Impact of US Shale Export to China

Impact of US Shale Export to China

February 14, 2018 | Energy & Utilities Blogs

Demand for natural gas is expected to rise significantly by 2025, inspired by lower prices ensuing from a predictable gush in sup­plies of shale gas and other unconventional resources.

The U.S. is looking to further expand its shale market and has found a suitable destination in two of the largest consumers in the East — China and India. China has seen the success story of shale gas imports by India and is contemplating something similar, sometime soon. China is looking at the possibility of importing shale-based eth­ane as a solution to the growing demand for petrochem­icals. Massive capacity expansions are on the cards for China as it is on the verge of becoming self-sufficient in a large way. Many new steam cracker units are slated to come online in the next decade or so based on lighter feed to take advantage of the abundance of gas that the U.S. possesses. Satellite Petrochemical will commission a 1.2 MMT/year ethane cracker unit by the end of the decade in the Jiangsu province in one of the chemical industry hubs. This will be China’s first cracker unit that will be fed by U.S. ethane and the world’s first greenfield investment that runs completely on U.S. ethane.

Cost-Saving Strategies

At present, there are crackers across Europe run by INEOS and in India run by Reliance Industries that have been converted to run on lighter feeds and are mighty successful from an econom­ic perspective. This is a major reason why these crackers were converted due to the massive cost advan­tage they command. Satellite Petrochemical is ex­pected to strike a long-term contract with one of the ethane suppliers in the U.S. and ethane is expected to be shipped from the port of Texas. Since logistics costs involved will be massive owing to the distance, Satellite Petrochemical is contemplating building its own vessel to transport ethane, as frequently as they want (in storage tanks at the destination port). The margins involved in such an exercise are massive. It is es­timated that for a steam cracker based in China or India importing about 1.5 million tonnes of ethane from the U.S., the feedstock costs drop from anywhere between 20 to 25 percent as compared to naphtha. Firms in the East are inclined to take advantage of the U.S. shale situation by entering into long-term contracts to stay competitive in the volatile game. A few firms in China are already import­ing cargoes of propane from the U.S. to feed their propane dehydrogenation (PDH) units and by 2020, ethane imports too will be a reality. INEOS imports ethane from Marcus Hook and Morgan’s Point terminals, and Reliance has a long-term contract with Enterprise Products Partners.

Ethane imports from the West are a part of the Chinese government’s feedstock plan as per their latest five-year plan. Also, this is in sync with their upcoming en­vironmental regulation plans that intend on curbing pollution levels to a large extent. However, a facility running on 100 percent imported ethane is at a significant risk of operations not only because of supply chain issues, but also the cracker output. Since an ethane cracker gives maximum ethylene, a sudden glut in the ethylene supply in any given market can result in a significant production hit.

Unprecedented Growth for the U.S. Shale Industry

Now, what does all this mean for the U.S. shale industry? The American shale gas revolution is expected to go through a second growth spurt backed by demand from the East, driven by India, China and Europe. As per the latest estimates, U.S. is expected to become one of the world’s largest gas exporters with the country exporting oil and gas at a record pace. In 2018, exports of natural gas liquids (NGLs) and liquefied natural gas (LNG) will hit new records in the U.S. NGLs like propane and butane will continue to be in high demand, and China along with Japan will be the largest buyers in 2018. What is further interesting is that the sole export terminal in the U.S., run by Cheniere Energy Inc., is expected to hit new highs in 2018 due to its increased capaci­ty, thereby increasing its exportability. Demand from Mexico will continue to remain robust along with markets in the East. LNG is even expected to hit the Middle East soon because of cost competitiveness.

Overall, international gas demand will get a boost in the coming years, driven by a supply surge thus pushing prices even lower. 

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