, will at least endure a number of years. The reason for their optimism is a so-called virtuous cycle that will secure a reliable supply of feedstocks. Low natural gas prices have caused gas exploration companies to cut back on drilling. That might seem like bad news. However, high oil prices ensure that natural gas liquids sell at a healthy premium above natural gas, although at enough of a discount to oil to make them economical chemical raw materials. IHSs Barrasa says drillers can charge as much as $11 per million Btu more for natural gas liquids than for natural gas. The composition of hydrocarbon resources varies considerably from region to region. Exploration companies preferentially develop wells in places that will yield a large amount of natural gas liquids rather than in locations with mainly dry gas. In a presentation at Decembers Gulf Petrochemicals & Chemicals Association meeting in Dubai, Chevron Phillips Chemical CEO Peter L. Cella outlined the economics at play that promise to yield ethane for the petrochemical industry. To earn a 10% return on the cost of capital for a new dry gas well, a driller needs natural gas prices of $2.00 to $5.00 per million

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Btu, he noted. However, for wells focused on natural gas liquids, the 10% return price needed for the natural gas production is actually zero because the driller earns its entire return on the liquids production, which tends to be priced off crude oil, Cella said.
THIS IS THE REASON why the gas com-

panies that are pulling back on natural gas drilling are also reassuring investors that they are increasing exploration for natural gas liquids, Barrasa observes. The only thing that can meaningfully affect the drilling for gas liquids is if we get a sharp correction in oil prices, he says. It really shows how much things have changed, where exploration companies actually talk about going after liquids and almost treating the gas as the coproduct, Novas Thomson says. It wasnt long ago that they just went after the natural gas and the liquids were just by-products that you wanted to get rid of. Ethane oversupply is hitting the market from all this drilling. According to IHS, the U.S. will see more than 400,000 bbl per day of new ethane supply by 2020, a more than 40% increase from todays levels. Since the beginning of the year, ethane prices have dropped from 84 cents per gal to 54 cents, Barrasa says. With its success tied to petrochemical makers that buy natural gas liquids, the gas industry needs chemical companies to build more capacity. Given their own motivation to boost profits, chemical producers are willing to oblige. But it takes three or four years to build an ethylene cracker. Thus, the market will see only incremental capacity additions until 2016. These projects will cap an enormous spate of capacity additions. North American firms will add about 8.4 million metric tons per year of new ethylene capacity by 2017, IHSs Stekla says, a 35% expansion of the regions output. Of the companies that announced new ethylene crackers over the past year, Chevron Phillips was the first out of the gate with an announcement last spring. It intends to build a 1.5 million-metric-ton ethylene cracker at its Cedar Bayou facility in Baytown, Texas, and downstream polyethylene plants. Dow was the second company with a cracker announcement. Its planned Gulf Coast unit is part of a comprehensive plan to integrate downstream ethylene derivatives into shale-based feedstocks. The initiative involves restarting a cracker in Hahnville, La., that the company idled in

2009 plus upgrades to other crackers. Propylene is an important part of Dows plan. The company recently inked a licensing agreement with Honeywells UOP engineering unit for a propane dehydrogenation unit that would add 750,000 tons of propylene capacity in Texas by 2015. Dow plans a second propylene unit that would use its own technology.

Ames points out that Dows acrylic, propylene oxide, and epoxy operations are large consumers of propylene. But with the propylene supply becoming tighter, the cost of buying propylene relative to the cost of buying propane and converting it into propylene is such that we are better off buying propane, he says. Dow isnt alone. Eastman Chemicals

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COVER STORY
OLD WORLD INDUSTRIES

oxo chemicals business has a large appetite for propylene. When asked during a recent conference call whether the firm will restart a cracker at its Longview, Texas, complex, CEO James P. Rogers mentioned that the company is instead considering an olefins conversion unit, which likely refers to a metathesis unit that makes propylene from ethylene via a butylene intermediate. Similarly, LyondellBasell is building another metathesis unit at its Channelview, Texas, complex. Sasol is studying a cracker at its Lake Charles, La., complex that would have up to 1.4 million metric tons of capacity. A spokesman says the company is in discussions with a potential partner for the project. If we build an ethylene cracker, there will be some derivatives that will be Sasol only, and some partner derivatives, the spokesman says. Shell is also planning a cracker, but unlike the other projects, its plant is planned for the Northeast to tap into the Marcellus Shale, a geological formation extending from New York state through West Virginia. The company hasnt yet selected a site for the project.

Formosa Plastics is the latest firm to announce a new ethylene cracker. Last week, the company disclosed plans to build an 800,000-metric-tonper-year ethylene cracker at its Point Comfort, Texas, site. The $1.7 billion project, to be completed in 2016, will also include a low-density polyethylene plant and a 600,000-metric-ton STORAGE Indorama is propane dehydrogenachloride. At the time, the company buying an ethylene glycol said the processing plant would altion unit. plant from Old World Occidental Petrolow it to explore various options Industries in Texas to leum has hinted that it for the future supply of ethylene at take advantage of shale. is considering building the plant. an ethylene plant. Last Beyond those that have been anJune, the firm signed nounced, one or two more crackers a transport agreement with pipeline firm could be proposed for the U.S., IHSs Stekla DCP Midstream so it can ship natural gas says. One could be a second project in the liquids from the Eagle Ford Shale basin in Northeast to take advantage of the MarTexas to a proposed gas processing plant cellus Shale. There might also be another in Ingleside, Texas, where Oxy makes vinyl cracker on the Gulf Coast, although he notes that even with the flood of ethane due to hit the market, an additional cracker in the region might run into feedstock constraints.
MANY FIRMS that arent building new

crackers are expanding existing facilities to leverage the shale boom. Nova is perhaps the most ambitious of these companies. It has inked agreements to bring ethane from the Marcellus Shale up to its complex in Corunna, Ontario, and from oil fields in North Dakota to its plants in Joffre, Alberta. The company is also conducting studies, due for completion later this year, about expanding the Corunna cracker and perhaps building polyethylene plants in Corunna and Joffre. When all the new capacity hits the market around 2017, the U.S. could very well see a downturn in the petrochemical business cycle. Yet Novas Thomson notes that the North American industry seems to have missed the current petrochemical trough entirely, a phenomenon that has caused him to doubt what he long thought he knew. The longer Im in the industry, the less I believe in the cycle, he says. When I first came into the industry in the late 80s, everybody talked about how its a sevenyear cycle, and were going to have two good years, and everybody is going to build capacity, and well have five bad years. I just dont believe that anymore. Shale gas, he says, has turned all of that upside down.
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BUSINESS CONCENTRATES

BERKSHIRE MAY SEEK MORE ACQUISITIONS


Berkshire Hathaway is considering more chemical acquisitions following its purchase of specialty chemical maker Lubrizol last September. Lubrizol will have many opportunities for bolt-on acquisitions in the specialty chemical field, Berkshire Chairman Warren E. Buffett wrote in his annual letter to shareholders. He pointed out that Lubrizol has acquired three firms, for a total of $493 million, since Berkshire took over: thermoplastic polyurethanes maker Merquinsa, botanical extracts supplier Active Organics, and grease formulator Chemtool. Buffett also asserted his confidence in Lubrizol CEO James L. Hambrick, calling him a disciplined buyer and a superb operator. Buffett notes that he is eager to expand [Hambricks] managerial domain.AHT

FORMOSA PLANS U.S. CRACKER


Formosa Plastics has become the fifth company in less than a year to announce its intention to build a new ethylene cracker complex in the U.S. The company has unveiled plans for a $1.7 billion investment that will include an 800,000-metric-ton-per-year cracker at its chemical complex in Point Comfort, Texas. Formosa will also build a propane dehydrogenation plant with 600,000 metric tons of capacity and a 300,000-metric-ton low-density polyethylene plant as part of the project, which it hopes to complete in 2016. Chevron Phillips Chemical, Dow Chemical, Sasol, and Shell Chemical are also considering new crackers as part of a wave of investment spurred by low-cost feedstocks derived from shale-sourced natural gas liquids (see page 10). Formosa completed an ethylene cracker, as well as downstream polyethylene and polypropylene plants, in 2001 as part of a previous expansion wave.AHT

SOLVAY COMMERCIALIZES NEW ROUTE TO EPICHLOROHYDRIN


Solvays Thai affiliate has commissioned a plant in Map Ta Phut, Thailand, that makes the epoxy raw material epichlorohydrin
SOLVAY

phenyl diisocyanate (MDI). SABIC plans to build isocyanates facilities in Al Jubail, Saudi Arabia, by 2016. The two companies have further agreed to consider a strategic alliance in polyurethanes. SABIC lacks polyurethane manufacturing know-how, whereas Mitsui faces rising costs and a shrinking market in Japan. In the future, Mitsui hopes to supply most of its MDI and TDI needs from a lower cost base in Saudi Arabia. Currently the Japanese firm produces TDI in Japan and MDI in Japan and South Korea.JFT

capture exhaust CO2 from the sites steam generators and use it to convert sodium monochromate into the leather-tanning agent sodium dichromate. The concentrator will replace CO2 that the company now buys from outside suppliers. Lanxess says the concentrator, set to open in the second half of 2013, will allow future expansion of sodium dichromate capacity, now set at 70,000 metric tons per year.MSR

PLANT EXPLOSION KILLS AT LEAST 16 IN CHINA


A Feb. 28 explosion at an agrochemicals and explosives plant near Shijiazhuang, in northern China, killed at least 16 people and injured more than 40. The blast occurred at Kaer Chemical. According to Shijiazhuang officials, the plant produced ammonium sulfate fertilizer, the rocket fuel guanidine nitrate, and the explosive nitroguanidine. Both the city of Shijiazhuang and the government of Hebei province posted reports about the accident on their websites. The governments say the cause of the blast is unknown. Officials have vowed to audit safety measures at industrial sites throughout the province and crack down on companies that cut corners.JFT

SYMRISE EXPANDS FRAGRANCE BUSINESS


Flavor and fragrance maker Symrise has made two acquisitions and formed a partnership. The German company purchased the Brazilian business of the fragrance firm Belmay. Symrise says it will next pool all its Brazilian development activities in a new center of expertise in Cotia, Brazil. In the U.S., Symrise acquired Trilogy Fragrances, a New Jersey-based developer of natural and organic fragrances. And it formed a partnership with Swedens Indevex Biotech, which produces a nutrient complex sold to the health-food and weight-loss markets.MM

Solvays new from vegetable-oilepichlorohydrin derived glycerin rather plant in than petrochemicalThailand. derived propylene. The 100,000-metric-tonper-year facility was built at a cost of $160 million, Solvay says. The Belgian company continues to pursue a similar epichlorohydrin project in Taixing, China.MM

GENOMATICA TAKES ITS 1,4-BUTANEDIOL TO ASIA


Mitsubishi Chemical and Genomatica are planning a joint operation in Asia that will produce 1,4-butanediol (BDO) from sugar using Genomaticas process technology. Mitsubishi has paid Genomatica $3.5 million up front while the companies work toward completing a definitive agreement. Mitsubishi made an equity investment in Genomat-

MITSUI, SABIC LINK FOR POLYURETHANES


Saudi Basic Industries Corp. (SABIC) will license from Mitsui Chemicals technology for making the polyurethane raw materials toluene diisocyanate (TDI) and methylene di-

LANXESS INVESTS IN SOUTH AFRICA


Lanxess plans to spend $54 million to build a carbon dioxide concentrator at its Newcastle, South Africa, site. The facility will
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