In the 1967 movie, “The Graduate,” Ben Braddock, played by Dustin Hoffman, is famously told that there’s a great future in plastics. For some time it appeared this period had ended in the U.S., but there is growing evidence that a renaissance is afoot.

The shale gale is not just creating new infrastructure opportunities and market dynamics in the midstream, it’s also revitalizing a dormant petrochemical industry. While constant adjustments in infrastructure and direction have been part of the game for pipeline, processing and storage operators for many years, the North American petrochemical industry has largely been static.

That is now changing. The American Chemistry Council recently announced that the value of the 148 projects outlined by U.S. chemical companies total more than $100 billion, with most of these projects scheduled to be completed by 2017. These include Dow Chemical Co. restarting its Hahnville, La., plant in 2012; Westlake Chemical Corp. expanding its Lake Charles, La., plant and Eastman Chemical Co. expanding its Longview, Texas, plant, both in 2013. In 2014, there are six plants set to be expanded with three more expansions planned in 2015.

Growth of exports

The first really big shift for the petrochemical industry has been the growth of the U.S. export market, with LPG exports of propane and butanes being shipped from the Gulf Coast to foreign markets. Such exports have taken off in recent years due to the oversaturation of these products in the North American market along with the ability to realize a greater netback from export markets.

The issue that emerged as LPG exports continue to grow: Can production match domestic and export demand at the same time? This past winter was the first real test of this capability, and the market responded well. Volumes were kept for domestic markets due to short-term price increases with exports dropping off until this demand declined.

Going forward it is likely that propane production will increase to continue to meet both demand markets simultaneously. In fact, supplies are expected to increase at such a level that more propane dehydrogenation (PDH) plants will be needed to absorb it long-term.

“China’s PDH plants aren’t running at full capacity, and it will likely take two years for this to happen, which will help limit global demand,” Dan Lippe, principal at Petral Consulting, told Midstream Business. “We have a really dynamic marketplace and in the longer term—over the next five to 15 years—the world really needs the petrochemical industry to continue to build PDH plants or we will have an overwhelming surplus of propane.” Given the production forecasts and the new LPG/PDH infrastructure being developed, he anticipates the U.S. exporting between 350,000 and 450,000 barrels per day (bbl/d) of LPG for a long time to come.

Ethane sea change

These exports are helping to work off the supply overhang for propane, and there is a new focus on doing the same for ethane. New infrastructure brought online in January has spurred the development of ethane production out of the Marcellus and Utica shales with Sunoco Logistics’ Mariner West Pipeline providing producers access to the Sarnia, Ontario, hub and Gulf Coast processing and cracking facilities via Enterprise Products Partners LP's ATEX Pipeline.

While infrastructure growth is an obvious sign of change in the industry, the most basic one is the price changes related to increased supplies. According to Michael Greenberg, CEO of the Plastics Exchange LLC, a real-time marketplace to buy and sell domestic and international commodity-grade resin, the margins between NGL and resins have grown so wide now that it is changing how business is done. “The relationships just don’t work like they used to,” he told Midstream Business.

Greenberg also noted that polyethylene prices seem to be disconnected from past market dynamics. “There appears to be between 500 to 550 million pounds of polyethylene that gets exported from the U.S. no matter what, even when the arbitrage appears to be close. This is because multinational petrochemical producers are slowing their reactors in Europe and Asia to sell U.S.-produced resins as if they were made in those regions.”

This means that these exported resins are no longer going through the open market, with the percentage of exports sold through third parties down compared to the amount sold by the producers themselves. By continuing to flood Asian markets with resins, U.S. sellers are also keeping those markets from rebuilding at their customary rate, Greenberg said.

Typically, Asian petrochemical companies would slow their reactors to re-establish ethylene and polyethylene margins. However, the glut of product that continues to make its way to this market is keeping this rebuild from happening. “We’re hitting those markets with so much resin that they can’t get their prices back up. They’re not making any margin, and we continue to export. It would not surprise me if these countries seek to tariff this resin as we’ve done to them in the past,” he said.

Oversaturation problem

This market oversaturation could cause a problem for ethylene in the U.S., with the market going long as cracking capacity comes back online as well and increases this summer. Greenberg said it was likely that U.S. companies would store ethylene during the summer since that is not its peak market. This could be a problem by the fall if too much storage capacity is absorbed in the summer, leaving the market with fewer options. Regardless, he anticipates it being a while before ethylene truly matters to buyers—likely not until the market rebalances.

Historically, U.S. exports of ethane products have taken the form of ethylene, but that is quickly changing. Sunoco Logistics’ Mariner East project includes the capability to export between 30,000 and 50,000 bbl/d of ethane from its Marcus Hook, Pa., terminal. The company is still considering increased capacity for its Mariner East 2 expansion project.

However, the biggest change came in April when Enterprise Products Partners LP said it would follow through on its long-anticipated plan to build an ethane export terminal along the Gulf Coast. This project, estimated by industry analysts to cost between $500 million and $1 billion, will have the capacity to export up to 240,000 bbl/d of ethane when it comes online in third-quarter 2016.

The Enterprise project is only partially subscribed, but the long-term contracts in place are sufficient for the company to move forward. The facility will integrate with the company’s Mont Belvieu, Texas, complex, which includes more than 650,000 bbl/d of fractionation capacity and more than 100,000 bbl/d of NGL storage capacity, along with access to Marcellus and Utica ethane via the ATEX Pipeline.

The day after Enterprise made this announcement, Navigator Holdings Ltd. exercised its option to build three 1.24 MMcf ethane-capable, semi-refrigerated liquefied gas carriers for $78.4 million each. Another vessel of the same size is under construction. Navigator has 13 carriers in its new building program, with four scheduled for delivery in late 2014, another four in 2015 and five in 2016. The completion of these ships is designed to coincide with the completion of the export terminal.

Previously, Evergas contracted with INEOS Technologies to build and operate as many as six ships to transport up to 200,000 bbl/d from the Marcus Hook terminal, via the Mariner East project, to its ethane crackers in Rafnes, Norway, and Grangemouth, Scotland. In addition, INEOS was the first company to announce it had contracted with Enterprise for capacity at its Gulf Coast ethane export terminal. Despite these orders, it is likely that more ships will be necessary if the terminal is contracted out to full capacity.

The ethylene question

While this news has been met with much support from gas and liquids producers, it has been questioned by quite a few others. Rather than export this ethane or seek to export it as ethylene, U.S. operators should be building more crackers and reactors to consume it, Greenberg said. “You can’t efficiently ship ethylene around the world. There aren’t many cryogenic ships that could freeze the ethylene and transport it as a liquid. Six of them are floating between Japan and South Korea so that’s not an efficient way of getting rid of the U.S. ethylene that’s coming online.”

Other companies questioned whether European crackers could accept exported ethane and believed it would have to go to Asia. Given these difficulties, several petrochemical insiders said that Enterprise’s decision to move forward with the project is a strong indicator from producers and the midstream that the market will remain long on ethane for some time.

“It’s a big vote of confidence of strong oversupply of Gulf Coast ethane,” Jim Gallogly, CEO of LyondellBasell, said during the company’s first-quarter earnings call in April. He noted that Enterprise indicated that by 2020, supply could exceed demand by 700,000 bbl/d, which is the equivalent of three world-scale crackers and 20% of current supply.

Gallogly raised the possibility that some of this ethane could be used to spike LNG exports in countries that have lean gas supplies, as well as being exported to Asia and Europe. He added that LyondellBasell had explored the concept of exporting ethane to its European crackers, but it wasn’t as fiscally sound as cracking propane, butane or condensate. “The economics really favored the slightly heavier feedstock when we looked at all of the transportation costs. It just didn’t work out very well for us. I was hoping it would.

“I just don’t see how all of that Enterprise volume goes to Europe. I don’t see anybody that would build a new cracker over there with these kind of economics. You can build it here in the U.S. immediately and not have those shipping costs,” he said.

The European market

BASF SE’s CFO Hans-Ulrich Engel agreed with this sentiment during the company’s May conference call to discuss its first-quarter earnings.

“We think there will be very little ethane that’s exported to Europe. Two reasons: cost, specifically logistic costs similar to the LNG supply chain; and the European facilities would need a significant amount of capital in order to convert them to be able to consume lighter feed,” he said.

Andrew Liveris, Dow Chemical’s chairman and CEO, said exporting ethane is very different than exporting LPG because it requires increased capital costs on the export, shipping and receiving sides. “To put these contracts in place with ethane consumers, they’re going to have to commit capital,” he said during an April earnings conference call.

Enterprise officials countered that they have a strong track record of responding to market needs and delivering projects on time and under budget. “We have a high regard for the U.S. petrochemical industry and have been very supportive of their expansions to the extent that we’re willing to put money in projects like the Aegis and ATEX Pipeline systems. Frankly, producers need markets,” Jim Teague, the company’s COO, said during a May conference call.

“I know that some people don’t have the same robust forecasts that we do, but invariably, when we sit down with a petrochemical company or with a producing company, by the time we’re through, they have a full understanding of what it is we’re looking at … and become a big believer,” he continued.

The fact that all of the North American processing facilities are currently running negative margins for ethane means that foreign markets and their margins are attractive based on the projected supply levels. Teague added that the company doesn’t believe this terminal will change the market dramatically, but it will serve as a bridge until the North American market can fully absorb these supplies.

Shipping pellets

Lippe told Midstream Business that the best way to export any product is to put it in a form that makes it easily exportable. “Exporting in a cryogenic liquid is a lot harder than exporting a solid pellet that you can put in container vessels. If you export a cryogenic liquid, you restrict your destination points. If anything happens at those specific destination points, you’re in trouble. I’m not saying we should or shouldn’t export ethane, but from an economic point of view, it would be better to export solid polyethylene as pellets in containers and using container vessels than it ever will be to export ethane as a cryogenic liquid,” he said.

This is a sentiment that Enterprise’s Teague holds as well, but he cited that the current market dynamics require more options. “I would rather have everything this country exports be solid rather than liquid, but that’s not the reality today,” Teague said. The company is planning to secure long-term contracts at 10+ years, which is another indicator of just how long the country will be on ethane in the years ahead.

Teague declined to comment on what markets the company is eyeing for the exports, but said that the Panama Canal will be “helpful.” He views this proposed project as being closer to a pipeline than an LPG export terminal because it would not be dependent on spot market prices. That strategy would see dedicated carriers make regular runs between the terminal and buyers with long-term contracts. Enterprise would collect a delivery fee as it does with pipeline operations.

Ethane prices are expected to remain weak with a range of between 28 cents and 33 cents per gallon (/gal) in 2014 and 2015; 33 and 38 cents/gal for 2016; and 38 and 42 cents/gal between 2017 and 2020, Lippe said. However, he added that if there are full commitments for the current announced ethane export capacity, the U.S. will be undersupplied for ethane between 2017 and 2020. Should this occur, he anticipates ethane prices could increase to the range of 55-60 cents/gal.

Even with the decrease in margin for producers, new ethane cracker projects will remain attractive, he added. “Today, ethane prices are 28 to 30 cents/gal, which yields an ethylene production cost of 13 cents per pound (/lb); when ethane prices reach 55 to 60 cents/gal, ethylene production costs will increase to 26 cents/lb. Ethylene from ethane would maintain a significant cost advantage, just not as good as today. For that reason, I don’t think anyone will scrap new ethylene plants.”

While the outlook for ethylene is better long-term, the polyethylene market is facing a downturn, according to Greenberg. He expects prices to drop for the first time since November 2002.

“Producers have been trying to continue this price increase, but it is having real difficulty taking hold with an oversaturated market,” Greenberg said. However, even with a downturn in prices producers will continue to make large returns with healthy margins. As polyethylene supplies increase, Lippe said that producers will need to lower prices to gain market share.

Manufacturing lagging behind

While the domestic petrochemical industry is enjoying a resurgence, the expected U.S. manufacturing renaissance has failed to materialize. Domestic manufacturers would benefit from more of this cheap ethylene staying in the U.S., but since much of it is being shipped out to foreign markets, the U.S. market isn’t functioning properly, Greenberg said.

“We have too much supply right now. Our markets should go down, our price should go down, [and] we should be building capacity downstream right now because we have cheaper prices. Instead we’re exporting these supplies. It’s keeping this natural economic cycle from working, and I think it’s going to catch up to the market,” he said.

Greenberg noted that these exports aren’t a result of higher demand or prices, but rather resin is being exported at cheaper prices to foreign countries than it would be sold in the U.S.

“It’s to the point that Chinese companies can turn this resin into products that undercut domestic manufacturers. We ship this resin around the world to still beat our price,” he said. “This couldn’t be done if the export price matched our domestic price. If we sold this resin in the U.S. at the same prices, then we could export bags and bottles to the rest of the world instead of our resin pellets.”

Integrating operations

As with the midstream, larger companies are becoming more integrated to take advantage of the opportunities presented. Many producers and operators only think of Dow Chemical as an end-user, but the company is not just a customer of processors and refiners. It also supplies goods to these companies.

Five years ago, Dow Chemical created its oil and gas unit to solve some of the issues operators were experiencing as the production of shale gas increased. “We’re focusing on what the natural gas producers, processors and refiners’ real needs are. Our division has an upstream focus as well as a midstream focus,”Ajay Badhwar, strategic marketing manager for Dow Oil & Gas, told Midstream Business.

This Dow business was created prior to the shale revolution as the company sought to provide products that would bring lower-quality gas streams online. This gas was being produced due to the spike in gas prices between 2005 and 2007. Once producers began to focus on shale gas, Dow Oil & Gas also shifted its focus toward removing other contaminants from the gas stream.

“Once shale gas came online, gas streams went from having a high CO2, high H2S composition to a high CO2, low H2S composition. That required us to develop different technologies to clean the gas,” Badhwar said. He also noted that there are contaminants that exist in shale gas—oxygen as a result of the use of water in fracking—that aren’t present in other gases.

Dow is also changing its focus on infrastructure buildout. “In 2011, Dow announced a comprehensive investment plan to increase the company’s ethylene and propylene production and to connect the company’s U.S. operations into feedstock opportunities made available from increasing supplies of U.S. shale gas,” Badhwar said.

Due to the company’s integrated nature, this project is designed to create long-term competitive advantages for its downstream operations as well as its performance plastics, products and advanced materials businesses.

Plant restart

The investment plan included successfully restarting an ethylene production unit at its St. Charles site near Hahnville, La., in December 2012; improving ethane feedstock flexibility for an ethylene production unit at its Plaquemine, La., site in 2015; construction of a new world-scale, on-purpose propylene production facility at its Dow Texas Operations site in 2015; and construction of a new world-scale ethylene plant at the Dow Texas Operations site in 2017.

The company announced further expansion plans as part of its performance plastics business in March 2013, which would add several new specialty material production units along the Gulf Coast. These facilities will manufacture competitively advantaged materials for several of the company’s fastest-growing segments, including packaging; hygiene and medical; electrical and telecommunications; transportation, sports and leisure; and consumer durables.

“Collectively, our high-return Gulf Coast investments in ethylene and propylene integration and performance plastics franchise growth are expected to deliver approximately $2 billion in incremental EBITDA in 2017 and approximately $2.5 billion when fully operational,” Badhwar said.

It isn’t just Dow that is adding new infrastructure in the space—the entire petrochemical industry is in the midst of adding new infrastructure designed to handle all of the new production coming online. Among the big questions: Which projects will make it? Lippe anticipates the bulk of these announced projects will be developed.

“People say, ‘We don’t think they’re going to build everything, but they always overbuild.’ Those are contradictory opinions. If you believe companies always overbuild, then they will build all of them, plus more,” Lippe said.

Much of this infrastructure is being developed along the Gulf Coast, but there are indications that the Northeast is becoming increasingly attractive to the industry. Sunoco Logistics’ Marcus Hook facility is seen by some as the possible site of a Northeast gas and liquids hub, based on the Mariner East and West projects.

In addition, several companies, Royal Dutch Shell being the largest, have discussed the possibility of building a world-scale ethane cracker in the Northeast. After uncertainty surrounding Shell’s project following the announcement that the company was planning on pulling back on U.S. infrastructure projects, sources told Midstream Business that the company is indeed moving ahead with its $2.5 billion cracker outside of Pittsburgh.

Should the anticipated environmental study not turn up anything, insiders expect the project will be approved before the end of this year. Options are also being explored to provide the facility with access to foreign markets via Mariner East.

Best of times

While the Gulf Coast is the traditional home of the U.S. oil, gas, NGL and petrochemical industries, the end-use market is now expanding to cover the entire globe. The glut of cheap NGL and resins has moved the U.S. from having a cost basis nearly on par with Asia or Europe to being competitive with the Middle East.

“We have to stop thinking of North America as our marketplace; we have to start thinking of the world as our marketplace. The world market for polyethylene is four times as large, if not bigger, than the market for polyethylene in North America. This means that people that think 15 billion pounds of new capacity is too much are just thinking too small,” Lippe said.

The global ethylene business consumes approximately 240 billion pounds of ethylene per year, with U.S. ethylene comprising about 25% of that share. “We’re now at the low end of the cost curve, which means we can double up market share. I don’t think we can make a mistake in building new capacity in North America as long as we can count on continued growth in feedstock supply,” Lippe said.

“I think if a petrochemical company with a global scope of business is not optimistic about building capacity in the U.S., they need a new CEO, because this is the best of all possible times since the late 1940s and early 1950s for chemical companies to be building new capacity in the U.S.,” he added.

While the North American energy industry has failed to deliver on several pronouncements related to expensive projects—namely the need to construct LNG import terminals to close the gap on declining gas production prior to the shale revolution—the demand for NGL and resins from the global petrochemical industry should leave executives and investors with more clarity on their future when they’re signing off on crackers and other related infrastructure, unlike Ben Braddock at the end of “The Graduate.”