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Shell’s chemical investments on track, lifting company’s earnings expectations

Posted on November 14th, 2017 by in Chemicals Industry News and Analysis

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Capturing growth in petrochemicals has to also be about capturing value, whether you are a standalone player or a producer integrated back to the refinery or other source of feedstocks. Making money down the chain has never been assured and typically runs in cycles. Feedstock cost volatility and the fluctuation of supply and demand see to that.

Shell said last week that a degree of a down-cycle trend had been factored into its planned earnings growth for chemicals. The company is performing well in petrochemicals even though its operating rates took hits in 2015 and 2016 from accidents and unexpected outages.

The plan still is, however, for a doubling of earnings by the mid-2020s from the current level, to between $3.5bn and $4bn a year. That would be based on a cash flow of between $5bn and $6bn and a base capital spending run rate of between $1bn and $1.5bn.

“About two-thirds of this aspiration is baked in,” Shell’s executive vice president for chemicals, Graham van’t Hoff, told investment analysts in mid-October.

Shell said at the start of 2016 that it planned to improve operating performance by $500m and van’t Hoff said that by the end of 2018 the goal will be about 80% complete.

Costs will have come down with a 10% reduction in head count (at the end of 2018 versus the end of 2015) and work on variable costs.

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Shell has also added value in chemicals by creeping capacities at its giant Norco complex in Louisiana, US, and at the Bukom plants in Singapore, he said.

Work with the Shell trading business has deepened to optimise sell side opportunities for the product portfolio.

In addition, three major investment projects have been given the go-ahead.

The fourth alpha-olefins plant at Geismar in Louisiana will lift capacity at the site to 1.3m tonnes/year and give Shell about 25% of global alpha-olefins capacity. The site is advantaged with its integration to ethylene oxide and detergent intermediates and to the Norco refinery and cracker as well as ethylene from Deer Park.

Shell’s alpha-olefins technology dates back to the 1970s and Van’t Hoff said that another generation of the process technology will be tested in a pilot plant at the site, due on-stream next year.

“We are beating all our aspirations here,” he added. The alpha-olefins expansion will also be on stream in the second half of next year.

Shell’s head of chemicals said that a variety of the company’s technologies will come to fruition at the expanded CSPC petrochemical complex in Huizhou, Guangdong Province in China.

The final investment decision on the 1m tonne/year expansion of ethylene capacity was made by the joint venture partners – Shell Nanhai and China National Offshore Oil Corporation (CNOOC) – in March last year. The expansion will include the largest styrene monomer/propylene oxide (SMPO) plant in China.

The main construction of Shell’s 1.5m tonne/year cracker and 1.6m tonne/year polyethylene project in Pennsylvania is just about to start, van’t Hoff said.

It had been put back as Shell looked at affordability and its funding requirements following the $52bn BG acquisition. That deal led to a significant group-wide asset disposal programme alongside strict appraisal of potential projects.

Anecdotal evidence suggests that the cost of the project will have risen significantly given the pressure on contractors and construction labour in the current chemical industry construction wave but an update from Shell was not immediately available.

A great deal of site work has been undertaken in Pennsylvania, however, with all foundations now in place and underground cooling systems concreted in.

As of today, the project is in “extremely good shape,” van’t Hoff told analysts. It will deliver a “substantial amount of cash cost advantage,” he added.

The project taps into the ethane advantage available from shale gas derived from local Marcellus and Utica deposits. Recent press reports show that Shell is making some progress on its Falcon Ethane Pipeline project that is likely to be operational well before the cracker and downstream PE units. The pipeline would transport ethane to the cracker site in Potter Township Pennsylvania.

The final third of earnings growth would be delivered from Shell’s portfolio of new business opportunities and the progress made beyond current memorandums of understanding and letters of intent.

But van’t Hoff added a note of cautious realism. “We will only invest after we see fundamental competitive advantage,” he said.

Read more news and analysis stories from ICIS, go to www.icis.com/about/news/

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