U.S. Shale Surge Saves Dying Chemicals Plant 3,300 Miles Away

  • Ineos replacing dwindling North Sea supply with Marcellus gas
  • Grangemouth chemicals plant was losing money `hand over fist'
Photographer: Eddie Seal/Bloomberg

The U.K.’s largest closely held company has U.S. shale to thank for its survival.

Ineos Group Ltd., which manufactures chemicals used to make jet fuel to yogurt pots, was running equipment at its biggest plant, in Grangemouth, Scotland, at less than half capacity. That’s because its sources of raw materials -- oil and gas fields in the North Sea -- were depleting and the volume of fuel heading to the facility dwindling.

Hoisting the roof in July onto an ethane storage tank large enough to hold 560 double-decker buses was a sign of the company’s reviving fortunes. Amid a $1 billion overhaul -- a life or death revamp for the plant -- the biggest such container in Europe will store feedstock originating not from fields off Britain’s coast, but from as far away as Pennsylvania; gas produced amid the shale-fracking boom.

“We had to convince the site and the government that this is a workable plan,” John McNally, chief executive officer of Ineos Olefins & Polymers U.K., said in a telephone interview. “It was the only plan, the survival plan for Grangemouth chemicals.”

Changing Landscape

The story of Ineos shows how the U.S. shale-drilling frenzy is altering the global energy landscape, and points to one possible future for Europe’s chemical and manufacturing industries. Output of crude oil and liquid fuels in the North Sea has fallen by 50 percent since 2005, while U.S. exports of natural gas liquids and liquid refinery gases surged 16-fold in the period. The boom has driven the price of U.S. ethane down 86 percent from a 2008 peak. It now costs about half as much as the same fuel in Western Europe.

An Ineos ethane storage tank stands in Scotland.

Source: Ineos

Ethane, a natural gas similar to methane, is extracted from wells including shale, and is an ingredient for producing ethylene, a key component in plastic and cables.

The U.S.-sourced fuel -- exported from a Sunoco Logistics Partners LP terminal in Marcus Hook, Pennsylvania -- will feed plants including Ineos’s cracker, a machine that converts oil and gas into ethylene. The company is also seeking access to onshore British supplies, having acquired 12 shale gas exploration licenses. It will apply for permits, and will buy hydraulic fracking expertise if it wins permission to drill, McNally said.

North Sea

On Sunday, Ineos said it will buy North Sea fields from a unit of LetterOne Holdings SA -- the investment firm founded by Russian billionaire Mikhail Fridman -- to further shore up supplies. The fields provide as much as 8 percent of the U.K.’s gas, according to Ineos. Financial terms weren’t disclosed.

Ineos’s investment plan also includes eight tankers built in China to zip ethane across the Atlantic Ocean, a new Scottish head office and two import terminals. The deal with Sunoco will give it access to a 100-mile U.S. pipeline from the Marcellus shale formation, which spans states including Pennsylvania, West Virginia, Ohio and New York. Shipments from the U.S. will probably start by January, while the storage tank will be ready in the first quarter, according to the company.

Grangemouth was facing closure as recently as 2011, losing money “hand over fist” amid the drop in raw input materials, McNally said. The site generates about 3 percent of Scotland’s gross domestic product. If the plant’s pipes were laid end-to-end, they would stretch from Edinburgh to Nice, France, and back, according to the company’s website.

Ineos was the first European chemicals maker to seek U.S. shale gas to replace North Sea fuel, according to Wood Mackenzie Ltd.

“Grangemouth was losing a lot of money on that cracker,” Alex Lidback, vice president for chemical research at the energy consultant, said from London.

Ethane Purchases

Ineos isn’t alone in tapping U.S. gas. Borealis AG is spending $135 million upgrading its cracking facilities in Sweden. It plans to source about two-thirds of its ethane from the North Sea, with the remainder coming from the U.S., Markku Korvenranta, executive vice president for base chemicals, said by e-mail. The Vienna-based petrochemicals company will also import U.S. propane, he said.

QuickTake Fracking in Europe

The Ineos plan is not without risk. A renewed drop in oil prices could reduce the cost advantage for ethane versus naptha, a crude product that can also be refined into ethylene. A decade ago, importing U.S. gas for use in European chemical production was unthinkable, with companies shutting down ethane crackers in favor of naphtha.

The biggest danger is that the “large price difference that has existed for the better part of the last five years goes away,” Lidback said.

U.S. ethane production jumped 24 percent in the first half from the same period in 2010, the start of the shale boom, according to the Energy Information Administration. The gas was trading at about 20 cents a gallon on Wednesday, DTN Energy and Liquidity Partners data compiled by Bloomberg show. It reached 17.25 cents a gallon in March, the cheapest since Bloomberg began collecting the statistics in 2001, after the price slid 32 percent last year.

“We really do believe U.S. ethane will be cheap -- forever is a long word -- but for a long time,” Charles Blanchard, an analyst at Bloomberg New Energy Finance, said by phone from Houston.

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