If crude oil prices don’t recover within five years, the second wave of new ethane crackers in North America will likely be postponed to 2025, tightening ethylene supply and boosting the profitability of naphtha-based producers in Europe and Asia, a recent IHS Chemical report concluded.

An extended recovery period for crude oil prices, exceeding five years, would have dramatic implications for the global petrochemical industry and could mean a “Back to the Future” experience for some companies and regions, creating a more competitive environment for naphtha producers, according to the 2,000-word report, titled “Crude Oil Turmoil and the Global Impact on Petrochemicals—Special Report.”

Specifically, the report assesses the potential market and economic implications of three possible, short-, medium- and long-term recovery trajectories for crude oil prices to help petrochemical producers address their investment planning in the midst of significant market volatility, and a higher degree of uncertainty regarding the role of OPEC in managing the global supply of crude oil.

“We’re not restating IHS Energy’s view of the world. What we’re saying is be prepared if the recovery does occur in a different path,” Don Bari, vice president, technology and analytics for IHS Chemical and author of the report, told DownstreamBusiness.com (DSB).

Oil-price volatility is creating a nightmare for petrochemical companies planning investments, according to Bari.

In the case of a long-term oil-price recovery (exceeding five years), Bari said he and his team expect moderate economic growth to continue for several years, along with slower oil demand growth. At the same time, technology would continue to reduce oil production costs and increasing supply, even at lower oil prices.

Long-term, continued global oversupply of crude oil could keep prices from recovering to trend for more than 10 years, according to IHS.

For petrochemicals, the first major impact of a long-term oil price recovery, Bari explained, would be on NGL production and ethylene production in the U.S., where prolonged lower oil prices would slow NGL production and ethane-cracker capacity expansions, potentially creating a tight market.

“It’s that second wave—the 2018 to 2022 timeframe—we see that if oil stays low that’s where you’d start to see those plants [U.S. ethane crackers] put on hold and we could see more investment of naphtha crackers in China and expansions in Europe and Asia,” Bari told DSB.

“It would essentially put a pause in supply—so supply and demand would be very tight,” he said.

Ethylene is the basic building block for many downstream chemicals, plastics and synthetic fibers, and as such, is the largest volume, and perhaps most market-indicative petrochemical. A tighter ethylene market would not only push operating rates higher, but would also cause prices to increase and introduce more market volatility.

According to IHS’ analysis, in the long-term recovery case, ethylene demand is forecast to grow at an annual rate of 4.5% and nearly 4% during 2015 to 2020 and 2020 to 2025, respectively, while the nameplate capacity is forecast to grow at an annual rate of more than 3% and less than 1% respectively, during the corresponding time periods.

Naphtha shift

A second macro trend would be seen in Europe and Asia, according to Bari. With naphtha back in economic favor as a cost-competitive feedstock, the regions’ petrochemical producers would be the winners, with their naphtha crackers running at high rates, and margins back in positive territory.

In response, more naphtha-based crackers would be built in China, and other emerging countries building a petrochemical base, Bari explained.

“Compared to the base case, we would see the integrated margins in the U.S. maybe $200 less because naphtha sets the price,” he said.

Since more ethylene production from naphtha yields more co-production of propylene and butadiene, global on-purpose producers of propylene would see their profits erode quickly as conventional production is able to meet market demand reducing the need for higher-cost production options, according to IHS.

A long-term oil price recovery would also have a profound impact on both global polyethylene and polypropylene markets. In this case, IHS found, polyethylene production rates would grow as global demand expands by more than 54 million metric tons per year during the study period 2014 to 2025, due to a higher gross domestic product, better price competitiveness displacing conventional materials such as metal, paper and glass, and the replacement of recycled material by virgin material.

Western Europe and Asia would benefit greatly from more competitive feedstock and buoyant demand, while North America would experience lower integrated margins.

“In other words, the international competition against paper, aluminum, glass and recycle would be stronger for virgin resins. As a result, we would see a strong uptick in demand for plastics,” Bari explained.

“So, you’re getting a tight supply, a strong demand, but a little lower price-point because naphtha would be more competitive,” he said.

Investment dilemma

Meanwhile, a prolonged oil price recovery would also dramatically impact future investment plans as chemical producers adjust to the shifting feedstock dynamics. In North America, U.S. ethane would remain “stranded,” and advantaged in the long-term as oil prices cycle and necessary LNG and ethane export and shipping infrastructure is added, according to IHS, which also covers the global shipping trade through IHS Maritime.

A prolonged period of low oil prices would also put new Russian polyethylene projects in jeopardy because of the poor investment climate, leaving Russia as a net-importer of the chemical. The changes in the global oil market due to persistent low prices would continue to impact regional capacity additions, creating significant implications for global petrochemical producers and maritime operations, the IHS report concluded.

The winners in this view would be European and Asian naphtha-based producers due to their conventional cracker investments. South American polyethylene projects also would move forward and additional Asian capacity would come online. North America would be the losers in this equation, the IHS report noted, since the North American export position would be negatively impacted as its economic advantage shrinks.

“Should such a scenario take shape, it would definitely be a tale of two worlds,” Bari said.

Bryan Sims can be reached at bsims@hartenergy.com