The ethylene industry is going through another phase of the cycle impacted by the convergence of multiple factors:

• Increase in ethylene supply over last two years, leading to an imbalance
• Economic slowdown and demand destruction from global impacts of pandemic – on many market segments (e.g. auto industry), economic contraction, behavior shift (e.g. working from home), increase in unemployment, a large portion of the global population being pushed into poverty
• Energy dynamics, partly driven by the pandemic, driven by demand constraints of fossil fuels (particularly petroleum-derived fuels – gasoline, jet fuel, marine fuels, etc.)
• Geopolitics – trade wars, tariffs regime, sanctions, nationalistic approach vs. globalization
• Environmental pressures – plastic circularity, emissions (greenhouse gas, nitrous oxides, particulates, etc.), sustainability, shareholder pressure

Competitive pressures will put greater emphasis on running these facilities at high utilization rates with a lower cost of production. Smaller, inefficient, and less sophisticated assets will be under pressure to shut down. The outcome will vary regionally.
The cost of production in the ethylene manufacturing process depends on:

1. Performance efficiencies – feed consumption, product yield, selectivity, energy efficiency (utility consumption), catalysts/chemical consumption
2. Plant mechanical availability
3. Production slowdown contributed by operation and mechanical reliability issues, process operation, and control
4. Fixed costs
5. Depreciation, cost of money, etc.

The first three points are related to process technology, operation, and maintenance practices.
These may appear to be the obvious areas to optimize for improving competitiveness, but many owners and operators struggle to focus on improvements under the current market environment due to the:

• Potential budget constraints; resulting in cuts in preventive maintenance needs, operational mitigation, training, etc.
• Availability of the right resources
• Experience gap, given the attrition and layoffs because of cost-reduction efforts

The savings in many of these essential costs can easily be recovered by high plant availability and high utilization rates. Knowing the full capability of your facility is equally important to benchmark operation.
At Apex PetroConsultants, we work together with owner/operator teams to understand the full capability of your facility to identify areas of opportunity to improve performance efficiency and plant reliability for minimizing the cost of production. We also focus on imparting working knowledge based on experience and expertise to fill the experience gap through focused training programs.

​In this blog, I would like to highlight the bigger picture aspects that will shape the future of our industry. A deeper understanding will enable us to make strategic choices that not only ensure business growth but also contribute significantly in meeting future challenges.
The positive long-term outlook for petrochemicals
The demand is closely related to GDP and population growth

• World population is increasing rapidly, growing by another billion people by 2030 from the current base of about 7.6 billion. By 2050, the overall population is expected to reach close to 10 billion.[1] Asia and Africa will be contributing a large portion of that growth.
• Long-term GDP growth is expected to be in the range between 3 to 4% average annual rate.[2]
• Urbanization in Asia and Africa will continue, therefore contributing to the demand growth

Demand for engineered plastics and specialty materials is bound to increase as the world will need higher efficiencies to meet sustainable growth. Based on these factors, the expected annual average growth rate for petrochemicals will be in the 4 to 4.5% range.
Energy Dynamics
Energy dynamics have always impacted the competitiveness of the petrochemicals industry as feedstock plays a major role in the cost of production.

• Long-term oil projection scenarios project a wide range from 65 million barrels per day to as much as 120 million barrels per day. [3] 2019 crude oil demand was nearly 100 million barrels per day.
• Emerging and developing economies are projected to add more than 8,000 TWh of renewable power generation by 2040.[4] Solar PV is likely to be the largest share of this growth followed by hydro and wind.
• Conventional fossil fuel transportation demand is flattening and demand for electric vehicles is expected to contribute towards most of the growth projections
• Natural gas demand is expected to increase significantly by 2040. Emerging and developing economies will likely add more than 900 bcm to the demand. [5]

As a result of this, many companies are now investing in integrated complexes where 40% or more of the crude oil intake is converted to chemicals. [6] These complexes produce a large volume of chemicals from a single facility as compared to annual demand growth, changing the competitive landscape. High volatility in crude prices and likely to settle at lower levels in the near term (and potentially in long term based on most of the projection scenarios), making liquid feed cracking more competitive.
Sustainability, circularity, and environment

• Greater push from consumers and bulk end users for plastic recycling. Plastic recycling is expected to double by 2040 from current levels – including chemical, mechanical, and bio recycling depending on the type of plastic waste/collection logistics.
• Regulations related to single-use plastics, greenhouse gas emissions, etc.
• Net zero approaches in line with Paris Agreement (IPCC scenarios) – using multiple technologies and approaches to achieve across-the-board emission cuts

Recycling and circularity will lead to an impact on fresh feed demand and potentially some impact on investments in the longer term. The technologies for recycling are still evolving. Logistics of recycling, technologies, and economic drivers in combination with regulations will dictate future outcomes. Current projections indicate that the overall demand growth will require significant investment in base chemicals during the forecast period.
Geopolitics
It is one of the more complex areas to predict with far-reaching impact on the economies, trade, supply chains, investments, etc.

• Energy dynamics in recent times put a sharp focus on the approach to the energy security of nations
• Growing nationalism and protectionism are resulting in a shift away from international cooperation and economic globalization that contributed to human health, wealth, and quality of life over the last 40 years (more so since World War II).[7]
• Cyber-security, information, and data security in weakening global security structures[8]

Global businesses, like petrochemicals, are more exposed to geopolitical conflicts[9]. It will be harder to reach agreements on common global standards and protocols on sustainability, data, security, etc. Managing these risks will pose a significant challenge for petrochemical businesses.
Global Disruptions
Some risks and opportunities are posing challenges requiring more international cooperation.

• Pandemics – like COVID-19, resulting in a significant slowdown in economic activity globally and supply chain disruptions.
• As the world population grows, essential resources like water and food can become scarce (in combination with the impact of climate-related events)
• Extreme climatic events that can have a far-reaching and significant impact

 
At Apex PetroConsultants, we look forward to a healthy dialogue for helping our industry to make positive contributions and grow.


[1] UN DESA forecast

[2] IMF, World Bank, and other industry publications

[3] IEA scenarios

[4] Id.

[5] IEA outlook

[6] Blogs and publications by the author, multiple industry news and publications

[7] WEF, IMF, CEFIC, and other industry sources and publications

[8] Id.

[9] Id.

I hope that everyone is staying healthy and safe!
As I mentioned in a previous blog, these are times of uncertainty and so much has happened in the last two weeks.

• Pandemic has peaked in some places while others are still experiencing an increase.
• Economic activity is slowly opening up in some areas while others will still stay with essential services activity to minimize the spread
• Slowdown of overall economic activity continues to impact individuals, businesses, states, and countries. Unemployment levels in the US have reached a point not seen in recent times.
• On April 20, crude oil (WTI) futures contracts for May dived below zero-dollar for the first time in history, and at one point in the day it was as low as -40$/barrel, a drop of $58 within a single day. WTI disconnected its relationship with product prices and other benchmarks (like Brent). This was the result of contract expiry approaching with no ability to either hold positions or to take physical delivery. Crude oil prices are in the $20/barrel range now and are an indication of the depth of demand destruction even with announced production cuts by OPEC+.
• Road to recovery remains uncertain and there appears to be a consensus among pundits and economists that it will take much longer than the earlier hope for a quick recovery.
• With an unprecedented reduction in activity due to lockdowns, this is the first-time people observed the impact of these activities on the environment (particularly in large urban centers) and nature. This is likely to have a significant impact on the younger population about the influence they may exert on businesses and policymakers in the future. This will likely put more pressure on hydrocarbon fuels and therefore on refineries.
• There is a silver lining for the petrochemical industry as the larger population and policymakers recognize the contributions this industry makes towards health, hygiene, safety, and quality of life. This provides an opening and opportunity for the petrochemical industry to build on the goodwill and keep focusing on circularity and sustainability.

When will things go back to normal? I am sure that this question must have crossed your mind. I believe in human ingenuity and adaptability, the disruption caused by this pandemic has exposed some of the fallacies and at the same time forced us to think differently. I will try to limit my observations to the impacts on our industry and to the new normal. Some of the elements of the new normal include:

• Lowest cost of production in combination with high reliability
• Sustaining operation with minimum staff at the plant site
  • Relying on automation, digital and smart technologies. Safety, security, and reliability will play an important role.
  • Remote monitoring, diagnostics, inspection, etc.
• Smaller, inefficient, and less sophisticated assets will be under pressure to shutdown
• Adapting processes and technologies for maintenance and construction to minimize site staffing for safe and efficient execution
• Low crude oil prices result in a competitive cost of production for liquid feed crackers in Asia and Europe as compared to ethane crackers in North America and the Middle East (see Figure 1 below)
• Post-pandemic demand growth will be driven by Asia (including China) and other emerging economies
• Experience gap will likely increase due to voluntary retirements and layoffs as a result of the cost reduction effort
• Strategic focus and leadership style will evolve to cater to the new normal

 
How well we prepare for and adapt to the new normal will determine our success. Please feel free to send me a message if you would like to discuss or brainstorm ideas and share your thoughts. 

​Figure 1: Cost of Production for Different Feedstock (Refer to previous blog – Sep 30, 2018)

 I hope that everyone is staying healthy and safe while coping with many changes impacting our working and social lives.

These are the times of uncertainty and at times seem like lacking hopefulness. We are faced with an unprecedented slowdown of economic activity due to the COVID-19 pandemic and that impacted the overall demand for petrochemicals, as it is tied directly to the GDP.

Oil prices plunged due to a supply glut created by a price war between Saudi Arabia and Russia, in parallel with an unprecedented demand slowdown because of the pandemic. Even though OPEC+ has agreed to significant production cuts, these may not be enough to deal with the demand impact. In the near term, crude prices will likely remain low combined with high volatility.

The petrochemical industry is seeing similar impacts, with exception of demand related to health, hygiene, and the food/grocery industry (and maybe to some extent for digital technologies-related activity). Even with demand increase in niche segments, overall demand has slowed down significantly. At this point there is uncertainty about the timing for the start on the road to recovery and how long will it take to reach the pre-pandemic levels. The pundits and economists have a large divergence in their estimates, starting from 3 months to 2 plus years (with some estimates of recovery very similar to the trend seen after the last financial crisis). I will leave these discussions to experts (pandemic experts and institutions to determine the timing for opening the economic activity and to economists/policymakers to find a path to help the individuals to participate in a productive recovery). These factors are not under our direct control.

Our focus and energy, as individuals and companies, need to be channeled toward the things and issues that are under our control. It goes without saying that we all need to be aware of the developments around factors beyond our direct control to make adjustments to our plans on a needed basis.

We must bring the financial discipline to conserve and manage cash in times of uncertainty. This translates to savings in operating expenses as well as managing capital spending in the right places to position the companies to come out stronger on the other end. Each idea and item on the savings list need to consider the direct and indirect impact on core business and success factors, given the competitive landscape in a demand-constrained environment. I have talked about the turn-down operation or shutdown of some of the facilities in the previous blog. There is tremendous potential for savings in the decisions related to the operation of these facilities. Keeping the needs of employees, customers, suppliers, and other stakeholders; during these hard times; in the overall decision-making process pays out many folds over. I am available to discuss (pro bono phone consultation) to brainstorm ideas that can help this analysis. Please feel free to send me a message to reach me.

​As I write this blog, let me start by saying that hope everyone is staying safe and healthy!
With double whammy of demand destruction (impact of pandemic and efforts to slow the spread) and oil supply/price war, the ethylene cost of production curve has turned-on-its-head.

• European naphtha cracking is lowest cost of production
• Even in US, naphtha or butane cracking is seeing lower cost of production as compared to ethane cracking

These trends may not represent long-term expectations but highlight some of the obvious issues around short-term volatility and feed flexibility.
The main issue, crackers are facing and may continue to face, relates to demand destruction and the decisions to run at turn-down or shutdown some of the facilities.
There is no silver bullet to address the challenges that each of the owners and operators face. There are specific knobs that each facility or company-wide operations can explore to minimize cost of production. At Apex PetroConsultants, we are available to discuss (pro bono phone consultation) with owners/operators about approaches and ideas for minimizing their cost of production. 

Here are some thoughts about the pandemic that we as engineers, particularly chemical engineers, can relate to. These are like runaway reactions that need to be contained by all possible means before they can result in loss of containment. As we all know that loss of containment in a reactive system can cause significant damage to the facilities and potentially to the employees and communities. We know from experience that we take all necessary steps to avoid and arrest the runaway reactions and not worry about the production. That's the reason for our pandemic experts and emergency response teams are telling all of us to stop the reactive chain of pandemic. This is going to be a tough task given the size and complexity, it does require individuals to be fully involved and responsive to the needs of the times.
Once the dust settles, we will need to assess the impact before getting things started towards the road to normalcy. Again, like in a runaway situation we look at the mechanical integrity of the system and we reevaluate the procedures before restarting so that we can avoid another situation where we can avoid the conditions that result in a runaway in first place and recur.
We, as individuals and companies/businesses, have to do our part to deal with this pandemic and there will be a time to look back and assess lessons learned to make the systems more robust and resilient.

The ethylene industry has been growing at a significant pace since the turn of this century, but more so in the last decade. We have seen growth in North America driven by shale-related advantaged feedstock. There is also continuing growth in Asia, particularly China, driven by demand and in the Middle East to capture value addition in hydrocarbon chains.
The growth story from the last decade is continuing and here is what to expect till about 2025:

• North America's renaissance continues. This region has added more than 11 million Metric Tons per Annum (MTA) of grassroots ethylene in the last 5 years and is expected to add more than 14 million metric tons more in the coming 5 years.
• China continues to add ethylene capacity and is expected to add more than 18 million MTA of ethylene in the next 5 years.
• Rest of Asia is expected to add more than 11 million MTA of ethylene by 2025.
• Middle East (excluding Iran) is expected to add more than 12 million MTA of ethylene in this period.

The regions mentioned here will likely add more than 50 million MTA of ethylene by building nearly 40 steam cracking units. These estimates include plants currently under construction and in various stages of development, including some that are in the feasibility stage.
This offers tremendous opportunities for the industry including the businesses that supply hardware and services to the industry. The key to success will depend on the business strategy for maintaining the competitive advantage to capture market share for sustained growth. The growth in this industry comes with challenges as the supply/demand equation comes under pressure in the short term.
As the petrochemical industry is going through a significant demographic and experience level change in staffing over the next few years, a wide range of skills is substantially lacking. The industry will need to invest in training professionals, including those who are directly involved in operations but also support roles, business development, service providers, etc. The industry must focus on imparting experience and knowledge in efficient and effective ways to not only fill the gaps left by the retiring workforce but to meet the growing demand for talent.  
At Apex PetroConsultants, we focus on imparting working knowledge based on experience and expertise to help individuals and companies in realizing their full potential.

As the new year is about to unfold, I wanted to share my thoughts on current state of our industry and how best to prepare for the future.
Summarizing the big picture:

• Integrated margins for olefins-polyolefins are declining and expected to stay low
• Capacity additions, in near term, exceed the demand growth
  • Lower global capacity utilization
• Slowing global economic growth
• Oil/refining majors investing in integrated mega-projects changing competitive landscape
• Chemical companies, in general, are shifting focus to capital discipline
• Plastic recycling picking up momentum for both mechanical and chemical recycling
  • Significant investment for developing new technologies
  • Breaking down plastic waste to pyrolysis oil or monomer
• Companies are preparing and positioning for reduction in carbon footprint

These issues will impact the industry and the individual players in significant ways. How you prepare for these issues will determine the future success.
No matter whether you are an oil/refining major or a chemical company, capital discipline and capital efficiency always help positioning for success in a competitive and cyclical business environment.
Whether you are trying to improve an existing operation or building a new facility, there are many areas that require attention:

• When identifying opportunities and setting the direction
• During implementation, to effectively turn the goals and objectives into the reality
• Knowing the full capability of the facility (existing as well as new)
• Utilizing the assets effectively, efficiently and reliably

The options can be technically complex with varying risk profile and deploying the process technologies effectively can be challenging. This requires a great deal of expertise, experience, industry insights and knowledge.
At Apex PetroConsultants, we provide independent expert advise and impartial analysis to help clients realize their full potential. Our clients, whether they have in-house expertise or not, have benefited from the independent reviews and input.

Greetings of the season and best wishes for the new year to you and your loved ones!

The plant owners/operators need to know the capability of an ethylene plant to produce the ethylene product. To be clear, it’s typically not the design or nameplate capacity.

The plant capability is a key parameter for

• Benchmarking the asset utilization
• Understanding the plant operation and maintenance effectiveness
• Determining the current plant bottleneck(s)

​A complete understanding of the plant capability helps in setting business strategies and plans. It typically results in better asset utilization.
This helps in determining the baseline for expansion/debottlenecking projects with a competitive and optimum technical scope.

We help clients in determining and reviewing the current plant capability for

• Better asset utilization and improved economics
• Setting up expansion/debottlenecking projects for arriving at competitive scope (resulting in lower installed cost)

We expect a supply overhang in olefins industry in next two to three years, can be even sooner. Main factors contributing to this are:

• Planned cracker capacity additions in North America, Asia including China, and Middle East
• Softening demand 
  • slowing economic growth
  • Geopolitics – Middle East tensions, Tariffs/Trade barriers

Petrochemical businesses, including steam crackers, need to start positioning to stay competitive when margins will be under pressure. Industry will likely prepare for this by tightening overall spending. We believe that this offers an opportunity to owners and operators to be more competitive while targeting the long-term growth.
Here are some of the smart ways to prepare for the future:

• Take a holistic view of the business
• Mid to long term targets for business growth

This provides key input for evaluating options and approaches:

• Aligning current efforts with future growth expectations

Significant part of the competitive advantages result from:

• Utilizing the current assets effectively and efficiently

The success of these efforts depends on a good understanding of:

• Cost of production from your  existing assets
• Current / historical operation and performance parameters along with benchmarks

We help clients with these assessments and develop a roadmap for staying competitive during the periods of supply overhang while aligning the efforts for future growth. We believe that independent and cold eye reviews provide owners and operators with benefit of a different perspective.