(Bloomberg) -- Royal Dutch Shell’s decision to build a massive chemical plant in Pennsylvania boils down to a bet that U.S. shale gas will remain cheaper than oil, the petrochemical feedstock used most often elsewhere, over the next decade. It’s a risk no one else has dared to take.
A barrel of Brent crude currently costs about 20 times more than a million British thermal units (BTUs) of U.S. natural gas, down from 60 times in 2012. With the continent’s cost advantage eroding, producers including Braskem and Chevron Phillips Chemical are reluctant to commit to new investments after they complete a series of new plants in the coming years.
The hesitation will leave few major projects underway after 2020, despite expectations that it will boost demand for products such as ethylene and polyethylene, used to make plastic bags and bottles. The situation raises the possibility of a supply shortfall early in the next decade because chemical plants take five to seven years to complete, said Hassan Ahmed, an analyst at Alembic Global Advisors.
Without additional production, prices are likely to rise, boosting profits — and possibly doubling the stock prices — of chemical makers like Dow Chemical and LyondellBasell Industries, he said in a note on Monday. “After this first wave came, people were paranoid about new additions because of all the volatility in the energy sector,” Ahmed said in an interview. “We could see a major underinvestment and that will keep the market tight.”
Price Guessing Shell’s ethane and polyethylene cracker plants outside Pittsburgh, US, would come online from 2020, following the start-up of half a dozen similar projects on the US Gulf Coast in 2018. Shell said the plants would be built by about 6.000 workers and would employ 600 people when completed. The company, which did not disclose an investment estimate, could commit $3,5 billion to the project, Ahmed said. The US chemical industry has announced $161 billion in investment since 2010, according to Kevin Swift, chief economist at the American Chemistry Council (ACC).
The new plants will produce more than local markets need, with the surplus exported. Shell’s announcement last week won’t prompt Braskem to make a decision on a similar project in neighboring West Virginia, company Chief Executive Fernando Musa said in an interview at the ACC’s annual meeting in Colorado Springs, Colo. That plant, as well as a polypropylene plant planned for Texas, remains under review, he said.
Any decision on that will require the company to try to guess the future spread between oil and gas prices, Musa said. “We’re not comfortable making that bet right now.”
Bloomberg – 14/06/2016