HARVEY HITS RESET ON FUELS AND CHEMICALS
September 8, 2017 § 1 Comment
A recent story discusses the impact of Hurricane Harvey on the availability of some common plastics. It points out that the hurricane has shut down production on the Gulf Coast sufficiently to impact availability of these materials well into November. They refer to derivatives of ethylene, in particular, polyethylene and PVC.
We have previously discussed in this forum, and in my 2015 book, the concentration of ethylene crackers in the Gulf area. The main point made then was the distance of the crackers from many of the ethane sources associated with shale gas. This distance has caused ethane pricing to be extremely low in consideration of its calorific value. In the book, I note that LyondellBasell grew substantially because they owned two crackers in the Midwest, and profited handsomely from the low local prices. More recently, ethane from Texas sources has fed plant expansion in existing plants near Houston. These are barely on stream. Then Harvey hit and shut many of these down. Incidentally, gasoline and diesel production also was impacted. This is evidenced by (Arab Embargo caused) 1970’s style lines at gas stations in Dallas.
The impact of Harvey on ethylene production underlines the risk associated with large concentrations of oil and gas refining, or any chemical industry for that matter, in storm prone areas. Distributed production of fuels and chemicals is a good idea for a variety of reasons. One is exemplified in the Harvey ethylene and gasoline situation. Another, more germane, is the location of conversion plants close to the raw material source. In the limit, pipelines are eliminated. Today, shale oil from the Permian is being hampered by lack of pipeline capacity. The spread between WTI and Brent is once again rearing its ugly head. It was squeezed when oil export was allowed.
The knee-jerk reaction would be to build more pipelines, fast. The more thoughtful action would be to permit and build small refineries proximal to the production. Shale oil is light, and mostly sweet (low sulfur). It can be refined in “simple” refineries; essentially distillation columns. The complications of cracking are not in play. Once financed, these can be built in two to three years, not very different from the time scale to enable pipelines. Fewer pipelines are better for local property owners, and for the environment. Local jobs will be created, and the prosperity will be distributed.
Shale oil, because it is light, always has associated gas. Expect a ramp up in gas production, possibly without enough pipeline capacity. Distributed conversion of this gas into chemicals such as methanol would be an alternative to pipelines. In some cases, new technology will be required, because small scale production of fuels and chemicals is disadvantaged by absence of economies of scale. A national network of manufacturing institutes (NNMI), a federal initiative, has one in this space, known as RAPID. The objective is process intensification, a means by which small scale processes can be economic.
The oil price scenario is playing out now. Shale oil caused the plummet in oil prices, beginning in late 2014. That 50% drop has substantially remained, almost three years later, with some ups and downs. The Saudis gambled on the demise of shale oil if the prices stayed low. Sure enough, according to the Economist, there were a hundred bankruptcies, and default on USD 70 billion in debt. But the industry is still alive, and fairly well. Part of the reason is the entrée of the big players such as ExxonMobil and Shell, into the Permian. The other reason is innovation to reduce the breakeven cost of production. Initially, the cost reduction came from service company discounts and operational efficiencies. Following a thinning out of service companies, those prices will rise. The key parameter is cost per barrel. The improvement can come either in reduced cost or increased production. Expect the latter to be the main player, through innovations increasing the percentage of oil in place recovered.
My crystal ball says that innovation will reduce breakeven costs below USD 40 per barrel and the industry will thrive. But oil prices will continue to stay low, in the consumer-friendly range USD 40 to 65 per barrel. If all of this comes to pass, expect US oil production to go up 3 million barrels per day by 2020 or so. That is a good 30% over current production. Associated gas will flow as well. Now is the time to challenge the orthodoxy in fuels and chemicals processing.