In the wake of the coronavirus (Covid-19) outbreak and collapse in crude oil prices, midstream chemicals, oil and gas companies must cut capital expenditure (capex) for growth projects to preserve cash, Independent Commodity Intelligence Services (Icis) said in a statement on Monday.
The US and global chemical investment wave, subsequently, looks to slow considerably in the years ahead.
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 thirties to the mid-teens “puts into question the economics long term,” American Chemistry Council chief economist Kevin Swift said during an Icis webinar on the economic outlook last week.
In turn, this creates a lot of uncertainty, which decision-makers are not fond of, he noted.
To put it into perspective, the statement on Monday said that, this year, US-based Dow had already decreased its capex to $1.5-billion for this year from $2-billion in 2019.
However, on an appearance on CNBC’s Mad Money programme with Jim Cramer earlier last week, CEO Jim Fitterling said the company would struggle to meet even the lowered $1.5-billion capex target because of limitations on the movement of contractors and engineers given the coronavirus outbreak.
On March 18, petrochemicals company Shell announced the temporary suspension of work on its 1.5-million-tonne-a-year cracker under construction in Monaca, Pennsylvania, in the US, to prevent the spread of the coronavirus. No timeframe was given for when work would resume.
For Dow, after having paid down around $2-billion in debt in 2019, it would like to pay off an additional amount of between $500-million and $1-billion in debt in 2020, said Fitterling.
At the end of 2019, Dow had net debt of $14.6-billion.
Dow is in the process of starting up its Texas-9 cracker expansion adding 500 000 t/y of ethylene capacity in Freeport by the middle of the second quarter.
Among other project plans are a 130 000 t/y ethylene expansion in Western Canada by the first half of 2021 and a 600 000 t/y polyethylene plant on the US Gulf Coast for a startup aimed at the second half of 2022.
Canada-based Methanex, meanwhile, said last week that it was evaluating all capital and operating spending, including its planned Geismar 3 project in Louisiana which would add 1.8-million tonnes a year of methanol capacity.
Construction on the plant started in late 2019 with planned start-up for mid-2022. However, in late January, Methanex announced that it was broadening its search for a strategic partner for Geismar 3.
Additionally, the statement indicated that oil companies were expected to pull back as well in terms of capex plans for 2020 and beyond in response to the collapse in oil prices.
While oil companies have not yet specifically mentioned cuts to chemical projects, Icis noted that all investments should expect to see an impact, particularly as many of these oil companies had aggressive plans for petrochemical capacity expansion, as they shifted their focus away from transportation fuel and towards chemicals for future growth.
To put it into perspective, Saudi Aramco is cutting its 2020 capex from an expected range of between $35-billion and $40-billion, indicated in its IPO prospectus, to a level of between $25-billion and $30-billion.
This is also down from capex of $33-billion in 2019.
Aramco’s capex plans for 2021 and beyond are also under review.
“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 CFO Khalid al-Dabbagh when commenting on the company’s fourth quarter earnings.
According to Icis, Aramco had some of the “most ambitious” petrochemical expansion plans of any company, with multiple new and derivative projects in Saudi Arabia, China, India and the US, where it had planned to spend around $100-billion towards petrochemical expansions over the next decade.
Other oil companies have also announced capex cuts, including Occidental Petroleum, Apache and Marathon Petroleum, and “more will surely follow,” Icis warned.
London-listed Shell on Monday announced plans to reduce its operating costs by between $3-billion and $4-billion over the next 12 months and its cash capex to $20-billion or below, from a previously planned budget of $25-billion.
French energy company Total also announced plans to reduce its capex by more than $3-billion this year and its operating costs by $800-million.
Meanwhile, North American midstream energy companies are also busy taking down capex plans.
Canada-based midstream energy and petrochemicals company Pembina Pipeline is reducing its 2020 capital spending by between C$900-million and C$1.1-billion to a level of between C$1.2-billion and C$1.4-billion.
Several projects will be deferred, including Pembina’s investment in the Canada Kuwait Petrochemical Corp petrochemicals joint venture – which involves building an integrated propane dehydrogenation and polypropylene complex in Alberta.
Further, officials have also previously indicated an in-service timeline for the complex in the second half of 2023.
Many other midstream energy companies have announced plans to cut capex, including Targa Resources, Hess Midstream, Enlink Midstream and ONEOK. Enterprise Products is also reviewing its capex programme.
“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 feedstocks is its lifeblood,” the statement noted.
While the US shale gas cost advantage has spurred hundreds of billions of dollars in chemical investment, the crash in crude oil prices, which has severely diminished this advantage, has placed the investment boom under threat.
“We could see delays in decisions for projects that were going to start up in 2025. Companies can certainly afford to delay a decision by a quarter or two,” said Swift.