(Article was originally published in March/April 2017 edition.)
Low oil and gas prices have triggered a boom in petrochemical production, particularly in the U.S. Petrochemicals pervade virtually every sector of the modern world – from plastics and pharmaceuticals to agriculture and construction – and the energy industry is poised to take advantage by shifting focus from new oil and gas production to the opportunities provided by the cheap and abundant supply already available.
Industry leaders highlighted the shift at the recent CERAWeek 2017 annual conference in Houston. Billed as a premier event offering comprehensive insight into the global energy picture, the conference opened with a keynote address by newly appointed ExxonMobil CEO Darren Woods, who described the company’s “Growing the Gulf” initiative – aimed at developing close to a dozen new petroleum-related projects along the Texas and Louisiana coasts.
The initiative will create tens of thousands of jobs and include upwards of $20 billion in spending while positioning ExxonMobil and the Gulf Coast as global leaders in petrochemical exports. In an era of low oil and gas prices and abundant supply, producers are taking advantage by focusing on more profitable petrochemical operations.
Gulf Coast Rising
Much of the refocus will support and expand existing infrastructure at ports and terminals in anticipation of growing national and international demand. Even port areas not directly responsible for the operation of petrochemical facilities stand to profit from the massive expenditures proposed by energy majors and chemical companies.
The Port of Houston is one among many that will reap the benefits, says Bill Hensel, Manager of External Communications: “Houston will benefit from the ongoing expansion of petrochemical facilities. The completion of these projects will mean an increase in the production of plastic resins, most of which will move across our docks as exports beginning later this year.” To put a number to it, the port anticipated last June that a minimum of a quarter-million twenty-foot equivalent units (TEUs) in new exports would be created by 2019 as expanded petrochemical capacity comes online.
The boom extends to crude oil exports as well, which early this year topped a million barrels a day. Alexandra Hernández, Public Information Officer for the Port of South Louisiana, which extends from New Orleans to Baton Rouge and describes itself as “the largest tonnage port in the Western Hemisphere,” notes that the port “continues to modernize its facilities” in anticipation of, among other things, the “potential increase in crude oil from the Dakota Access pipeline, the Bayou Bridge pipeline and perhaps the Keystone pipeline.”
She adds that, around the entire Gulf Coast, “There has been an increase in new construction and the expansion of existing crude oil storage and chemical facilities” – investments that serve as a bright source of hope for new jobs and new economic activity in an area hard hit of late by the downturn in offshore drilling.
Globally, forward-thinking organizations are seeing the benefits of investing in a future more heavily dependent on petrochemicals. Energy storage company Oiltanking, based in Hamburg, acquired Antwerp Gas Terminal last year in anticipation of increasing global demand for both energy and feedstocks. The world’s second largest independent provider of storage tank terminals, Oiltanking recently announced the signing of a long-term agreement with London-based petrochemical company INEOS (INspec Ethylene Oxide Specialities) for the storage and handling of petrochemicals that will see a near doubling of capacity at the INEOS terminal.
Tankers: A Different Story
The shipping sector, however, has not been so fortunate. Caught in the boom-and-bust cycle of oil and gas prices, shippers find themselves losing money per roundtrip as the cost of commodities drops even as they face increased demand for their services. And a continuing oversupply of vessels hasn’t helped any either.
According to a 2017 forecast by the online blog opensea.pro, 2016 witnessed growth in the global seaborne trade of crude oil and clean products (4.3 percent and 4.4 percent, respectively) and a simultaneous decline in freight rates, a rare and unfortunate confluence and clearly the result of tanker oversupply. As the market became flooded with oil and gas and their derivatives at a continually decreasing cost, the cost to deliver those products likewise fell.
Since 2015, the average spot rate for Very Large Crude Carriers (VLCCs) dropped from approximately $65,000 per day to $40,000 per day in 2016 with an even more severe drop in earnings for clean product tankers. The Suezmax, Aframax, and Panamax segments suffered similar results. Despite a nascent recovery in late 2016, 2017 has so far demonstrated continued rate uncertainty.
Nevertheless, shipping companies continue to invest in new product tankers. Stena Bulk recently took delivery of the 50,000 deadweight ton Stena Impeccable from China. The Impeccable is the tenth in a series of 13 sister ships, demonstrating the company’s continued confidence in the international petrochemical market.
Other industries, like rail, have also been affected. Crude-by-rail shipments dropped sharply in 2016 as more pipelines came online and the public backlash against crude-by-rail grew. As a result, some intermodal crude transport projects anticipated for the Pacific Northwest were canceled. Kayla Dunlap of the Port of Grays Harbor, Washington notes that “crude-by-rail projects that were proposed did not come to fruition” as a result of economic and environmental impact studies.
Zero Sum Game?
While the cut in production from OPEC in late 2016 was heralded by some as the beginning of the end of the down market for oil and gas prices, it only created more uncertainty, and producers and shippers alike continue to struggle with finding the right balance between the drop in commodity prices brought on by oversupply and the consequent increase in demand for the same reason.
Sensing an opportunity, non-OPEC producers have increased output in an effort to capture market share, citing lower production costs and the sheer need to produce in order to survive. Russia and the U.S., in particular, have stepped up production and largely offset the OPEC cut. The offshore industry also seems to be reviving with renewed investment in places like the Gulf of Mexico. Other countries with developing production markets have taken similar advantage of the OPEC cut. Kazakhstan, for example, started production at the Kashagan field last October.
With an eye on consumer demand and overall profitability, refiners around the world are less interested in OPEC than they are in a greater variety of suppliers. Reuters, in a December 2016 article, noted that Asian refiners, in particular, continue to be focused on demand and profitability rather than OPEC production.
Chaos & Competition
“There is no justice in shipping, there is only the market… The only thing that really matters is price,” says the fictional Greek shipbroker Spyrolaki in Matt McCleery’s acclaimed 2011 book, The Shipping Man. What’s more, “price” has many meanings – from a commodity to the service providing it.
The OPEC reduction made a big initial splash in industry news but had little subsequent ripple effect. The bigger impact in an over- supplied market comes down to demand, where it comes from and who can best fulfill it – at the cheapest rate, of course. Demand in the petrochemical market is up, and the supply of crude oil feeding it is plentiful.
At the same time, the cost of transporting goods has fallen in tandem with crude prices. But the oil industry exists in a dynamic state. When one sector is down, another is up. Petrochemical companies and the ports that serve as their export outlets have become the building blocks of a flourishing market around the U.S. Gulf Coast and the world, a market that has helped make up for the de- cline in earnings from oil and gas production.
For shipping and transportation companies, however, it is far from a simple market. In fact, it represents the crux of a larger is- sue. Commodity prices are down and therefore revenue is down. Operators are competing in a prophetic “race to the bottom,” providing the lowest rates possible in an attempt to keep their fleets profitable and company revenues growing. In a battle for survival, shipping companies are struggling to find balance in a market that is anything but. -MarEx