North American ethane supply offers opportunity for Western Europe

Europe remains among the globe’s highest-cost production regions for chemicals. But the verge of losing its competitiveness, a robust supply of US ethane imports present an opportunity for some Western European producers, with a potential to radically transform region’s feedstock landscape, according to a new report from global consultancy IHS. 

European producers are urged to innovate, further consolidate and rationalize to stay afloat, according to the report.

“With lack of investment in new plants and R&D, the chemical industry in Europe is in a stagnation phase,” said Michael Smith, vice president at IHS Chemical. “The competitive landscape forces Europe to concentrate on mature, domestic markets and leaves it vulnerable to imports. European producers must innovate to stay competitive.”

Globally, the chemical investment varies by region favoring demand growth centers, particularly fast-growing China, and low-cost producers, the US and the Middle East.  The US, especially, has recently seen a robust influx of foreign investment due to availability of cheap ethane feedstock and energy. 

“According to IHS Chemical forecasts, US ethane production will be in surplus, exceeding domestic requirements by around 300,000 barrels per day and growing. This surplus is expected to continue at least until 2030,” said Mukta Sharma, managing director with IHS Chemical.

In 2012, the last full year for which data are currently available, chemicals were the leading industry for FDI (foreign direct investment) flows into the US. 

“Energy prices in Europe will remain high, but this is not the end of the world,” Smith said. “Producers already have been taking advantage of increased supplies of liquefied petroleum gas (LPG) from international markets and they are looking for other ways to survive in this new world order. Ethane imports from the US seem to be an attractive alternative. 

"As we do not see the US shale gas boom being repeated in Europe, the availability of US ethane could significantly transform the European feedstock landscape.”

Until now, the anticipated surplus of the US ethane has attracted a number of European cracker operators who announced their plans for “a virtual ethane pipeline” between North America and Europe.

INEOS was the first to sign the contract to supply the US ethane for its crackers at Grangemouth, UK and Norway. Then two other producers followed with similar announcements. SABIC confirmed its intention to upgrade the plant at Wilton, UK, to enable greater feedstock flexibility, and Borealis signed an agreement to supply ethane for its cracker at Stenungsund, Sweden. 

This week at EPCA, Italy-based petrochemical producer Versalis also confirmed its intention to convert its coastal cracker in Dunkirk to consume ethane imported from the US. Other producers also are believed to be exploring the opportunity, according to IHS Chemical.

Western Europe accounts for 17% of global ethylene production and remains an integral part of the global industry, says IHS Chemical. The US ethane availability presents an interesting alternative for European ethylene producers, especially Western European producers with costal units, who are today still heavily reliant on higher-stock naphtha feedstock.

“In Europe, it’s those flexible coastal crackers in the northern part of the continent that are likely to benefit and, therefore, favor the use of LPGs. In the Mediterranean, crackers are less flexible than those in the north, so there is so much stronger weighting towards naphtha,” said Matthew Thoelke, senior director/olefins and derivatives, Europe, Mideast, and Africa at IHS Chemical.

Thoelke said that in terms of logistical integration, the Mediterranean crackers are not as well configured, on average, as the crackers in the north.   

“With the US ethane supply, its importance in the Europe’s feedstock landscape will increase, but naphtha is certainly not going away,” Smith said. “According to IHS Chemical forecasts, by 2023, naphtha will still account for 39 percent of the global feedstock market share and 67 percent of the European feedstock slate.”

The rationalization of units in Europe will also progress further in the near term. Smith said producers will need to close old, uneconomical plants; particularly those that are not well integrated into refinery complexes or chemical clusters close to important consumer markets.

As the European market undergoes transformation, IHS Chemical said it expects to see European producers responding to the new market dynamics with innovative feedstock deals, cost reductions and a determination to stay competitive. IHS Chemical said the market will see the need for further closures, consolidation of operations and plant conversions.