The supply of natural gas is expected to be ample in both the near and long term, according to analysts and producers at the Annual Unconventional Gas Conference, sponsored by BMO Capital Markets (Toronto), held in New York earlier this month. With supplies more than adequate, buyers of natural gas can anticipate moderate prices and ready volumes in the upcoming year, market watchers say.
“The outlook for the North American
Natural gas looks like it will be weaker longer than crude oil will be.
natural gas market is being dramatically transformed by shale gas plays,” BMO says. Until recently, “the prevailing belief was that U.S. gas production was in irreversible decline and gas prices would move higher to attract imports of liquefied natural gas (LNG),” BMO says. Several integrated major companies and chemical firms have been involved in LNG terminal
projects along the U.S. Gulf Coast.
That reevaluation is encouraging to chemical firms, analysts say. “Gas is looking like it will be weaker, longer than crude oil will be,” says Dan Lippe, president of Petral Consulting (Houston). “That means that there will be plenty of ethane and other liquids, and, as we have seen in the last cycle, olefins producers can] always find more ways to use ethane.”
Use of feeds is also determined by demand and margins for coproducts,
Lippe says. With coproduct demand weak, that is another argument against naphtha or other heavy feeds, he says.
While olefins producers focus on ethane and propane, versus naphtha, integrated producers must also pay attention to natural gas or methane says Fred Peterson, president of Probe Economics (Hanover, NH). “North American companies, much more so than European and Asian producers, use methane to produce ammonia, methanol, and syngas, as well as for utilities. Producers have got to stay flexible,” Peterson says.
Average U. S. ethylene margins turned negative in December, falling 4 cts/ lb, to -3cts/lb, due to weak demand and lower coproduct prices, analysts say. Margins were artificially inflated from August through October 2008, because the decline in ethylene contract prices did not keep pace with the sharp drop in feedstock costs, they say.
“Because the price decline caught up with feedstock costs in December, cash margins have turned negative,” says David Begleiter, analyst at Deutsche Bank (New York).
Ethylene production costs rose 1. 5 cts/ lb last month, to 26 cts/lb, with lower feedstock prices offset by lower coproduct values. Contract ethylene margins fell 11 cts/lb, to 2 cts/lb, and spot margins contracted 5 cts/lb, to - 9 cts/lb. “With prices remaining flat and coproduct values remaining low, we expect average ethylene margins to stay slightly negative in
January,” Begleiter says.
U.S. spot ethylene margins averaged just 1. 6 cts/lb for the whole of 2008, reflecting feedstock cost pressure in the first half of the year and collapsing demand in the second half, analysts say. Average ethylene margins in the fourth quarter were 7. 5 cts/ lb, down from 9 cts/lb in the third quarter.
“Despite signs that pricing hit a bottom in December, an uptick in spot ethylene prices mainly reflects pre-buying and operating rates at record lows for a non-hurricane impacted period,” Begleiter says. About 18%, or 1. 2 billion lbs/year, of North American ethylene capacity was offline last month, due to scheduled and unscheduled outages (CW, Jan. 19, p. 31). “We expect declining profitability to prompt the further idling of plants as well as permanent shutdowns in 2009 as the U.S. recession continues to suppress demand,” he adds. —LINDSEY BEWLEY
It was the collapse of demand that caused producer trouble, not high feedstock or energy costs from last summer, Peterson says. However, low prices for oil and gas will help producers keep operating costs in check this year and next while they wait for recovery in demand, he says.
About 230 trillion cu ft of gas is recoverable from the seven major shale basins in the U.S., BMO says. Gas from the basins with the best economics, like the Barnett shale area of Texas, can be brought to market at prices of just under $5/thou- sand cu ft, BMO says.
“Virtually all of the plays are economical at prices under $6/thousand cu ft,” analysts say.
The emerging view is the opposite, however, BMO says. “Rising U.S. gas supply has eliminated the need for LNG, and the U.S. could be on the cusp of another gas bubble.” Whether a gas oversupply emerges and is sustained depends on the economics of shale gas development, analysts say. —GREGORY DL MORRIS
● URALKALI CUTS PRODUCTION Uralkali (Berezniki, Russia) says it cut output of potash by 71.5% in December, to 129,900 m.t., from 456,600 m.t. in December 2007. It cut total output for 2008 by 6.4%, to 4. 8 million m.t. “The cut in production was a result of the current adverse situation in the world market for potash fertilizers, fuelled by the global financial downturn,” the company says. Uralkali announced last November that it would cut production substantially until at least the end of 2008 (CW, Nov. 24, 2008, p. 7).
● CHLORINE OUTPUT DROPS IN EUROPE European chlorine production fell 15% in December 2008 compared with the previous month, and 36% compared with December 2007, says European chlor-alkali industry association Euro Chlor (Brussels). The “drastic drop” in chlorine production is occurring across Europe and “reflects the impact of the global recession on sales of chlorine derivatives,” Euro Chlor says. December caustic soda stocks dropped 16% in Europe from the previous month, and were about 24% lower than in December 2007. December 2008 caustic soda exports were about 52% of the previous 11 months’ average, Euro Chlor adds.
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