Chemical and oil companies to slash capex, slowing investment wave

In the wake of the coronavirus and collapse in crude oil prices, chemical, and oil and gas, and midstream companies will all slash capital spending (capex) for growth projects to preserve cash. As a result, the US and global chemical investment wave looks to slow considerably in the years ahead, writes Joseph Chang, Global Editor, ICIS Chemical Business.

While major US chemical projects under construction should continue, the fall in Brent crude oil prices and the shrinking of the Brent/US Henry Hub natural gas ratio from the 30s to the mid-teens puts into question the economics long, creating a lot of uncertainty, which is something decision-makers don’t like.

This year, US-based Dow had already taken down its capex plan to $1.5bn for 2020 from $2bn in 2019. However, on a 16 March appearance on CNBC’s Mad Money programme, Dow CEO Jim Fitterling said the company would struggle to meet even the lowered $1.5bn capex target because of limitations on the movement of contractors and engineers given the coronavirus outbreak. Dow is in the process of starting up its Texas-9 cracker expansion adding 500,000 t/y of ethylene capacity in Freeport by mid-2Q2020. Among other project plans are a 130,000 t/y ethylene expansion in Western Canada by 1H2021 and a 600,000 t/y polyethylene (PE) plant on the US Gulf Coast for an 2H2022 start-up.

Meanwhile, Canada-based Methanex said it is evaluating all capital and operating spending, including its planned Geismar 3 project in Louisiana, which would add 1.8mn t/y of methanol capacity. Construction on the plant started in late 2019, with planned start-up for mid-2022.

In late January, the company had announced it was broadening its search for a strategic partner for Geismar 3.

On 18 March, Shell announced the temporary suspension of work on its 1.5mn t/y cracker under construction in Monaca, Pennsylvania, US, to prevent the spread of the coronavirus. No timeframe was given for when work would resume.

Pulling back
Major oil companies will also cut capex plans for 2020 and beyond in response to the collapse in oil prices. Importantly, many of these companies had aggressive plans for petrochemical capacity expansion, as they shifted their focus away from transportation fuel and towards chemicals for future growth. While oil companies have not yet specifically mentioned cuts to chemical projects, all investments should see an impact.

Saudi Aramco, the world’s largest oil producer, is slashing 2020 capex from an expected $35–40bn range indicated in its IPO prospectus, to a level of $25–30bn. This is also down from capex of $33bn in 2019. Aramco’s capex plans for 2021 and beyond are also under review.

‘As yet, no one knows precisely the impact on economic activity and energy demand from the coronavirus outbreak, especially in the longer term, and additional efficiencies may be required,’ said Aramco Chief Financial Officer Khalid al-Dabbagh.

Aramco has the most ambitious petrochemical expansion plans of any company, with multiple new cracker and derivative projects in Saudi Arabia, China, India and the US. It had planned to spend around $100bn towards petrochemical expansions over a decade.

US-based ExxonMobil said on 16 March it is considering significant cuts to capex and operating expenses. The company is building a 1.8mn t/y joint venture cracker complex with Sabic in Corpus Christi, Texas, with a planned start-up in 1H2022, and is planning a cracker complex in China as well.

Other oil companies have also announced capex cuts, including Occidental Petroleum, Apache and Marathon Petroleum. More will surely follow.

North American midstream energy companies are also busy taking down capex plans, including Pembina Pipeline, Targa Resources, Hess Midstream, Enlink Midstream and Oneok.

Major cuts to capex plans for oil and gas, and midstream energy companies are a long-term problem for the US petrochemical industry, as access to abundant and low-cost natural gas liquids (NGL) feedstocks is its lifeblood.

The US shale gas cost advantage has spurred hundreds of billions of dollars in chemical investment. With the crash in crude oil prices, which has severely diminished this advantage, the investment boom is clearly under threat.

Decisions for projects that were going to start up in 2025 are expected to be delayed.

Planned US cracker projects for start-up further down the road in 2023–2025 where final investment decisions (FIDs) have yet to be me made include those by FG LA (Formosa), PTTGC/Daelim, Chevron Phillips Chemical/Qatar Petroleum, and Motiva (Saudi Aramco).

Table 1: The 2^nd wave of US crackers
Source: ICIS