Last week The Joseph Priestley Society of Chemical Heritage Foundation in Philadelphia hosted a luncheon and a speech by Fernando Musa, head of Braskem USA, which is now the largest polypropylene producer in the Americas. The most interesting part of the speech was the description of a new ethylene plant that will shortly be constructed by Braskem near Parkersburg, West Virginia in the heart of the wet” Marcellus Shale gas region. Shell Chemical is also planning an ethylene complex in this region – to be built most likely near Pittsburgh.
Braskem is a Brazilian company that dominates the petrochemical industry in its home country, but also has extensive investments in the U.S. and Europe. Brazil’s Odebrecht group and Petrobras, Brazil’s national oil and gas producer, own large percentages of the company, which also has public shares.
Some early U.S. crackers were built in the 1950s in Iowa and Illinois when the first pipelines were constructed to bring Gulf Coast natural gas to the Middle West. Since this gas had a BTU value much higher than 1000 (i.e. containing ethane, etc), so-called straddle plants were built to extract ethane and propane from the gas to bring its heating value down to the desired range. The recovered LPG then made a perfect feedstock for producing ethylene. But after that time, essentially all new crackers were built on the Gulf Coast, using either ethane/LPG of naphtha and heavier liquids as feedstocks.
For a long time, the U.S. had a strong competitive advantage in petrochemicals, as described in Michael Porters 1990 book (“The Competitive Advantage of Nations”). Our advantage fit Porter’s model, which was based on Demand Conditions (large domestic market), Related Supporting Industries (A local “cluster of suppliers, universities, contractors, etc), Industry Structure Rivalry (strong competitors constantly improving operations) and Factor Conditions (primarily favorable raw material and energy costs).
By the late 1990s, natural gas prices on the Gulf Coast had risen sharply and naphtha became the worldwide feedstock , with the U.S. losing its competitive advantage. Then, as we all know, it regained the advantage as low cost dry and wet shale gas became abundant a few years ago. With that background, let’s look at Porter again with respect to the prospective new crackers in the Middle West:
Demand conditions: Similar, but slightly better as demand for petrochemical end products is more concentrated in the Middle West than on the Gulf Coast. Related Supporting Industries: Less favorable. The interconnectedness of petrochemical plants on the Gulf Coast was highly important to non-integrated downstream producers, who could source ethylene or benzene from a number of suppliers using existing pipelines. Also, contractors were quickly available for shutdowns and turnarounds. Barge, rail and container ships were at hand to allow efficient supply chains. Industry Structure Rivalry: No longer important as leading worldwide competitors all use the best technologies. Factor Conditions: Favorable. Shell will enjoy the full benefits of being back-integrated into the Marcellus shale gas. Braskem will obtain well-priced ethane from local suppliers and, while less competitive than Shell, will still have a worldwide competitive advantage. It may have the opportunity to back-integrate by acquiring a fracking company.
Interestingly and not surprisingly, Musa said that he hopes that Shell will also move ahead with its project. Having two producers in relative proximity, no doubt enhancing the growth of a Midwest petrochemical “cluster” moves in the direction of guru Michael Porter.