How are low oil prices affecting downstream projects: Part 1 the US

Lee Nichols, Director, Data Division, Gulf Publishing Company Lee.Nichols@GulfPub.com

Posted: February 2015
According to the Hydrocarbon Processing Boxscore Database, 2014 was a record year in new project
announcements. Globally, new project announcements climbed well over 500 in 2014. This represented
a 72% increase in new project announcements over the previous year.
Fig. 1 shows a Boxscore Database trends analysis on new project announcements from 2012-2014. The
US showed significant growth, due primarily to the shale boom that has brought about a surge in new
project investments along the downstream construction train.
180
160
140
120
100
80
60
40
20
0

2012
2013
2014

Africa

Asia-Pacific

Canada

Europe

Latin
America

Middle East

US

Fig. 1. Total new project announcements by region, 2012-2014

Note: European project totals include projects in Russia and the CIS
The US shale gas boom has been instrumental in adding capital investments to the gas processing and
petrochemical sectors. Within the past year, the US has announced billions of dollars of investments in
projects such as cryogenic gas processing plants, nitrogen fertilizer complexes, ethylene cracking and
derivative capacity expansions, GTL facilities, LNG terminals and methanol production units.
However, beginning in July 2014, the world began to witness a widespread fall in crude oil prices. By
mid-February, both WTI and Brent crude oil prices had plummeted from around $106/bbl to $51 and
$57/bbl, respectively. With the decrease in global crude oil prices, what does this mean for the future in
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downstream projects? Which regions and sectors might see success in 2015 and beyond? There are
multiple answers to both questions, which will be explored in this new e-newsletter series by
Hydrocarbon Processing and the Boxscore Database. We will kick-off this new series by discussing how
low oil prices are affecting the US downstream industry and what the project landscape looks like
moving forward.
New projects. The US has announced just over 70 new projects since WTI and Brent crude began its
price decline in July 2014. The US has also increased new project market share from 31% in July 2014 to
38% by mid-February (Fig. 2). The only other region with significant new project market share growth is
the Asia-Pacific region. Announced projects include new petrochemical capacity in China; continued
developments in the LNG sectors of Australia, India, Malaysia and Singapore; possible large investments
in Indonesias refining sector; and multiple refining and petrochemical projects in Vietnam that could
potentially transform the country into a net exporter of refined fuels.

5%
Africa
22%

38%

Asia-Pacific
Canada
Europe

7%

Latin America
Middle East

8%

14%

United States

6%

Fig. 2. New project market share by region, July 2014-February 2015.

Note: European market share includes projects in Russia and the CIS
Increased shale production in the US over the past few years has provided a boom in new, downstream
US project announcements. Over 85% of new US project growth is within the gas processing and
petrochemical industries, primarily along the US Gulf Coast. These two sectors are benefitting greatly
from cheap natural gas prices, which have provided abundant, inexpensive feedstocks for producers. In
total, the Boxscore Database is tracking over $200 B in US downstream projects. This includes projects
that have been recently announced or are in some phase along the projects planning, engineering or
construction timeframe.
Major downstream trends and project construction will be explored, in depth, at Gulf Publishing
Company and Stone Fort Groups upcoming Energy Construction Forum. Being held from March 3-4, in
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Galveston, Texas, the Energy Construction Forum is the US Gulf Coasts largest energy construction
forum and expo, offering a unique and timely gathering covering all phases of major expansions and
new construction projects throughout the oil and gas marketplace in North America. The forum will
focus on the challenges and solutions facing the downstream industry today. This unique event will
allow attendees the rare opportunity to engage with key decision-makers and stakeholders that impact
their projects success and bottom line. The forum includes speakers from distinguished companies and
associations such as Fluor, Freeport LNG, Greater Houston Partnership, JP Morgan Chase, Kiewit, Sasol,
Shell, TransCanada and Wood Group Mustang. For more information, visit the event website at
www.energyconstructionforum.com.
Petrochemicals
The US petrochemical sector is in the midst of one of the largest industry expansions to ever occur in
North America. Cheap, readily available shale gas is sparking a surge in the construction of new
processing capacity. Total announced capital investments in capacity expansions, upgrades, plant
restarts and greenfield facilities have climbed over $130 B. This includes a sharp increase in the
construction of ethylene cracking and derivatives capacity, methanol and nitrogen fertilizer plants, and
propane dehydrogenation (PDH) units.
Although oil prices have decreased, the US petrochemical industry has maintained an advantage in the
global market. This is because the US utilizes cheap natural gas as feedstocks, as opposed to naphtha,
which many global petrochemical producers utilize in their crackers. The recent downfall in crude oil
prices has provided naphtha feedstock users with cheaper feedstock to produce petrochemicals, but US
cracker margins for ethane have remained much more competitive than naphtha. This has kept the
outlook for US petrochemicals very favorable, even in the face of falling oil prices.
One of the largest impacts in the US will be in new ethylene capacity. Companies such as Axiall, Chevron
Phillips Chemical, Dow Chemical, ExxonMobil, Formosa Plastics, Sasol, Shell and LyondellBasell will be
instrumental in adding over 10 MMtpy of new ethylene capacity by 2018. Additional announced
ethylene cracker projects, such as Appalachian Resins ethylene production facility and OdebrechtBraskems Ascent project, could add an additional 3 MMtpy of new ethylene capacity by the end of the
decade.
The shale gas boom has also propelled methanol production to the forefront of the US petrochemical
sector. The US plans to add over 13 MMtpy of additional methanol capacity by 2018. Total methanol
capacity could reach over 23 MMtpy by 2020 if Yuhuang Chemical and the Connell Group-Sino Life
Insurance Corp. complete their ambitious methanol plant projects. Just last week, Yuhuang Chemical
awarded Air Liquide a contract to supply oxygen to the companys planned methanol plant in St. James
Parish, LA. Yuhuang Chemical is just another example of a multitude of foreign firms investing their
operations in the US to take advantage of cheap natural gas feedstocks.
As a consequence of the shale gas boom, cracking ethane has caused a tightening in domestic propylene
supplies. To decrease this propylene supply and demand gap, companies such as C3 Petrochemicals,
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Dow, Enterprise, Formosa Plastics and REXtac are planning to construct new PDH units along the US Gulf
Coast. These companies have announced over $5 B to increase propylene supplies by nearly 5 MMtpy by
2018.
With US natural gas prices forecasted to remain low for the foreseeable future, the US petrochemical
industry may be the globes biggest winner during this time of low oil prices.
Refining
Refiners across the globe saw large revenues during the global crude oil price drop, as pump prices fell
much more slowly than the price of oil. For integrated companies, downstream refining operations
provided somewhat of a cushion to offset hits to upstream revenues. Global refiners should see lower
margins through the first half of 2015 with stabilizing crude oil prices, lower oil demand growth, high
inventories and refinery capacity additions set to come online. However, low fuel prices tend to
encourage higher consumption, which some nations hope will eat up excess supplies. Many countries
though, will not see decreased pump prices as nations take this low crude price environment as an
opportunity to decrease or eradicate fuel subsidies. In contrast, the US has seen pump prices fall
significantly, which has spurred additional consumption, as well as an increase in auto sales of less fuel
efficient vehicles, such as trucks and SUVs.
The US dominates the world in refined products, with a refining capacity of almost 18 MMbpd at 139
operating refineries. US shale plays have led to an unprecedented level of domestic production. This
increased upstream output has spurred billions of dollars in new downstream investments. The majority
of this new capacity, which is designed to process light crude from US shale plays, is expected to be
built, just not as quickly as originally planned. Low oil prices have delayed final investment decisions
(FID) on more capital intensive projects. This was seen recently, as Marathon Petroleum delayed its FID
on its Garyville refinery and Sasol put its $11-B GTL project on hold. Marathon delayed its FID on its
Garyville residual oil upgrader expansion (ROUX) project. The $2.5-B project was an upgrade to the
Garyville refinery to convert heavy residual oil into ultra-low-sulfur diesel. The project has high potential
to be greenlighted, but Marathon has announced it will defer its FID as it evaluates the present market
condition. In turn, Sasol shelved its $11-B GTL project due to low oil prices. For the project to be
economical, oil prices need to remain relatively high compared to natural gas prices. The recent
downward spiral in oil prices has shrunk the gap between oil and natural gas prices, thus causing the
project to be unfeasible to pursue at this point in time.
Despite some delays and holds, many capital intensive projects are still a go. This includes refining
capacity additions at Valeros Corpus Christi, Houston and Sunray, Texas refineries to process light, shale
crude and the continued wave of micro-refineries to process shale oil into diesel to supply drilling
operations in shale oil plays. The Dakota Prairie Refinery, the first refinery to be built in the US since the
1970s, is expected to be completed in 2015. The project was delayed due to severe weather conditions
and revisions to the facilitys electrical systems and controls, and not due to low oil prices. MDU
Resources, one of the partners in the project, is evaluating another site new Minot, North Dakota for the
development of a second refinery. Quantum Energy has even announced plans to build up to five microHydrocarbon Processing | ConstructionBoxscore.com

refineries in the Bakken shale region. These refineries would each cost about $500 MM and have a
refining capacity of 20 Mbpd. ExxonMobil is continuing to evaluate a multi-billion-dollar expansion to its
Beaumont refinery, even as a strike from the United Steel Workers union continues. The project could
eventually increase refining capacity substantially to between 500 Mbpd and 800 Mbpd from its current
345 Mbpd.
Finally, the growth in light crude oil supply has boosted the construction of condensate splitters along
the US Gulf Coast. The development of new condensate splitter capacity may lead to a boom in semirefined exports. Condensate splitters partly refine condensate in a process called stabilization. This halfrefined fuel is then shipped to customers in regions such as Asia, Latin America and Europe, where the
fuel is further refined. Forecasts called for as much as 300 Mbpd of condensate to be shipped in 2015. At
the moment, the condensate export market is closing. The main culprit is the gap between Brent and
WTI prices. In order for condensate exports to be economical, Brent needs to be at a high enough
premium to WTI, in order to cover the shipping costs. Presently, that door has closed too much. Despite
that fact, infrastructure is still being built. This includes condensate pipelines to deliver product from the
Eagle Ford to export terminals in Corpus Christi, as well as the continued construction of planned
condensate splitters.
Gas Processing/LNG
The shale gas boom has established the US as the worlds leading gas producer and is responsible for
billions of dollars of investments in the US gas processing industry. Since 2011, new gas processing
project announcements in the US have experienced unprecedented growth of over 330%. New US gas
processing projects have tripled within that same timeframe. These projects include the construction of
cryogenic and gas processing plants, NGL fractionators, and LNG export facilities. The majority of
midstream-operations, i.e. gas processing plants, are proceeding as planned; LNG is another story. Low
oil prices will likely have a negative effect on the US LNG export industry.
With an abundance of low-cost natural gas, US companies had announced over 200 MMtpy of LNG
export capacity to come online by 2025. These projects were to target the high-priced Asian LNG
markets that linked LNG prices with the price of oil, known as oil-indexing. Things didnt look so good
though during the third and fourth quarter of 2014. With crude oil prices decreasing by 50% over the
past few months, the US Henry Hub market is losing its price advantage. This not only minimizes
projected LNG export revenues, but it also makes financing capital-intensive LNG facilities more difficult.
The projects that can secure, or that have already secured, supply contracts are more likely to move
forward, including projects up for FID in 2015, such as Chenieres Corpus Christi LNG project. The US also
has to contend with additional LNG supplies coming online from Australia. Multiple Australian LNG
terminals (Australia Pacific LNG, Gladstone LNG and Gorgon) are scheduled to begin exports in 2015.
Low oil prices have already claimed its first US LNG casualty. In February, Excelerate Energy announced
it will suspend activities on its Lavaca Bay LNG project. Nearly 300 miles east of Port Lavaca, BG Group
and Energy Transfers JV (Lake Charles Exports) delayed FID on its Trunkline LNG project till 2016.
Trunkline LNG was one of only eight US LNG projects that have received non-FTA approval from the US
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Department of Energy thus far. BG Groups announced decision comes only four months after it delayed
its FID on its Prince Rupert LNG project in British Columbia, Canada.
Despite these delays, the US is expected to begin nearly 45 MMtpy of LNG exports over the next few
years. This includes:
Project

Location

Sabine Pass LNG

Cameron LNG
Freeport LNG
Cove Point LNG

Sabine Pass, LA
Hackberry, LA
Freeport, TX
Lusby, MD

No. of liquefaction
trains
4
3
2
1

Capacity
18 MMtpy
12 MMtpy
9 MMtpy
5.75 MMtpy

The projects above represent those that are furthest along. Additional LNG trains are still under
development as well. This includes additional LNG capacity at Sabine Pass, Freeport, Corpus Christi, as
well as the Jordan Cove LNG and Oregon LNG projects on the US West Coast, and BP-ConocoPhillipsExxonMobils mega-LNG terminal project in Alaska. Developments also continue at multiple LNG
terminals along the US Gulf Coast. The next few years will definitely begin to shine a light on which US
LNG projects will continue and which will see the same fate as Lavaca Bay.

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