Is Shell’s decision to scrap GTL project an omen for US petchems?

Shell’s recent decision to abandon plans for a massively expensive gas-to-liquids project in the US Gulf Coast serves to further illustrate the complicated conundrum many petrochemical companies are faced with these days: to build or not to build.

And yet, as 2013 comes to a close, the North American petrochemical industry remains rather bullish on shale gas.

The $100 billion investment figure gets thrown around with wild abandon. Everyone wants to cash in on cheap feedstocks…still. Not one company has abandoned a major petrochemical project, at least not publicly.

Just last month, the Brazilian conglomerate Odebrecht, which has a controlling stake in Braskem, became the latest to say that it, too, is mulling building a world-scale steam cracker and polyethylene units to bask in the feedstock advantage afforded by shale.

Get in line.

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To date, seven chemical makers have announced plans to build world-scale steam crackers, or ethylene plants, five in the US Gulf Coast and two in Appalachia . Two smaller-scale crackers are proposed for Appalachia by startups.

And that does not include expansions, retrofits or debottlenecks already taking place in plants in the US Gulf and elsewhere. Nor does it include the Etileno XXI project in Mexico, which is expected for startup in Q2 2015.

Six propane dehydrogenation units, or on-purpose propylene plants, remain proposed, five of which would be located in the US Gulf (more on this later).

At least 10 methanol plants are either planned, under construction, or being relocated to the US Gulf Coast from places as far away as Chile.

That Odebrecht has thrown its hat in the ring is not surprising; after all, for the past two years Braskem has been vocal about exploring such a project.

What is surprising is that such an announcement would come so late, at a time when some of these chemical majors are having–or perhaps should be having–second thoughts about all these projects they came up with.

Some of these companies probably should be exiting the game. Instead, more keep entering. And to hear one well-respected consultant at a recent chemical gathering in Colombia say it, the list isn’t done growing.

Shell decided to abandon its ambitious GTL project in Louisiana–a $20 billion undertaking to turn natural gas into liquid fuels–because of rising costs and the ever-present uncertainty in oil and gas pricing.

Another company planning a GTL plant in Louisiana, Sasol, is proceeding with its the front-end engineering and design phase.

In Shell’s own words:

“Despite the ample supplies of natural gas in the area, the company has taken the decision that GTL is not a viable option for Shell in North America, at this time, due to the likely development cost of such a project, uncertainties on long-term oil and gas prices and differentials, and Shell’s strict capital discipline.”

Keep in mind Shell is a pioneer and an industry leader in GTL technology. Its rationale should not be taken lightly.

Also keep in mind Shell is among the companies looking to invest billions of dollars in petrochemical plants to take advantage of cheap ethane, the key raw material in the production of many plastics that become so abundant as a result of shale gas.

And for the record, Sasol also plans to build a world-scale steam cracker and polyethylene plants in Louisiana.

To say that Shell has been hesitant about its project near Pittsburgh would be an understatement. Yet the company extended its land option agreement and recently took in ethane bids for the proposed cracker. Its latest land option extension runs through this month.

Talk in the market is that rising costs have led at least three chemical companies to reconsider–if not abandon–more aggressive expansions of their propylene production. Instead of two PDH units, maybe only one gets built. Instead of a major expansion to an existing on-purpose plant, maybe none takes place.

Steam crackers, on-purpose propylene units and methanol plants don’t cost $20 billion to build, like a GTL plant. But they remain sizable investments. A world-scale steam cracker and associated polyethylene units can run $3 million to $5 billion.

Let’s go back to the reasons behind Shell’s decision to can the GTL project: rising costs and uncertainty in the relationship between crude and natural gas prices.

These are precisely the same concerns staring chemical makers as they face their boardrooms and investors.

This game is definitely not for the faint of heart.

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  1. Tom Gandolfo at December 18, 2013 10:45 pm

    The answer to the question: “Is Shell’s decision to scrap GTL project an omen for US petchems?” is NO ! For one thing, Shell’s GTL was not a ‘petchem’ operation. It was a project to convert Methane Gas into Diesel fuel. Now, I must say, I was somewhat disappointed because I drive a Diesel automobile and I thought this project would bring the price of Diesel down for Diesel powered autos and trucks. But, the fact that all that NG will not be going into making Diesel fuel means there will be even more NG available for the Petrochemical companies already here in Louisiana and those planning to come to come. TG

  2. Simon at December 17, 2013 7:48 am

    Believe it’s cost driven, mainly because of high marginal costs for GTL.

    In North America, they are not subsidized so GTL profitability will depend on Trading i.e the Oil/Gas Ratio.

    Shell’s Lousiana GTL has a price tag of 171,000$ per installed barrel per day capacity, maybe they should consider buying existing refineries for less than 30,000$ per installed barrel per day capacity.

    In both UAE and INDIA the outlook is better : because of gas subsidies, regulated energy prices, lower engineering costs..


  3. Ronald Backers at December 16, 2013 3:45 am

    I guess prices could also up because demand for engineering firms and all the equipment needed would rise enormously.

    • Bernardo Fallas at December 16, 2013 10:59 am

      Mr. Backers — That’s exactly right. A big part of the reason why costs are going up is the lack of skilled labor and equipment that’s available. Craft importation is inevitable, and even then the engineering firms and contractors will struggle to find/train enough qualified manpower.

  4. Ron Wagner at December 15, 2013 7:23 pm

    It never made any sense to begin with. High prices in Europe, made their plant in the Middle East feasible. Not here in the USA. Look at what gasoline prices are doing now, and we have a growing CNG and LNG market that can replace gasoline or diesel at far lower prices and run any engine. See References for The Natural Gas Revolution:

    • Bernardo Fallas at December 16, 2013 11:04 am

      Good points, Mr. Wagner. That then begs the question: What will Sasol do with its GTL project? We should find out soon enough.


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