Refined products peak will pressure naphtha prices, broaden cracker feedslate

With demand for ethylene forecast to grow long after demand for refined fuels, feedstock naphtha will soon become a premium product with a premium price, and other refinery products will become viable alternatives for steam cracking, according to Walt Hart, vice president and global olefins lead at S&P Global Commodity Insights. Refineries designed to prioritize chemicals production will provide the long-term solution, but owing to their scale, these projects may also increase the potential for oversupply.

Hart spoke on March 19 at S&P Global's World Petrochemical Conference (WPC) in Houston.

Demand for ethylene is forecast to grow through 2050 and beyond, owing to rising living standards and a growing population. However, the traditional feedstocks for ethylene —naphtha, ethane, and liquefied petroleum gases (LPG)— will become more scarce, a consequence of the energy transition, noted Hart. In the case of naphtha, 80% is generated in oil refineries as a byproduct, but refined product demand is forecast to peak by the end of this decade.

"If refined product demand peaks, naphtha production could fall back," said Hart. "To increase the yield of naphtha coming out of the refinery, you need to have a price incentive. That means that naphtha is going to have to be priced at the [level] of transportation fuels like gasoline and diesel."

LPG, being priced off of naphtha, will also become more expensive, Hart added. Moreover, LPG supply is forecast to peak around 2030, as well, so increasing its use as cracker feedstock will require pulling it from the fuel markets.

Ethane supplies

Additionally, growth in the US ethane supply will soon slow. Hart estimated that there is only enough spare ethane in the PADD 3 and 4 regions that feed the US Gulf Coast to support 4-5 additional steam crackers.

"So, as we move forward, we should expect to see a lot of gasoil cracked, we might even see middle distillates cracked," said Hart. "It's going to be a range of things because we will not have enough of the other feeds."

The result will be the increasing integration of chemicals production into refining, referred to as crude-oil-to-chemicals (COTC) when 40%-60% of the refinery's output is chemicals or direct crude-oil-to-chemicals (DOTC) when the share is 75% or more.

"One of the issues we have to look at with COTC is that you're looking at whole sites, not individual assets," Hart said. "If you add a really big site, you're going to be adding big increments of olefins, big increments of aromatics, and maybe other chemicals as well." Hart noted that the startup of COTC projects designed to produce paraxylene has tended to flood the market with aromatic byproducts.

"So it's possible that we might see periods where too much olefins is added, or too much aromatics," he said. "That's a risk that's going to come with that."