Dan Lippe
Petral Consulting Co.
Houston
In contrast to upstream, midstream, and refining companies, US Gulf Coast ethylene producers rolled along in first-half 2020, with industry wide operating rates of 85-90%, and continued to increase exports of polyethylene and other key derivatives in spite of global economic disruptions caused by coronavirus (COVID-19) and government responses to the pandemic. Many of the problems that ethylene producers anticipated for 2020 were more manageable or did not occur at all, but producers must now weigh plans regarding whether to add additional capacity.
Changing focus
Following completion of all new plants and expansions, US nameplate ethylene capacity was 86 billion lb/year (234.4 million lb/day) on July 1, 2020 and will remain constant at this level until 2023 or 2024. Before March 2020, two additional ethane crackers were under construction and scheduled to reach mechanical completion by yearend 2022. Bayport Polymers LLC (Baystar)—an equal JV of Total SA’s Total Petrochemicals & Refining USA Inc. and the Borealis-Nova Chemicals Inc. JV Novealis Holdings LLC—was progressing with construction of a 625,000-tonne/year (tpy) Borstar PE unit as part of the Baystar Bay 3 project at its production site in Pasadena, Tex., as well as a 1-million tpy ethane steam cracker at Total’s 200,000-b/d integrated refining complex in Port Arthur, Tex. Shell Chemical Appalachia LLC was building an ethylene-polyethylene complex in Potter Township, Beaver County, Pa. (OGJ Online, Mar. 1, 2019).
Construction was well under way on all three plants in first-quarter 2020, with Shell’s complex scheduled to reach mechanical completion by yearend 2021 and Bayport’s Port Arthur ethane cracker due to complete mechanical construction by yearend 2022. Shell, responding to concerns about COVID-19, shut down all construction activity in March 2020 (OGJ, Aug. 3, 2020, p. 35). Evidence now clearly supports conclusions that the pandemic will delay construction of all new plants, and based on reasonable estimates of 6-12 month construction delays, US ethylene capacity will remain constant at 86 billion lb/year until 2023 or 2024.
Ethylene producers’ primary concerns for 2020-22 were related to marketing 20 billion lb/year of additional polyethylene and other ethylene derivatives and the anticipated impact on pricing and profitability. Since US polyethylene supply has exceeded domestic demand for more than 20 years, all new polyethylene production must be exported to consumers outside North America.
The transition from a domestic geographic focus to a global focus will continue having various consequences. Some consequences have been anticipated in strategic plans and some will be unexpected.
Regardless of the timing of new ethylene derivatives projects under construction or in the planning stage, trends in ethylene derivatives exports to destinations outside North America will be important elements of this series of articles for years to come. As important as global market trends are, developments and changes in supply-demand balances at the USGC remain critical.
Ethylene production
Petral Consulting Co. tracks US ethylene production via a monthly survey of operating rates and feed slates. In first-quarter 2020, ethylene production was 210 million lb/day before slipping to 203 million lb/day in the second quarter. Operating rates, based on industry nameplate capacity of 234 million lb/day, were 87.8% in first-half 2020. In the six quarters preceding first-quarter 2020, operating rates averaged 87.5%.
Production rates in any 6-month period vary, and month-to-month variability (minimum vs. maximum) is usually within a range of ±2-4% of the 6-month average. In first-half 2020, however, production varied within a range of 190-210 million lb/day, and the variance (minimum vs maximum) was 25 million lb/day (±5-7% of the 6-month average). During 2018-19, the difference between high and low production rates in the first and second halves of those years was 14-18 million lb/day (±3-5% of 6-month averages).
Production rates and imbalances in regional supply changed measurably, as all new plants in Louisiana which had been under construction in 2018-19 reached stable operations following extended startups. Three major ethylene buyers (Indorama Ventures Olefins LLC, Lotte Chemical Corp., and Shintech Louisiana LLC) completed about 4 billion lb/year of new ethylene capacity in Louisiana and entered the ranks of ethylene producers. These three plants with combined capacity of 3.7 billion lb/year accounted for about 20% of new ethylene capacity in the USGC, with production from these plants ending decades of dependence on ethylene shipments from plants in Texas to Louisiana consumers.
Before 2020, ethylene supply from Louisiana plants was chronically 3-4 billion lb/year less than consumption. These three plants changed short-term marketing and sales planning paradigms that had been in place for 40 years. Many ethylene producers in both Louisiana and Texas must now substantially revise strategic and long-term planning as well as short-term marketing and sales.
Trends in regional production during first-half 2020 support this point of view. In the 5 years before second-half 2020, Louisiana ethylene production rarely exceeded 45 million lb/day. In second-half 2019, production was 48 million lb/day in the third quarter and 53 million lb/day in the final quarter. When all new plants reached full capacity in first-half 2020, Louisiana ethylene production increased to about 60 million lb/day, or about 15-20 million lb/day (5.5-6.5 billion lb/year) more than in any of the previous 20 quarters.
Even though new capacity has made Louisiana self-sufficient, ethylene producers also increased production from Texas plants during first-half 2020. Texas plants produced 140 million lb/day vs. 137 million lb/day in first-half 2019 and 134 million lb/day in second-half 2019. The transition from a domestic-market focus to a global focus for plants in Texas began in 2018-19 as production capacity increased 10 billion lb/year (Table 1).
Fig. 1 shows trends in ethylene production.
Global turmoil, petroleum products pricing
After the first week of March 2020, Saudi Arabia launched another crude oil price war when Russia and a few key non-Organization of Petroleum Exporting Countries (OPEC) producers rejected the kingdom’s all-or-nothing production cut gambit. Turmoil within OPEC compounded the bearish impact of the collapse in refined products demand. Within a week, prices for all major crude oil benchmarks fell below $30/bbl and continued falling to their lowest levels since 1986.
The collapse in demand for refined products was as important in lowering prices as Saudi Arabia insisted on participation by all OPEC+ members (including Russia and a few key non-OPEC producers such as Norway) in the organization’s deepest production cut ever. As refineries in all major global markets reduced operating rates, OPEC members (except Libya) had little choice and responded by reducing oil production. Following production cuts, pricing for benchmark crudes Brent and West Texas Intermediate at Cushing, Okla., recovered to $40-45/bbl in June 2020 from lows of $18-19/bbl in April 2020.
In March-April, the global response to COVID-19 caused a temporary collapse in global demand for motor gasoline, diesel fuel, and jet fuel. Statistics from the US Energy Information Administration (EIA) for US markets show refinery crude runs hit bottom in first-half April (about 12.5 million b/d) and rebounded to 14.0-14.5 million b/d in late June and early July. Similarly, analysis of weekly EIA data shows gasoline demand fell to its low (about 5.2 million b/d) in mid-April before recovering to 9.0-9.5 million b/d in first-half July. The recovery in motor gasoline prices relative to crude oil prices in European, Middle Eastern, and Asian Pacific markets during second-quarter 2020 supports the view that refined products demand outside the US followed a similar path.
Ethylene production costs
Ethylene production costs are determined by raw material costs and coproduct credits. Based on variations in yield patterns for the various feeds, coproduct volumes range widely between the three categories of plants (ethane-only, LPG-only, and multifeed plants). Raw material costs are determined by each feedstock’s price and its conversion to ethylene. Similarly, coproduct credits are determined by spot prices and production volumes for each coproduct but only for those plants that upgrade all coproduct streams to meet purity specifications.
A few ethylene plants can upgrade all coproducts to purity streams and sell all coproducts at market prices. Most ethylene plants produce purity coproduct propylene but produce all other coproducts as mixtures (mixed butylene-butadiene and mixed aromatics) and sell mixtures at discounted prices. Variations in realized revenue for coproducts result in large differences in coproduct credits from one plant to another. Cash production costs are determined by simple addition of raw material costs and coproduct credits (see accompanying box).
Before 2018, multifeed plants accounted for 62-67% of US ethylene production. As new production capacity—based almost exclusively on ethane feed—came on stream during 2015-16 (the ethane-retrofit era) and 2017-20 (the worldscale-ethane cracker era), ethylene from multifeed plants fell below 60% of total production in second-quarter 2018 and was less than 50% in first-half 2020. While multifeed plants are no longer the dominant sources of ethylene in the USGC, their feedstock flexibility remains an important influence on industry-wide production costs and profitability.
Ethane has been the most important fresh feedstock by volume and as a percent of ethylene production for decades, and multifeed plants were the dominant ethane consumers until second-quarter 2018. Ethane has been the dominant feedstock for multifeed plants since 2012 and continues to account for more than 50% of fresh feed, even with now-reduced production costs based on propane and naphtha.
As US ethylene producers steadily increased their ability to use ethane in multifeed plants during the past 20 years, they also developed hair-trigger response capability by using feedstock flexibility to take advantage of short-term aberrations in feedstock-pricing relationships. Producers with multifeed plants, effectively, were able to limit upward price pressure on all light feedstocks.
One of the most notable consequences of the transition from a USGC-market focus to a global one centers around feedstock flexibility. During 2017-19, feedstock suppliers and ethylene producers frequently asked questions about the impact of ethane retrofit projects on industry-level feedstock flexibility and economics. Specifically, everyone wanted to know if multifeed producers had sacrificed feedstock flexibility in the drive to expand capacity based on ethane as the cost-advantaged feedstock. These questions, while important, were generally answered in theoretical terms until first-half 2020. Trends in ethylene production costs for ethane, propane, and light paraffinic naphtha in first-half 2020 were usually variable, consistent with the increased crude price volatility. During second-quarter 2020, ethylene producers responded to changes in ethane’s feedstock costs vs. propane and naphtha, providing answers to these questions.
Crude oil prices greatly influence prices (directly or indirectly via the value of one feedstock as a substitute for another) for most feedstocks and coproducts and are especially important as the primary driver for naphtha, propane, normal butane, propylene, and aromatics.
During first-quarter 2020, before global governments began shutting down day-to-day economic activity in response to the emerging COVID-19 pandemic, crude prices were $50-65/bbl through the first week of March. Ethylene production costs (variable costs) based on ethane and propane were 2.5-5.0¢/lb, or 14-20¢/lb less than variable costs based on light naphtha feeds. From the perspective of Louisiana and Texas ethylene feedstock buyers, all was right with the world.
As governments around the world ordered everyone to self-isolate and work remotely, demand for refined products and prices for all petroleum products crashed. While spot propane prices in March were 32% less than in January and normal butane and light naphtha prices 54% less, purity ethane prices declined by only 17%. At the same time, spot prices for polymer-grade propylene declined only 22% (March vs. January), less than half as much as naphtha prices. As a result, variable production costs for light naphtha ranged from -2¢/lb to 6¢/lb during March-June, averaging 1.4¢/lb. During this period, variable production costs for ethane increased from 4¢/lb in March to 7-8¢/lb in May-June. The cost advantage for light naphtha rose 0.8¢/lb from March to 9.2¢/lb in June. Naphtha also sustained cost advantages of 4-14¢/lb in March-June.
When propane prices fell to 25-30¢/gal in mid to late March, variable production costs fell to 1-2¢/lb. As Middle East oil producers made deep cuts to production, however, gas plant propane and butane supply in the Middle East fell sharply but LPG demand in Asian-Pacific markets remained steady, even increasing in some countries. As gas plant supply dropped, Middle East producers increased contract prices 25¢/gal in May-July. Propane prices in European and Mediterranean markets also rallied by 15-20¢/gal, while variable ethylene production costs based on propane surged to 12-13¢/lb in June as propane prices rallied 20¢/gal in concurrence with rising international prices. Although production costs based on ethane increased, propane’s cost advantage disappeared in April, reaching 2-5¢/lb more than ethane in May-June.
Table 2 shows production costs for major ethylene feedstock.
With substantial turmoil in feedstock prices in first-half 2020, ethylene producers had major opportunities to benefit from cost advantages for naphtha vs. ethane and propane in April-June. Ethane’s share of fresh feed in multifeed crackers was 69% in January-February 2020 but slipped to 66% in March and 61-62% in the second quarter. Propane and normal butane consistently had cost advantages to light naphtha, and their combined shares of fresh feed to multifeed plants were 21-22% in January-February, 24% in March, and 25-27% in the second quarter. Heavy feeds accounted for 9-10% of fresh feed in first-quarter 2020 and 11-13% during the second quarter. These comparisons indicate producers reduced ethane consumption as LPG and heavy feeds were more economic.
Ethylene production costs based on naphtha feeds averaged 1.4¢/lb in March-June, with cost advantages vs. ethane at 4.5¢/lb. Petral Consulting estimates of production costs for light naphtha are based on non-TET prices for natural gasoline. (“TET” is short for “Texas Eastern” and refers to petroleum products in Texas Eastern storage at Mont Belvieu, now owned and operated by Lone Star Partners, an operating unit of Energy Transfer Partners. “Non-TET” refers to product at Mont Belvieu but in other owners’ systems.) Differentials in natural gasoline prices in Mont Belvieu between the various storage sites are typically seldom more than 2-3¢/gal. In June 2020, however, prices for non-TET natural gasoline were 30¢/gal less than prices for TET natural gasoline. Prices at Mont Belvieu’s largest storage facility did not track the recovery in natural gasoline prices in other Mont Belvieu locations.
Price differentials of this magnitude usually indicate severe problems within the pipeline distribution system between Mont Belvieu’s major storage operators. If non-TET prices in June had been 30¢/gal higher, ethylene production costs would have jumped to 13-14¢/lb from -2¢/lb in April. Furthermore, light naphtha prices (on a natural gasoline-equivalent basis) would have been uneconomic relative to all light feeds. The incentive to swing from ethane to naphtha was substantial, but Petral Consulting monthly survey results showed demand for heavy feeds declined about 15,000 b/d in June vs. May, supporting the contention that prices were weak because one or more storage operators had sizeable problems with natural gasoline distribution pipelines.
Ethane has always been an important feedstock for US ethylene producers. For the next 5-7 years, growth in ethane supply is critical for continued growth in US ethylene capacity.
Petral Consulting routinely estimates ethane rejection volumes. During second-half 2019, ethane prices were persistently weak. Midstream companies increased ethane rejection in New Mexico and Texas from 200,000-220,000 b/d in first-half 2019 to 300,000-350,000 b/d in second-half 2019 and 375,000-420,000 b/d in first-quarter 2020. During that 15-month timeframe, midstream companies increased ethane recovery to 1.10 million b/d in fourth-quarter 2019 and 1.17 million b/d in first-quarter 2020. Production in March reached a record high of 1.24 million b/d, but EIA statistics showed production dipped to 1.14 million b/d in April, with April propane+ production dipping to 1.60 million b/d from 1.62 million b/d in March.
During the previous 16 months, unrecovered ethane supply from New Mexico and Texas gas plants alone (low-cost supply sources) was sufficient to meet demand from the equivalent of three new major ethylene plants (25-30 million lb/day of additional production). EIA statistics for gas plant NGL production in April provided one of the first major surprises resulting from the global pandemic.
Ethylene pricing, profit margins
Given the turmoil in feedstock and coproduct markets in first-half 2020, it comes as no surprise that spot ethylene prices also fell sharply in March-April. Pricing data published by OPIS PetroChem Wire showed spot ethylene prices were 19¢/lb in January 2020 before falling to 15¢/lb in February and a low of 8¢/lb in April. Consistent with increasing production costs in second-quarter 2020, spot prices began recovering in May to reach 12-13¢/lb in June.
Equally important, the trend in pricing differentials between Choctaw Dome, La., and Nova Chemical Corp.’s hub in Mont Belvieu provides supporting evidence that interregional ethylene flows reversed, with surpluses from Louisiana moving to storage in Texas. For 4 of the 6 months in second-half 2019, fixed-price trades at Choctaw Dome occurred at premiums to trades at Nova Chemical’s hub, with differentials averaging 1.1¢/lb, according to OPIS PetroChem Wire. In first-half 2020, prices at Choctaw Dome vs. Nova Chemical’s hub and other Mont Belvieu locations were discounted in all months, with discounts averaging 1.3¢/lb vs. Nova Chemical’s hub and 1.1¢/lb vs. other Mont Belvieu sites. The swing of 2.2-2.4¢/lb for spot prices at Choctaw Dome vs. prices in Texas is consistent with increased production of 15 million lb/day (34% higher) in Louisiana in first-half 2020 vs. the same period in 2019.
Net transaction prices (NTP), the basis for ethylene supply contracts and internal transfer price agreements, are more important than spot prices. Negotiated settlements for NTP prices declined for 3 consecutive months (February-April 2020), falling from 25.75¢/lb in January to 20.5¢/lb in April. In May, NTP prices jumped 4¢/lb, settled up 5¢/lb in June, and increased to 25¢/lb for July. NTP prices, with all prices settled retroactively, maintained premiums of 9-12¢/lb vs. spot prices at Nova Chemical’s hub.
Profit margins based on cash costs for ethane, propane, and normal butane were positive in first-quarter 2020 at 7-8¢/lb. Margins for natural gasoline and light naphtha of similar quality yielded negative margins in January-February before improving to 3-5¢/lb in March-April and 8¢/lb in June
Fig. 2 shows historical trends in ethylene spot prices and NTPs.
Olefin-plant feed slate trends
Petral Consulting’s monthly survey of plant operating rates and feed slates showed industry demand for light feedstocks (ethane, propane, and normal butane) was 2.0-2.1 million b/d in 5 of 6 months during first-half 2020. Light feed demand fell to 1.89 million lb/day in April due to planned turnarounds and unplanned maintenance problems. These issues reduced production at five plants, with a combined capacity of 14 billion lb/year offline. Two of the five plants were ethane-only.
Ethane demand was 1.74 million b/d in first-quarter 2020 before falling to 1.62 million b/d in the second quarter. In January-February, ethane demand set back-to-back record highs, but demand varied within a range of 1.53-1.68 million b/d for the balance of first-half 2020. Ethane’s share of fresh feed in LPG/ethane-only plants was consistently 90-92%.
During first-half 2020, ethylene producers consumed 320,000-370,000 b/d of LPG feeds (propane, normal butane), with LPG demand reaching a high of 350,000-370,000 b/d during March-June. In second-quarter 2020, LPG feeds accounted for 25-27% of fresh feed to multifeed plants vs. 21-22% in the first quarter (Table 3).
Monomer exports
As US chemical companies gradually expanded production capacity for ethylene and downstream products during the last decade, increasing production required new outlets. As North American demand for basic polymers (polyethylene, polypropylene) reached market saturation, rising supply increasingly required export to markets abroad. Additionally, as ethylene production costs provided US producers with economic advantages vs. supply from plants in the Asia Pacific, Europe, and South America, US producers and international chemical trading companies also became interested in exporting ethylene and propylene.
US International Trade Commission (ITC) data showed monomer exports on a quarterly basis ranged from zero to 1.6 million lb/day during 2015-18. Ethylene monomer exports became more consistent in 2019, averaging 1.98 million lb/day in first-half 2019 and 1.75 million lb/day during the second half. Exports increased to 2.6-2.8 million lb/day in January-February but slipped into the typical historic range of 1.7-1.9 million lb/day in March-May. Even though exports during the pandemic-driven, global-shutdown months were less than in January-February, they were consistent with the industry’s recent experience.
With the 2019 completion of Enterprise Products Partners LP and Navigator Holdings Ltd.’s 50-50 joint venture marine export terminal at Morgan’s Point, Tex., along the Houston Ship Channel, and the long-term service agreement with Marubeni, USGC chemical companies—unlike monomer producers—may reasonably export ethylene monomer (OGJ Online, June 30, 2020). If they do, exports may increase to 4-5 million lb/day for short periods of time. For the past 18 months, the Asia Pacific has been the primary destination for US ethylene exports.
Propylene monomer exports were never constrained by the need for cryogenic storage tanks and terminals and have shared LPG export capacity in the USGC for many years. Exports to all destinations in 2019 were 3.25-4.62 million lb/day to average 3.92 million lb/day. ITC data showed exports were above 6 million lb/day March-May 2020 and averaged 4.7-5.0 million lb/day for the first 5 months of the year. The year-over-year increase in propylene exports supports the view that fallout resulting from COVID-19 had no measurable negative impact on global chemical trade.
The bulk of US propylene monomer exports historically were delivered to Mexico and Colombia. In 2019, exports to Mexico averaged 1.64 million lb/day and Colombia 1.47 million lb/day. For the first 5 months of 2020, ITC data showed exports to Mexico rose to 1.70 million lb/day, while exports to Colombia increased to 1.87 million lb/day.
Polyethylene exports
Polyethylene exports are critical to success and profitability of the 2-billion lb/year of new ethylene and polyethylene capacity that came on stream 2017-19. To be more precise, polyethylene exports to destinations outside North America are critical. According to ITC statistics for second-half 2019 and first-half 2020, exports to all destinations were 37-40 million lb/day, or 8.87 million lb/day (3.3 billion lb/year) more than second-half 2018 through first-half 2019.
Exports to all other destinations (ROW) were about 29.2 million lb/day in first-half 2020, or 1 million lb/day more than in second-half 2019. In the first 30 months of the global-market era (January 2018-June 2020), polyethylene exports to ROW destinations were three times more than in fourth-quarter 2017 (Table 4).
Fig. 3 shows US exports for the three primary grades of polyethylene.
The supply chain margin (polyethylene price minus ethylene production cost) is a useful indicator of profitability of those producers who are vertically integrated and make ethylene as a raw material for their ethylene derivatives plants. As new polyethylene plants were completed and reached full operating rates, polyethylene prices declined. Because ethane now accounts for 80-82% of US ethylene production, Petral Consulting tracks spot prices for high-density polyethylene (HDPE) and gross margins (HDPE prices minus ethylene cash costs based on ethane).
In second-half 2019, HDPE-ethane margins were 20-25¢/lb. and remained within this range in first-quarter 2020. Even though polyethylene exports (ROW destinations) were nearly constant in the second quarter, OPIS PetroChem Wire reports showed HDPE prices fell to 24-26¢/lb in April-May, with ethylene production costs increasing to 3-4¢/lb and gross margins falling to 13¢/lb. Consistent with the global economic recovery, HDPE prices increased 4¢/lb in June and 5¢/lb in July. Margins improved to 18¢/lb in June and 23¢/lb in July. The rebound in polyethylene prices and gross margins is a favorable short-term indicator for USGC integrated ethylene producers.
Fig. 4 shows pricing and margin trends for high-density polyethylene (HDPE).
Propylene supply
Olefin-plant coproduct supply of propylene depends primarily on the use of propane, normal butane, naphtha, and other heavy feeds. In first-half 2020, monthly survey results showed demand for LPG feeds (propane, normal butane) was 352,000 b/d, nearly equal to demand in first-half 2019. Demand for LPG and all heavy feeds during the same period was 469,000 b/d, also virtually equal to first-half 2019. Demand, however, was 43,000 b/d (8.5%) less than in second-half 2019. Although average demand for first-half 2020 was stable relative to first-half 2019, demand for LPG and heavy feeds during second-quarter 2020 was 486,000 b/d, or 34,000 b/d (7.6%) more than in the first quarter.
Coproduct supply in first-quarter 2020 was 19.4 million lb/day, unchanged from fourth-quarter 2019 but 0.46 million lb/day less than in first-quarter 2019. Consistent with quarter-over-quarter increases in LPG and heavy feeds, coproduct supply in second-quarter 2020 increased 1 million lb/day to 20.4 million lb/day (Table 5).
PDH plant supply. Based on OPIS PetroChem Wire daily reports and other industry sources, Petral Consulting estimates propylene production from propane dehydrogenation (PDH) plants at the USGC. All three PDH plants rarely operate at full capacity for an entire quarter, but all plants ran smoothly in first-quarter 2020 to produce 12.7 million lb/day (98% of full-capacity output). PDH plants had some downtime in second-quarter 2020, with production falling to 10.5 million lb/day (80% of full capacity output). PDH plant supply for first-half 2020 was better than in any previous 6-month period.
Refinery supply. Refinery propylene sales into the merchant market are a function of:
- FCCU feed rates (most important variable).
- FCCU operating severity (important but not directly measurable).
- Economic incentive to sell propylene rather than use it as alkylate feed.
Seasonal variations in refinery operating rates directly influence FCC unit feed rates, and the combination of feed rates and operating severity are the most important factors determining variations in refinery-grade propylene supply.
Crude runs for USGC and Midcontinent refineries typically fall to their seasonal minimums during the first quarter of a year and recover to seasonal maximums in June. In fourth-quarter 2019, crude runs at USGC and Midcontinent refineries were 12.5 million b/d before falling to 12.1 million b/d in March 2020. Crude runs in March 2019 were also 12.1 million b/d.
As governments around the country directed bars and restaurants to shut down amid the COVID-19 outbreak and demand for transportation fuels dropped, refinery crude runs also continued to fall. Based on EIA weekly statistics, refinery crude runs for USGC and Midcontinent refineries fell to 10.6-10.8 million b/d in April-May 2020. As various states began to relax strict shutdown orders, gasoline and diesel fuel demand began to recover, with crude runs by the end of second-quarter 2020 increasing to 11.3 million b/d, still 1.8 million b/d (14%) less than in second-quarter 2019. Refinery crude runs in during first-quarter 2020 were unchanged from the same period in 2019.
EIA statistics for January-April 2020 showed fresh feed to USGC and Midcontinent FCC units was 3.17 million b/d in first-quarter 2020, or 303,000 b/d (8.7%) less than in first-quarter 2019. The year-over-year decline for refinery crude runs during the same period was 1.8 million b/d (14.4%), while FCCU feed rates were lower by 863,000 b/d (25.4%).
EIA statistics for February-March 2020 indicated refining companies, anticipating substantially weaker demand for gasoline, curtailed FCCU rates considerably more than refinery crude runs. Additionally, prices in the USGC pipeline market for diesel fuel (low-sulfur distillate fuel oil) were 20-30¢/gal more than prices for unleaded regular gasoline in March-April 2020. Jet fuel demand, however, fell more sharply than gasoline and diesel fuel. During second-quarter 2020, refineries shifted 1.0-1.3 million b/d of jet fuel into distillate fuel oil, with prices for low-sulfur fuel oil crashing 30¢/gal in April-May as unleaded regular gasoline prices rebounded sharply to be 54¢/gal higher in June vs. April.
Petral Consulting estimates FCCU feed rates improved on a year-over-year basis to 2.8 million b/d in May 2020 (713,000 b/d more vs. May 2019) and 3.0-3.2 million in June (567,000-b/d more vs. June 2019). FCCU feed rates averaged 25.9% of crude runs in first-quarter 2020 vs. 28.3% the same period in 2019. Estimates of rising FCCU feed rates during second-quarter 2020 are consistent with the extreme swings in pricing relationships between unleaded regular gasoline and low-sulfur fuel oil. Petral Consulting estimates FCCU feed rates improved to 26-27% in May-June 2020 vs. 23.6% in April.
In view of extreme swings in gasoline-diesel fuel pricing relationships and the crash and surge in crude prices, trends in refinery-grade propylene supply in first-half 2020 should not surprise anyone. Refinery-grade propylene supply from USGC and Midcontinent refineries was 45.2 million lb/day in January, dipped to 40.5 million lb/day in February, and recovered to 42.3 million lb/day in March before reaching 45.2 mm lb/day in April. Year-over year, refinery-grade propylene supply for January-April 2020 was 566 million lb (9.7%) less than in 2019. Petral Consulting estimates refinery-grade propylene supply was 46 million lb/day in May 2020 and 51-52 million lb/day in June, with supply in second-quarter 2020 only 2.5-3.0% less than the same quarter in 2019 (Table 6).
US supply. EIA statistics for refinery-grade propylene and Petral Consulting estimates for coproduct supply and PDH plant production show total USGC propylene supply fell to 74.4 million lb/day in first-quarter 2020 and recovered to 79 million lb/day in the second quarter. Supply from all sources in first-half 2020 was 77 million lb/day, down 2.8 million lb/day (3.5%) from second-half 2019.
Fig. 5 shows coproduct supply trends, PDH plant production, and refinery merchant sales of propylene.
Propylene economics, pricing
EIA, for undisclosed reasons, discontinued reporting propylene inventory in USGC merchant storage in its weekly and monthly statistics. While a few well-positioned propylene producers have insight into propylene inventory trends, most producers and all consumers are adapting to making buying and selling decisions without this useful statistic.
In first-half 2020, extreme swings in unleaded regular gasoline prices contributed to volatility in refinery-grade propylene prices. In January-February 2020, spot prices for refinery-grade propylene were 16¢/lb, with discounts to unleaded regular gasoline 8-10¢/lb. As prices for all petroleum products collapsed, refinery-grade propylene prices fell to 12¢/lb in March 2020, with discounts to unleaded regular gasoline narrowing to 1.6¢/lb.
Prices rebounded to 13-14¢/lb in April (4.4¢/lb more than unleaded regular gasoline), but the swing from discounts to premiums was temporary. Gasoline prices increased by 54¢/gal (8.8¢/lb) in May-June, while refinery-grade propylene prices reversed course, falling to 10-11¢/lb (7.5¢/lb lower vs. unleaded regular gasoline) in June 2020. Based on OPIS PetroChem Wire reports, prices for refinery-grade propylene averaged 14.7¢/lb in first-quarter 2020 and 11.6¢/lb in the second quarter.
Two economic factors are the primary drivers for polymer-grade propylene prices. The cost of upgrading refinery propylene via propane-propylene fractionation units (commonly known as PP splitters) is a well-established driver. A few companies control merchant fractionation capacity for upgrading refinery propylene to polymer-grade quality and many refining companies sell refinery propylene to the companies who control upgrading capacity. Companies operating PP splitters play the classic trading game of buy low, sell high. PP splitter operating costs are only 15-20% of typical differentials between polymer-grade and refinery propylene prices, and PP splitter economics are of secondary importance as a price driver. Since 2010, the conversion cost of propane to propylene via a dehydrogenation unit is the new price driver. Propane is a PDH plant’s major cost, and PDH plant process economics vary directly with propane prices. Petral Consulting monitors and forecasts prices for both grades.
During first-quarter 2020, propane prices at Mont Belvieu were 10.2¢/lb in January and fell to 6.9¢/lb in March. Prices rallied in second-quarter 2020 to reach 11.7¢/lb in June. Including cash costs for fuel, catalyst, and process technology royalty, Petral Consulting estimates operating costs other than feedstock are 5-6¢/lb, with a propylene yield from propane of 80%. Petral Consulting estimates cash production costs for PDH plants were 14.0-14.5¢/lb in first-quarter 2020 and 15.3¢/lb in the second quarter.
Spot prices for polymer-grade propylene were 29.8¢/lb in January 2020 before falling to 23.3¢/lb in March. Polymer-grade propylene prices fell to a low of 22.4¢/lb in May 2020 but recovered to 24.5¢/lb in June, according to OPIS PetroChem Wire. Prices averaged 27.4¢/lb and 23.6¢/lb for first and second-quarters 2020, respectively, and gross margins based on cash costs were 13.1¢/lb in the first quarter and 8.4¢/lb in the second. While trends in PDH plant economics indicate polymer-grade propylene prices were notably weaker in second-quarter 2020, differentials to refinery-grade propylene prices present an alternative perspective.
Polymer-grade propylene premiums to refinery-grade propylene were 13-14¢/lb in January-February, 10-12¢/lb in March-May, and recovered to 14-15¢/b in June. Premiums for polymer-grade propylene in 2018-19 averaged 13.5¢/lb and varied within a range of 10-23¢/lb. From this perspective, polymer-grade propylene prices were within the normal range. Responding to sharply lower supply from Middle East producers, propane prices in all global markets were sharply higher in second-quarter 2020, with supply costs squeezing PDH plant profit margins.
2020-22 outlook
The most important objective for USGC ethylene producers is to continue increasing exports of polyethylene, ethylene glycol, and other ethylene-based products to ROW destinations. While gross margins for HDPE (FOB Houston pricing) based on ethylene production costs from purity ethane declined in second-half 2019 and continued to weaken January-May 2020, HDPE prices increased 4.6¢/lb (18.3%) in June 2020. Gross margins on an ethane-production cost basis improved to 17.7¢/lb in June 2020 vs. 13.3¢/lb in May. The June recovery bodes well for further improvement in gross margins for the ethane-HDPE value chain.
Continued growth in ethane supply for USGC ethylene producers is the critical parameter that will sustain long-term economic advantages for USGC producers. One question, asked repeatedly in first-quarter 2020 by domestic and international ethylene producers, focused on the risk to USGC producers if naphtha becomes the low-cost feedstock and erodes the economic cost advantage for new ethane-based Louisiana and Texas ethylene-polyethylene plants. The strong rebound in prices for crude oil, gasoline, and naphtha in May-June 2020 helped ease these concerns. Additionally, companies that began construction of new capacity in 2017-18 will complete these plants in 2022-24.
As refineries on the Texas Gulf Coast continue to increase operating rates, Permian basin crude oil producers will restore production. These developments are critical to maintaining cost-advantaged polyethylene exports to ROW destinations. In 2010-15, polyethylene exports (all grades to all destinations) were 18.5 million lb/day. Exports reached 40 million lb/day in second-quarter 2020, and the increase vs. the recent historic average was 18 million lb/day. Exports to ROW destinations were 9.4 million lb/day in 2010-15 and averaged 28-30 million lb/day in first-half 2020. Growth in polyethylene exports alone (all growth in exports was to ROW destinations) during 2018 through first-half 2020 was 7.7 billion lb/year. USGC producers’ cost advantages will support continued growth in exports for all important ethylene derivatives in second-half 2020 through 2022.
The author
Daniel L. Lippe ([email protected]) is president of Petral Consulting Co., which he founded in 1988. He has expertise in economic analysis of a broad spectrum of petroleum products including crude oil and refined products, natural gas, natural gas liquids, other ethylene feedstocks, and primary petrochemicals.
Lippe began his professional career in 1974 with Diamond Shamrock Chemical Co., moved into professional consulting in 1979, and has served petroleum, midstream, and petrochemical industry clients since. He holds a BS (1974) in chemical engineering from Texas A&M University and an MBA (1981) from Houston Baptist University. He is an active member of the Gas Processors Suppliers Association.