Chemical production and oil price shock: still “advantage USA” – White Paper

EXECUTIVE SUMMARY

Cheap gas has led to a boom in North American supply of many of the chemical intermediates that require natural gas and natural gas liquids as a fuel and feedstock. These intermediates include olefins, methanol, and ammonia. Yet demand for these products is growing faster elsewhere – especially in Asia.

In our – and many others’ – base case, North America remains the most cost-advantaged region for the production of ammonia, methanol, and olefins, save for facilities in the Middle East and those in Asia that gasify coal. In this paper, we examine what might need to happen to change this, making either Europe or Asia price-competitive with US chemicals producers.

• Our Back to Black scenario details our forecast for fuel and feedstock prices based on the assumption that oil returns to $90/bbl in the long-term, and presents the corresponding cost of chemicals production by region.

• In our Technological Advancement scenario, we examine a world where the advances in drilling and completion technology that have made the US a low-cost gas producer spill over into other geographies. Shale gas and tight oil become global phenomena, leading to lower feedstock prices across the board.

• In our Stringent Emissions Regulations scenario, we measure how a global carbon price would affect relative economics, with a particular focus on coal gasification versus steam methane reformation (SMR) for methanol and ammonia production.

Bloomberg New Energy Finance is a specialist not in global chemical markets, but in global chemical feedstock markets. Therefore, our analysis is underpinned by fundamental views on price trajectories of those feedstocks. The feedstocks covered in this analysis include North American natural gas, global oil and naphtha, propane (LPG), ethane, natural gas from other regions, and Asian coal. Each section of this White Paper first presents our projections for feedstock prices in a given scenario and then uses that analysis to ultimately construct a view on two simple questions: “Does North America remain the lowest cost region to produce chemicals?”, and “What could happen to change that?”.

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