Analysis: Naphtha’s challenge in the age of petrochemical feedstock boom – Naphtha petrochemical feedstock - Arhive

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Analysis: Naphtha’s challenge in the age of petrochemical feedstock boom

London (Platts)-

Naphtha petrochemical feedstockThe fastest-growing source of global oil demand growth, according to the International Energy Agency, is petrochemicals, the group of chemicals derived from oil and natural gas crucial to the manufacture of plastic consumer and industrial products.

However, while demand for petrochemicals is growing stronger, their composition may be at risk of changing, as US shale production growth continues to drive down prices of some of the key inputs used in their manufacture, particularly natural gas liquids: LPG and ethane.

In Asia, where naphtha has traditionally been the dominant feedstock used in the production of petrochemicals, olefin producers have been responding to wider NGL availability by improving the flexibility of their steam crackers to include additional capacity in their ethane and propane feeds.

Although naphtha remains the feedstock of choice in Asia, the trend towards a lighter petrochemical cracking slate may have consequences for European naphtha suppliers who rely on demand from the Asian petrochemical complex to clear the region’s net excess.

The Asian petrochemical complex is one of the primary export destinations for long Northwest European naphtha barrels, meaning Europe typically has to send 1 million-2 million/mt of product per month to Asia in order to clear its marginal flow of product.

FEEDSTOCK PRICES

Over the past five years, US exports of NGLs have soared as cheaper ethane, propane and butane produced from domestic fracking have stoked global LPG consumption. LPG and ethane are now the fastest-growing category of global oil demand by product at 2.6%/year from 2017 to 2023, outpacing naphtha, the second-fastest growing product at 1.9%/year, according to the IEA.

In comparison, the IEA projects an annual growth of only 0.7% from 2017 to 2023 for gasoline and the same rate for gasoil and diesel.

According to analysts at Bank of America Merrill Lynch, the US produces one in three gallons of LPG sold into the global oil market, an increasing share of which is expected to be taken up by petrochemical demand.

“While gasoline demand could eventually be hit by electric vehicles, petrochemical and residential demand for NGLs will likely expand at a steady rate through 2030 in line with economic growth,” the analysts said in a report.

And feedstock costs are not the only consideration factoring into the increased demand for NGLs in petrochemical production.

New crackers are also increasing their capacity to crack lighter feedstocks in order to meet increased demand for one of the major bellwethers of the petrochemical industry: ethylene.

CO-PRODUCTS, YIELDS

On a weight basis, ethane produces 80% of ethylene per pound of feed and propane produces 40%, both of which are significantly higher than naphtha, which produces 23%.

Ethylene production worldwide is expected to grow nearly 33% over the next decade from 146 million mt in 2017 to approximately 194 million in 2027; however, naphtha’s share of that production is set to decrease.

In 2017, naphtha accounted for about 47% of all ethylene produced, while ethane accounted for 35%.

During the next decade, some of naphtha’s influence will erode as its percentage of ethylene produced falls to nearly 44% by 2027. During the same period, ethylene produced from ethane will rise to 38.5%, according to S&P Global petrochemical analytics.

The amount of ethylene produced from propane globally is also expected to climb 22% during the next decade, growing from 16 million mt in 2017 to nearly 19.75 million mt in 2027. Total propane used as an ethylene feedstock globally is estimated to be 38.3 million mt in 2017 and nearly 46.8 million mt by the end of the next decade.

PETROCHEMICAL FLEXIBILITY

In response to rising demand for ethylene and cheaper feedstock choices, olefin producers in key petrochemical-producing hubs like Asia and Brazil are therefore moving to retrofit their steam crackers to enable them to select the most optimal feed mix based on market conditions.

In November, Brazil-based petrochemical giant Braskem began cracking ethane at its retrofitted cracker in Bahia and in late 2016 it retrofitted one of its crackers at Camacari to use ethane for up to 15% of its feedstock.

Looking East, companies in producing bases such as Taiwan and South Korea have also switched to larger portions of LPG usage as those products compete on a margin basis to naphtha.

At the beginning of the year Taiwan’s Formosa capitalized on the deep discount LPG held against naphtha by boosting its usage of LPG to at least 5% of its cracker feedstock slate, while South Korea’s LG Chem was considering opting for between 5-10% of LPG usage in March.

Japan’s JXTG also switched a portion of its steam cracking feedstock to LPG from naphtha in late January, when the price of propane went below 90% of the price of naphtha, making it a more lucrative feedstock.

In China, fresh propane dehydrogenation investments are underway as Oriental Energy plans to build two more 660,000 mt/year PDH units at Lianyungang, eastern China’s Jiangsu province, the Shenzhen-listed company said at the beginning of March.

There are currently eight PDH plants in China with a combined propylene production capacity of 4.61 million mt/year and they can use up to 5.53 million mt/year of propane as feedstock at full operating rates.

THE CHALLENGE FOR EUROPEAN NAPHTHA SUPPLIERS

While exports of LPG from the US have been growing to meet increasing demand for petrochemicals in regions such as Asia, expensive all-in transportation costs have hindered ethane from competing on a margin basis as steam cracker feedstock outside of the US.

In April 2017, India’s Reliance Industries Limited invested in a $1.5 billion project to transport liquefied ethane from the US to Dahej; however, other ethane-based investments on a similar scale have thus far failed to materialize.

In order to take advantage of cheap US ethane, companies require advanced marine facilities for securing refrigeration capacity, a fleet of Very Large Ethane Carriers or VLECs to import ethane from areas like the US Gulf Coast, the construction of ethane receipt and handling facilities and pipelines, and the upgrading of crackers to receive the gas.

Despite the increased availability of cheap alternative feedstocks for cracking, for the time being it is clear naphtha will remain the dominant feedstock for petrochemical production in Asia, with only a partial amount of its market share eroded by LPG and ethane.

However, although the shift away from naphtha as petrochemical input may be marginal in the short term, suppliers in Europe must still contend with Europe’s falling market share of naphtha imported into Asia.

Europe only accounts for a small proportion of Asian naphtha imports and that number is set to fall even further as Asia’s supply of naphtha from regions other than Europe is increasing.

According to Hetain Mistry, managing analyst at S&P Global Platts Analytics, with additional capacity to shift between naphtha, ethane and LPG feeds because of the abundance of supply outside of the region, petrochemical players in Asia are increasingly able to pick and choose the types of product they import if the economics make sense for new projects.

“Indian naphtha production is rising faster than demand, condensate splitter projects in Iran are resulting in increased naphtha supply, and refinery developments in the Middle East have increased the supply of product from countries like the UAE, Saudi Arabia, Kuwait, Bahrain, Qatar and Egypt,” said Mistry.

European suppliers will be monitoring this trend carefully for any impact on naphtha prices.

–Philip Reeder, philip.reeder@spglobal.com

–Edited by Jonathan Fox, jonathan.fox@spglobal.com

(corrects figures in 8th paragraph)

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