Petrochemicals: Cost overruns and lower oil prices became headwinds for U.S. chemical makers
For the past five years, U.S. petrochemical makers have been raking in enormous profits thanks to cheap shale-gas-based methane, ethane, and propane feedstocks. As 2014 showed, however, every silver lining has a cloud. New projects are being hit by cost overruns, shale-based feedstocks are leaving the country to be upgraded elsewhere, and a collapse in oil prices will likely crimp profits for U.S. chemical makers.
The American Chemistry Council, a trade group, expects more than $100 billion in new chemical investment in the next 10 years. Construction is beginning on these projects. ExxonMobil, Chevron Phillips Chemical, and Dow Chemical all have cranes and bulldozers erecting ethylene crackers on the Gulf Coast.
But multi-billion-dollar chemical complexes need a massive amount of resources and muscle. Richard Meserole, vice president of energy and chemical construction for the engineering firm Fluor, estimates that 60,000 skilled workers, such as welders and steamfitters, will be needed for the building boom—20,000 within a 50-mile radius of Houston alone.
Such demand is already leading to cost overruns. When Sasol announced this fall that it is moving forward with its ethylene complex in Lake Charles, La., it estimated the cost at $8.1 billion, nearly double its 2011 estimate of $4.5 billion. Stephen Cornell, head of international operations for Sasol, blamed the escalation, in part, on “the heated labor market.”
John Floren, chief executive officer of Methanex, told a Bloomberg reporter recently that he is paying welders and pipe fitters more than $100 an hour. The firm’s project to move a methanol plant from Chile to Louisiana is running $300 million over budget, he said.
As costs rise domestically, overseas chemical firms are doing what they can to take advantage of U.S. shale gas.
Chemical makers in Europe—including Borealis, Ineos, Saudi Basic Industries Corp., and Versalis—plan to import ethane from the U.S. to feed their operations. They are building terminals and storage facilities for the gas and are even having shipbuilders construct specially designed tankers.
Lloyd’s Register estimates that Europe could import as much as 2 million metric tons of ethane per year by decade’s end, enough to support a couple of large crackers. Other estimates are as high as 8 million metric tons.
Similarly, Indian chemical maker Reliance Industries has signed a contract to import 1.5 million metric tons per year of U.S. ethane, beginning in 2016.
And chemical feedstocks aren’t leaving the U.S. only in the form of ethane. Companies are planning more than 30 million metric tons of methanol capacity in the U.S. over the next decade. Most of the alcohol will be exported to Asia, where firms are building massive methanol-to-olefins plants.
As shale gas is sucked up, U.S. chemical makers are also watching prices for oil—the chemical feedstock used in much of the rest of the world—plummet from nearly $107 per barrel in June to less than $60 earlier this month. The drop is saving consumers money, but it could spell lower prices for chemicals and cuts in domestic energy production.