Documenti di Didattica
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See With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing? at www.atkearney.com.
4 Shale Gas: Threat or Opportunity for the GCC?
Shale gas impact on international markets
North American shale gas has created uncertainties in natural gas markets. Despite the fact
that shale gas production is still confined to North America, its impact is being felt around the
world. Shale gas has created more uncertainties in natural gas markets and has added a new
dimension to the already complex and fluctuating global flows of natural gas, making it even
more dificult to forecast the evolution of the natural gas markets, the supply-and-demand
balance for each regional market (domestic conventional and unconventional resources versus
pipeline gas versus LNG), and the international flows of natural gas. This amplified uncertainty
is at the heart of the mounting pressure on natural gas producers to move away from long-term
contracts and gas prices indexed to crude oil.
Shale gas is creating mounting pressure
on natural gas exporters.
The price of natural gas in Europe and Asia remains substantially higher than in the United
States, but some signs of decoupling are emerging in the European market (see figure 2).
The duration of new gas contracts signed over the past five years has become significantly
shorter, and the LNG spot market has grown to represent 30 percent of all LNG trade in 2012,
favored by the need to reallocate LNG flows originally directed to the U.S. market and by new
uncertainties in the natural gas market.
Note: MMBtu is nillioh British thernal uhits. NBP is the hatiohal balahcihg poiht. LNG is liquefied hatural gas.
Sources: .S. Ehergy hfornatioh Adnihistratioh, Bloonberg; A.T. Kearhey ahalysis
Figure 2
Signs indioate natural gas and oil prioes are deooupling in Europe
Spot prioes for oil and gas
|erMMBtu
K NBP for hatural gas
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|erbarre|
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Breht price for crude oil 1apahs price for LNG
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5 Shale Gas: Threat or Opportunity for the GCC?
The development of shale gas resources could reshape the global natural gas market.
Large developments of shale gas and aggressive expansions of LNG capacity have the potential
to fundamentally reshape regional and global gas markets. Most of the unconventional technically
recoverable resources are outside of the United States (see figure 3).
Development of the vast unconventional resources in China and Latin America will take at least
another five to 10 years because of the need to better understand shale formations, adapt
technology, build the midstream infrastructure, and create a supporting political and
regulatory environment. But its just a matter of timeand when it happens, it could have a
major impact on the regional market balance and on regional and global natural gas prices.
China has vast unconventional gas resources, and their exploitation could cause another major
shock that reshapes the entire natural gas market. China recently started assessing and exploring
its shale reserves in cooperation with more experienced international players. The government
has set ambitious targets for the production of shale gas and is releasing several policies to
encourage the development of indigenous unconventional gas. However, we believe more time
and efort will be required to meet the government shale gas targets because of the concentration
of shale gas reserves in mountainous or densely populated areas with technical challenges
and insuficient infrastructure, a lack of capabilities, and an unfavorable political and economic
system. By 2020, shale gas is expected to account for 3 to 9 percent of Chinas domestic demand
and further grow thereafter. Whether domestic unconventional gas displaces rapid natural gas
import growth or coal used for power generation, it will have a huge impact on the regional and
global gas market. This will largely depend on environmental considerations and regulations.
Ethylehecash
costrahgebased
ohpastthree
yearsoffeed-
stockfluctuatioh
(naxinun,
average,ahd
nihinunvalue)
Middle East:
ethane
Ethahe:
$u.7-$2.u
perMMBtu
Ethahe:
$.u-$1.1u
perMMBtu
Coal:
$uu-$uu
perMT
Ethahol:
$1-$2
pergalloh
Naphtha:
$7u-$1,u7u
perMT
United States:
ethane
1,ACC
1,2CC
1,CCC
8CC
6CC
ACC
2CC
C
9 Shale Gas: Threat or Opportunity for the GCC?
Source:A.T. Kearheyahalysis
Figure
The worlds ethylene capacity is expected to rise well above demand
Global ethylene capacity vs. demand
in million metric tons
e
(uhcohstraihedplahhed
capacitybuild-out)
1A
11
2u
1
Capacity
Denahd
However, this will impact profitability when supply outpaces demand as a result of increasing
global ethylene overcapacity by 2018. Assuming all announced ethane-cracking capacities will
be fully built out, capacities will far exceed demand, putting tremendous pressure on operating
rates and profitability (see figure 5).
Implications for global polymer producers
Expected polymer capacity expansions will drive a global battle for polyethylene demand.
The North American investments in ethane-cracking capacity will likely result in subsequent
ethylene derivative investments, in line with the current North American ethylene derivative
profile. Ethylene producers will want to capture the value further downstream with a more
integrated asset base. These downstream investments are a low-risk approach for an ethane-
cracking player to secure of-take while protecting revenue streams from downstream
conversion steps. Polymer investments are likely, as the resins can be much more easily exported
globally as containerized products, as opposed to many other derivative options. In addition,
logistic costs associated with exporting ethylene are high when compared to distribution costs
for polymer resins, making downstream conversion of ethylene at the cracking site even more
likely. Although most North American ethane cracking investors have not yet finalized or
announced their downstream plans, we believe several polyethylene capacity projects will
emerge from the planned ethane-cracking investments.
North America is already a net exporter of polyethylene resins. Assuming a full build-out of the
announced cracking capacity, polyethylene exports from North America are going to explode
(see figure 6 on page 10). Even in a conservative 50 percent build-out scenario, North America
will still become a much stronger exporter of polyethylene resins and will compete head to
head with the Middle East for market share (see figure 7 on page 10).
10 Shale Gas: Threat or Opportunity for the GCC?
Source:A.T. Kearheyahalysis
Figure6
Armed with a supply of ethylene, North America is poised for explosive polyethylene
export growth
North American ethylene derivative supply
of installed capacity
North American polyethylene exports
million metric tons
A%
%
6%
12%
16%
Polyethylene
7%
Ethylene
oxide
Ethylene
dichloride
Alpha oleins
Ethylbenzene
Others
e
(uperceht
build-out)
e
(uhcohstraihed
build-out)
.2
7.A
12.1
Sources: GlobalData; A.T. Kearney analysis
Figure
North America is expected to rise among the ranks of polyethylene resin exporters
Global demand and supply for polyethylene
unconstrained capacity build-out scenario, million metric tons
Denahd Supply
e
A A
6
e
1
11
1
1
e
2
11
1
e
u
27
Au
e
1
1
17
2
South America
North America
Europe including Russia
Middle East and Africa
Asia Paciic
11 Shale Gas: Threat or Opportunity for the GCC?
Implications for GCC players
The U.S. shale gas revolution provides both risks and opportunities for the GCCs petro-
chemical sector:
The U.S. ethane cracking expansion will result in increased polyethylene overcapacity and
shortages of propylene, butadiene, and aromatics. Opportunities are emerging in liquid
cracking and its derivatives.
Opportunities will emerge for GCC players to convert propane exports to propylene.
GCC players will face fierce competition in the traditional polymer export markets and will
need to reassess their sales and supply chain strategies.
Many international players high debt and low margins create attractive potential for
mergers and acquisitions, provided vertical integration and complementarity of assets,
intellectual property, and skills are high.
Lets take a deeper look at each.
Increased polyethylene overcapacity and shortages of propylene, butadiene, and aromatics
Europes ethylene supply is largely naphtha-based, which also results in a good supply of
propylene, butadiene, and aromatics (see figure 8). The planned U.S. petrochemical invest-
ments are driven by the availability of shale gas, and thus ethylene capacity expansions are
fully ethane-based, which results in very limited secondary yields.
The cheap ethylene supply from strong expansion of U.S. ethane cracking will put severe
pressure on European and Asian naphtha cracking capacities, pushing for accelerated closure
of older, less integrated assets. As a result, a significant shortage of propylene, butadiene, and
aromatics will emerge, the size of which is dificult to predict. Even if liquid cracking on its own
were not to take a significant hit, still-older and smaller-scale naphtha-based infrastructure is
likely to be impacted by new, world-scale, and possibly more flexible, assets.
Note:Percehtagesnayhotresolveduetorouhdihg.
Source:A.T. Kearheyahalysis
Figure8
Ethane crackers yield much more ethylene than naphtha crackers
Steam cracker yields by type of feedstock
in weight
Naphtha cracker Ethane cracker
Ethylehe(C2)
Propylehe(C3)
Butadiehe(C4)
Aronatics
Other
2%
1%
% 1%
1%
1%
u%
%
1%
%
12 Shale Gas: Threat or Opportunity for the GCC?
This opens opportunities for GCC players because liquid cracking will become more attractive
for several reasons. First, the global shortage will drive up prices for butadiene and aromatics.
Second, U.S. competition will be low because of a lack of heavier yields from the ethane-cracking
capacity additions. Third, liquid cracking opens opportunities in higher-value specialty chemicals,
currently less available in the Middle East region. Fourth, technology improvements and larger
scale of new assets allow greater economic returns for new investments compared to older
petrochemical capacities in Europe or Asia. And last but not least, the potential for creating jobs
increases, which fits well with local government agendas.
However, liquid cracking comes with two main risks that potential investors should carefully
assess. First, feedstock competition is continuously increasing from internal demand for fuels in
the GCC. Public policies that are geared to reduce fuel-based electricity generation and stimulate
fuel eficiency in transport and process and manufacturing industries will still surely benefit the
GCC petrochemical industry in that respect. Second, liquid cracking yields substantial additional
ethylene, for which margins will be low and finding demand will be dificult. Vertical integration of
assets, flexibility of feedstock, and selective use of on-purpose technologies, especially to find
alternatives for ethylene output, will be a must for any solid business case.
Opportunities to convert propane exports to propylene
U.S. shale gas is wet as dry plays are uneconomical at current prices. This has resulted in sub-
stantial propane capacity expansion plans that will help the United States become a net exporter
of propane (see figure 9). The GCC has been a major exporter of propane, driven by Saudi Arabia
and, more recently, Qatar and the UAE. A global surplus of propane will emerge that can only
be absorbed by the petrochemical sector, as other demand for propane is much less elastic.
Note: GCC is the Gulf Cooperation Council.
Source: A.T.Kearney analysis
Figure
Middle East propane exports will faoe strong oompetition from North Amerioan suppliers
GCC propane exports
' barrels per day
Estimated U.S. propane export
oapaoity
' barrels per day
CAGR
United Arab
Emirates
Kuwait
Qatar
Saudi
Arabia
,
,
,