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North Americas development of shale gas has triggered a revolution in the gas market that could
have a major impact on other energy sources and on the petrochemical footprint. The effects are
spreading to the rest of the world and are even affecting the hydrocarbon-rich countries in the
Gulf Cooperation Council (GCC).1 A full appreciation of the potential threats and opportunities
that shale gas brings to the GCCs oil and gas and petrochemical industries requires an
understanding of the impact of shale gas in North America and other international markets.
Source: Henry Hub Gulf Coast Natural Gas Spot Price from the U.S. Energy Information Administration
$6 to $7 per MMBtu range.3 However, there are no signs that natural gas prices will go back to
the pre-shale correlation with oil prices.
Shale gas has the potential to turn the United States into an LNG exporter in the near future.
Abundant domestic resources and low prices are displacing natural gas imports to the United
States and creating the potential for the country to become a net exporter of natural gas by
2020 and a net exporter of LNG by 2016. LNG import terminals in the United States, built on the
expectation of substantial future LNG demand, are all suffering from low capacity utilization
and are looking for export opportunities.
At the same time, LNG importers are trying to secure supplies of North American shale gas
linked to the Henry Hub price. Japan, the largest LNG importer, has already signed agreements
with the United States and is working to secure shale gas from Canada. By 2020, North American
shale gas could represent 30 percent of Japans demand, with 17 million tons per annum (MTPA)
coming from the United States and nine MTPA from Canada. GAIL (India) recently signed a
20-year contract with the U.S. Sabine Pass terminal linked to the Henry Hub price.
Shale gas is turning North America into an important LPG exporter. The exploitation of wet
shale gas plays, which give producers higher returns, is not only fueling the renaissance of the
North American chemical industry but also lifting liquefied petroleum gas (LPG) production
for domestic and export markets. The increasing production of LPG has already turned the
United States into a net exporter with the potential to capture a growing share of the market
currently dominated by the GCC.
Figure 1
Natural gas prices have decoupled from oil prices
Spot and future prices for oil and gas
$ per MMBtu
14
13
12
11
$ per barrel
Hurricane
Katrina
Cold winter,
decrease in
hydroelectric
power due
to drought
140
130
120
Cold winter,
unanticipated
drop in
production
10
110
100
90
80
70
60
50
40
30
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10
0
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0
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1/
See With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing? at www.atkearney.com.
Figure 2
Signs indicate natural gas and oil prices are decoupling in Europe
Spot prices for oil and gas
$ per MMBtu
$ per barrel
20
140
130
120
110
15
100
90
80
10
70
60
50
40
30
20
10
0
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Note: MMBtu is million British thermal units. NBP is the national balancing point. LNG is liquefied natural gas.
Sources: U.S. Energy Information Administration, Bloomberg; A.T. Kearney analysis
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 effort 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 insufficient 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.
Figure 3
Shale gas resources are present around the world
Shale gas production
and resources
9,405
Selection
7,201
North
America
1,685
Europe
470
Canada
573
United States
567
Mexico
545
South
America
567
2012
production
(billion
cubic feet)
United
States
1
2013
resources
(trillion
cubic feet)
Rest of
the world
1,430
France
137
Algeria
707
Brazil
245
Argentina
802
Former
Soviet Union
415
Asia
Poland
148
1,170
China
1,115
Libya
122
Middle East
and Africa
1,393
South Africa
390
South
Asia
201
Australia
437
Pacific
437
Sources: U.S. Energy Information Administration study of 42 countries; A.T. Kearney analysis
Large projects under development to build natural gas import capacity (pipeline infrastructure
to connect Central Asia, Russia, and Myanmar gas to China and relevant LNG capacity creation)
suggest a strong expectation that Chinas demand for natural gas will grow.
Europe has about 6 percent of the worlds technically recoverable shale gas reserves.4 However,
European shale gas developments will likely require more time because land resources and
the political and regulatory environment are not expected to favor any significant shale gas
production before 2020. Based on A.T. Kearney scenarios, European shale gas production in 2035
could account for 2 to 10 percent of total domestic consumption. Europe is therefore expected to
continue to rely on imports of both piped gas and LNG to meet its internal demand.
Shale gas impact on the GCC
The impact of U.S. shale gas on the GCC has been rather limited so far, but shale gas could
represent both an opportunity and a threat for the GCC countries in the future. The effects vary
widely across the region. The challenges faced by gas-rich Qatar are substantially different
than those faced by the other gas-short GCC countries. We expect shale gas will cause no major
disruption to the GCC before 2020, but the scenario could be fundamentally different in the
longer term.
However, project delays and cancellations are likely because the uncertainty in the natural
gas market is making buyers increasingly reluctant to sign the long-term contracts that have
traditionally underpinned large LNG projects and is resulting in more difficulties in achieving
the final investment decision.
The Qatar National Development Strategy is based on an LNG price (cost, insurance, and
freight) of $9.60 per MMBtu. In 2012, the average price of Qatari LNG was about 40 percent
higher, with substantial differences across markets. (For example, Japanese LNG prices
averaged $17 per MMBtu while European prices have been more restrained at $11 per MMBtu.)
A drop in the price of LNG would directly impact Qatari GDP and net government savings. For
example, a price drop of 30 percent to $6.90 per MMBtu would cause a reduction of Qatars
GDP by about $100 billion over a five-year time frame and a decrease in net government
savings from 5.7 to 2 percent of GDP.
Figure 4
The Middle East is the most competitive for ethane-cracking expansions
Ethylene cash costregional feedstock platforms
($ per MT of ethylene produced)
1,400
Ethylene cash
cost range based
on past three
years of feedstock fluctuation
(maximum,
average, and
minimum value)
1,200
1,000
800
600
400
200
0
Middle East:
ethane
United States:
ethane
Ethane:
$0.75-$2.50
per MMBtu
Ethane:
$3.50-$13.10
per MMBtu
China:
coal
Coal:
$500-$800
per MT
Brazil:
ethanol
Ethanol:
$1-$2
per gallon
50
European Union:
naphtha
Naphtha:
$730-$1,070
per MT
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).
Figure 5
The worlds ethylene capacity is expected to rise well above demand
Global ethylene capacity vs. demand
(in million metric tons)
Capacity
Demand
209
149
131
2012
159
2018e
(unconstrained planned
capacity build-out)
Figure 6
Armed with a supply of ethylene, North America is poised for explosive polyethylene
export growth
North American ethylene derivative supply
(% of installed capacity)
Others
Ethylbenzene
5%
Alpha olefins
4%
6%
Ethylene
oxide
7.4
12%
3.2
Polyethylene
57%
16%
Ethylene
dichloride
2012
2018e
(50 percent
build-out)
2018e
(unconstrained
build-out)
Figure 7
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)
13
28
19
2012
Supply
North America
15
Demand
11
15
15
Asia Pacific
17
2012
2018e
2018e
35
27
11
South America
4
30
40
2012
2
6
2012
2012
2018e
2018e
2018e
Figure 8
Ethane crackers yield much more ethylene than naphtha crackers
Steam cracker yields by type of feedstock
(in weight %)
Naphtha cracker
Ethane cracker
Ethylene (C2)
13%
30%
38%
1%
1%
Propylene (C3)
3%
Butadiene (C4)
Aromatics
15%
13%
82%
Other
5%
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 efficiency 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 difficult. 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 substantial 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.
Figure 9
Middle East propane exports will face strong competition from North American suppliers
GCC propane exports
('000 barrels per day)
CAGR
2,000
Kuwait
5%
2,000
1,500
Qatar
20%
1,500
1,000
1,000
United Arab
Emirates
8%
500
500
Saudi
Arabia
0
2012
12%
0
As global propane prices will come under pressure and propylene will likely be short from
reduced output from naphtha cracking, an opportunity emerges to convert propane to
propylene. GCC players could create significant value through this conversion and further
reduce their dependency on less attractive propane exports.
Fierce competition in the traditional polymer export markets
The biggest impact for polyethylene producers can be expected in European and Chinese
markets, the traditional export markets for many GCC players. Polyethylene exports from
the Middle East to Europe will likely see strong competition from U.S. exports, particularly in
light of the ongoing free trade agreement discussions between the United States and the
European Union. China, on the other hand, is driving for self-sufficiency and is unlikely to
regain previous manufacturing double-digit growth thanks to rapidly increasing labor costs.
In the next few years, there will still be substantial exports to China, but in the longer term,
GCC petrochemical exports will likely require some redirection of volumes to other markets.
A strong sales and distribution presence in emerging markets such as Southeast Asia, the
India subcontinent, or Africa will help absorb the impact of a reduced market share in
China and Europe.
A need to shift the sales footprint of many GCC polyethylene players can be expected as
competition becomes fiercer. New trade patterns will emerge eventually, but a period of higher
uncertainty and variability is likely to set in. Sales and associated supply-chain strategies will
need to be reassessed. Players with a specialty portfolio are more protected in the battle for
lower costs and better service levels, but in a commoditizing market, these advantages could
be more short-lived than anticipated. A strong, flexible, and cost-conscious sales and marketing
organization is a must for any serious polymer player aiming to sell out its assets.
Attractive potential for mergers and acquisitions
The U.S. shale gas investments in petrochemical conversion are resulting in much higher debt
on the balance sheets. When such investments are not 100 percent backed by downstream
off-take, these debts are open and put investors at high risk. There are definite opportunities
for cash-rich GCC players to support these investments and acquire a complementary asset
base from international players that need debt restructuring or fresh cash injections for
capacity expansions.
Capacity expansions are also putting tremendous pressure on players with older, less efficient
asset bases, particularly when feedstock is secured from liquid cracking. This can result in some
players offering good intellectual property at discounted value.
These opportunities will not last long, and now is the time to move. Waiting a few more years
will increase the equity value of potential targets, especially if they have a strong U.S. base,
while debts will have been refinanced or old assets discontinued to clean up the balance
sheets. To capitalize on these opportunities, vertical integration of the asset base can secure
high asset utilization both upstream and downstream. This would be particularly attractive
when assets, intellectual property, and skillsets are complementary. A downstream player with
established global sales and marketing presence could be the perfect catalyst for an upstream
player looking to substantially expand its petrochemical activities. When the strategic planning
function is strong and centrally steered, the impact on the top and bottom line can be
especially positive.
Authors
Gal Rouilloux, partner, Paris
gael.rouilloux@atkearney.com
Atlanta
Bogot
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
Palo Alto
San Francisco
So Paulo
Toronto
Washington, D.C.
Asia Pacific
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Tokyo
Europe
Amsterdam
Berlin
Brussels
Bucharest
Budapest
Copenhagen
Dsseldorf
Frankfurt
Helsinki
Istanbul
Kiev
Lisbon
Ljubljana
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
Middle East
and Africa
Abu Dhabi
Dubai
Johannesburg
Manama
Riyadh
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