SHALE GAS DEVELOPMENT: A NEW ENTREPRENEURIAL OPPORTUNITY
When an established petrochemical company announces a new grass roots ethylene plant, it is generally described as a world scale facility. In 1970, the annual production capacity of a world scale ethylene plant was about 500 million pounds. To day, the size of a world scale ethylene plant is considered to be about 2.0 billion pounds per year. The world’s largest ethylene steam cracker has a capacity of 3.0 billion. A steam cracker of this size could become the benchmark for future world scale steam crackers.
There is generally a belief that an ethylene plant has to be world scale in order to be economically viable. This view incorporates an underlying premise that economies of scale associated with a world scale ethylene plant are necessary for a new plant to effectively compete. This assumption is rarely questioned.
Feedstock cost (raw materials), accounts for about 75% of the direct cash costs associated with ethylene production. Unlike some manufacturing operations, there is not a discount associated with the volume buying of feedstocks. In the case of ethylene, raw material costs (NGL’s), the unit cost of feedstock can increase increases with volume. This reflects the fact that you are dealing with a finite availability of a commodity. Not only do feedstocks have to be competitively priced, but they also have to be available over the forecast economic life of a new ethylene plant.
Economies of scale are not limited to capital efficiency and feedstock costs. Effective integration with downstream ethylene consumers, co-product disposition and support facilities are also factors that impact the total economics associated with mega world scale plants.
With new sources of least cost ethylene feedstock located near major polyethylene markets, the concept of smaller regional ethylene steam crackers begins to make economic sense. In fact, from a Homeland Security perspective, smaller than world scale ethylene steam crackers, spread over a wide geographic area, would allow for resiliency in case of natural disasters or terrorist attacks.
Smaller, fully integrated production clusters, would allow entrepreneurs to more readily participate in the downstream economic development of shale gas. Over the next several weeks, I will more fully discuss and develop this subject. We may be on the cusp of an entirely new petrochemical development business model.
