Petrochemical Makers Want Clear Rules Before Investing

(Corrects that Nova was purchased by International Petroleum Investment Co. in 12th paragraph of story published March 8.)

U.S. petrochemical producers want a clear federal energy policy to ensure the continued domestic shale-gas supply before they make large investments in steam crackers that utilize the feedstock.

“That’s where a clear regulatory policy needs to be,” Dennis Seith, president of Ineos Group Holdings Plc Olefins & Polymers division in the U.S. said at CERAWeek, a Houston conference held by IHS Cambridge Energy Research Associates. “What is going on in China? What is going on in the rest of the world with regard to greenhouse gas, permitting and licensing can actually help enable those long-term decisions.”

New drilling techniques are boosting production from the Marcellus Shale formation, which according to Energy Department estimates is the largest known U.S. gas field, keeping U.S. prices of natural-gas low relative to oil. Gas production from shale formations may double by 2035, according to U.S. Energy Department projections.

“A little concern for us is that the supply of natural gas has not kept pace,” said Doug May, vice president of energy and climate change with Dow Chemical Co. (DOW) “Policy makers need to realize that this natural gas change is an important part of petrochemical, but it is a national opportunity as well.”

Ethylene Margins

Ethylene margins may rise to a record over the next three to four years, partly because gas will become even cheaper relative to oil, Robert Koort, a Houston-based analyst at Goldman Sachs Group Inc., said in a March 6 report.

Increased capacity to separate gas into ethane and other components as well as an improving global economy also will contribute to rising ethylene earnings at Dow Chemical and LyondellBasell Industries NV (LYB), Koort said.

The cost of oil, which settled at $105.02 a barrel on the New York Mercantile Exchange, is 27 times the cost of 1 million British thermal units of natural gas, rivaling an August 2009 peak, according to data compiled by Bloomberg. Natural gas for April delivery fell 6.3 cents, or 1.6 percent, to settle at $3.864 per million Btu on the Nymex. Gas has fallen 15 percent in the past year as oil has risen 28 percent.

“This region is the second most competitive in the world for producing ethylene,” said Lyn Tattum, vice president with Chemical Business Media. “So we have the opportunity for manufacturing on a very competitive basis.”

Ineos Group

Ineos , the world’s fourth-biggest chemical maker, said profit margins from ethylene in the U.S. may reach a record as low natural gas prices relative to oil boost exports and demand improves.

Production from shale formations has increased supply and made U.S. ethylene costs among the lowest in the world, Seith said in an interview today. Low gas costs relative to oil will help keep U.S. ethylene and polyethylene, the world’s most-used plastic, globally advantaged for at least four years, he said.

Chemical companies have begun to start once-idled steam crackers and at least one large producer has proposed building a new steam cracker in West Virginia to take advantage of ethane from adjacent shale-gas deposits.

Nova Chemicals Corp., purchased in 2009 by International Petroleum Investment Co., owned by the government of Abu Dhabi, signed a memorandum of understanding for the supply of ethane from Caiman Energy LLC’s Fort Beeler Plant near Cameron, West Virginia, in the Marcellus Shale Basin.

Steam crackers use pressure and heat to split oil products like naphtha and liquefied petroleum gases into basic petrochemicals, including ethylene, which is a key ingredient in plastics such as polyethylene.

Bayer, Chevron, Eastman

Bayer AG (BAYN), the world’s largest maker of polyurethane, is considering building a steam cracker on company sites in West Virginia using ethane from adjacent shale-gas deposits, Bryan Iams, a spokesman for Bayer in Pittsburgh, said in January.

Chevron Phillips received preliminary approval in December from Texas regulators to reopen a cracker shut in 2008 at its Sweeny complex, according to a filing on the Texas Commission on Environmental Quality’s website.

Eastman Chemical Co. (EMN) is opening a mothballed cracker in Longview, Texas, because it says low-cost gas has made the U.S. more competitive. Dow plans to use 30 percent more ethane, a component of natural gas, at its Gulf crackers.

To contact the reporter on this story: Leela Landress in Houston at llandress@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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