A C6EN Feature
Petrochemical Earl V. Anderson, Senior Editor, New York City
nity is a wonderful thing. Old Ben Franklin thought so in 1776 when he said, "We must all hang together, or assuredly, we shall all hang separately." John Dickinson thought so, too, eight years earlier when he wrote, "By uniting we stand, by dividing we fall." Now, too, the petrochemical industry thinks so, because 25 companies that had been aligned into two different groups (Chemco and PetroChem) have joined to endorse a single, unified plan that will enable the petrochemical industry to break the shackles of the Mandatory Oil Import Program (MOIP) and to reap the economic benefits that will come from greater access to low-priced, foreign feedstocks. More important, there's an excellent chance that this increased volume of foreign feedstock will be flowing into their plants much sooner than anyone expected. Just how soon depends on how and how quickly the Government, particularly the Oil Policy Committee, acts. There's little doubt, however, that by getting together, the two groups have removed the biggest obstacle to favorable government action. The political climate couldn't be better. The petrochemical industry has been arguing for years that it must get its hands on additional foreign feedstock or domestic feedstock at world prices to remain competitive. Apparently, it has convinced government that it has a case. When the Cabinet Task Force on Oil Import Control, which had studied the entire oil import problem for almost a year, issued its mammoth and controversial report in February, it agreed unanimously that the petrochemical industry should have relief from MOIP. For the Oil Policy Committee, established right after the task force report was issued to set policy on oil imports, a satisfactory solution to the petrochemical feedstock problem is a high-priority project. Ever since OPC was formed, industry representatives have been working with
U
it and other government agencies on the problem. The major hangup was that the petrochemical industry was split into two groups, each offering a different solution. The differences were more apparent than real, however. The very fact that there were two groups —Chemco representing primarily integrated producers and PetroChem representing primarily the nonintegrated, downstream producers—gave the impression that the split within the industry was wider than it actually was. True, PetroChem emphasized increased quota allotments as the best solution for its members, but it also proposed an option by which other companies could get direct access to foreign feedstock for their plants. True, also, that Chemco emphasized unlimited access to foreign feedstock as the best solution for its members, but it also acknowledged that this might not be the best route for all companies, and that another option might be necessary. They
heeded
With one foot in the door by virtue of the task force report recommendations, and with several government officials almost begging the industry for a single plan to work with, all the petrochemical industry had to do was to heed the words of Ben Franklin and John Dickinson. Now they have heeded. Actually, the two groups have been working toward a single plan that both could live with ever since the task force report was issued. National Distillers and Eastman Kodak, two companies that have membership in both groups, made the task easier by acting as a bridge between the two. The result is a memorandum containing their proposed regulations that was submitted late last month to OPC and endorsed by Morse Dial, Jr., of Union Carbide, who is chairman of the eight-member Chemco group, and David S. Bruce of Hercules, who is
feedstock chairman of the 19-member PetroChem group. Now that OPC has a working document in its hands, it can move quickly if it wants to and, judging from the hectic pace around OPC lately, there's little reason to believe that it doesn't want to. The industry is hoping that new regulations patterned after its proposal will become effective for the last half of this year or allocation period. That's cutting it mighty thin. Even if OPC finds no major faults with the basics of the plan as submitted, there is still much staff work to be done-. After the staff hammers the regulations into shape, the regulations must be approved by OPC chairman George A. Lincoln, who also is director of the Office of Emergency Preparedness. Then they must go to the Oil Import Administration (Department of Interior), which will put them out for public comment. Normally, 30 days are allowed for comments on proposed regulations before they become effective. This period may be waived or shortened; it has been done before. However, the v e are no indications that it will be done with the petrochemical regulations simply to make them effective by July 1, just two weeks from now. If so, the regulations would be coming out of OIA just about the time this issue of C&EN goes to press. The new rules also could become effective on July 1 by making them retroactive to that date. A safer bet, however, is that they will become effective for the final quarter of the year on current allocation period. Everyone
benefits
If the regulations that come out of OPC are anything like the ones that the two groups submitted jointly, not only will petrochemical companies have access to more feedstock at world prices, they will have a great deal of flexibility in how they can obtain it. The plan offers something for every-
• It gives petrochemical companies the option of choosing either import quotas that are far greater than present quotas or unlimited access to foreign petrochemical feedstock for those companies that can use the material in their own plants. • It contains liberal exchange and certification privileges. • It provides an import-for-export plan for those who choose the quota option. • It recommends taking the petrochemical program out of the Mandatory Oil Import Program. Thus, imports for petrochemical operations would not be included under the 12.2% ceiling that limits total oil imports under MOIP.
• Perhaps most significant of all, it gives petrochemical companies the right to select their options on a plantby-plant basis. This provision gives the companies considerable flexibility because, not only can they choose between quota or access, they can choose quota for one plant and access for another. Under the proposed regulations, companies choosing the quota option as a way to offset the cost disadvantage of using domestic feedstock will be able to import crude oil or unfinished oils equivalent to 20% of their qualifying plant inputs. This 20% level becomes effective for the last half of the current allocation period and continues through the end of 1973. By
The Chemco-PetroChem combined group of 25 companies plans to import more foreign feedstock CHEMCO GROUP
PETROCHEM GROUP
Celanese Corp.
Cabot Corp.
Dow Chemical Co.
Chemplex Co.
Eastman Kodak Co.
Copolymer Rubber & Chemical Corp.
Monsanto Co.
Dart Industries, Inc.
National Distillers and
Eastman Kodak Co.
Chemical Corp.
E. I. du Pont de Nemours & Co.
Olin Corp.
El Paso Products Co.
Publicker Industries, Inc.
Ethyl Corp.
Union Carbide Corp.
Firestone Tire & Rubber Co. Foster Grant Co., Inc. Goodyear Tire & Rubber Co. B. F. Goodrich Chemical Co. Hercules, Inc. J. M. Huber Corp. Koppers Co., Inc. Marbon Chemical Div. of Borg-Warner Corp. National Distillers and Chemical Corp. Sid Richardson Carbon Co. Uniroyal, Inc. J U N E 15, 1970 C & E N
19
George A. Lincoln Must give OPC approval to regulations
used there or elsewhere to earn a subsequent allocation. This eliminates the "double dip" problem that has cropped up under MOIP. Safeguards also have been provided against double-dipping with the import-forexport allocations. The import-forexport allocations would be 100%. It is a bonus, or incentive, to encourage exports by making certain that the exports will be produced from competitively priced raw materials. Under the quota option, companies can import either crude oil or unfinished oils, but imports of unfinished oils can't exceed 15% of the total. Companies can skirt this limitation, however, and import 100% unfinished oils by petitioning OPC and certifying that the oils will not be sold or exchanged except on a like-for-like basis and that either the imports or the like domestic product will be used in their own plants. This is the only significant exchange provision for the quota option because, with the exception of the unfinished oil overrun, all imported crude and unfinished oils may be sold, or they may be exchanged as they are under current regulations. Unlimited
Chemco's Morse G. Dial, Jr. Endorses proposed regulations
then, OPC presumably .will have studied the relationship between domestic and foreign feedstock costs and should be able to make adjustments in the allocation level. If not, the regulations stipulate a 27% allocation level starting in 1974. The 20% level proposed in the Chemco-PetroChem plan follows the recommendation of the Separate Report of the task force. Last year's petrochemical quota for imports was equivalent to 11.2% of eligible petrochemical plant inputs for districts 1 to 4 and 11.9% for district 5. In calculating its eligible inputs, a company must reduce its claim by any inputs produced in the plant and 20 C&EN JUNE 15, 1970
access
If a petrochemical company chooses the access route to foreign feedstocks, it will not be bound by any allocation for imported crude and unfinished oils. It will have unlimited access to foreign feedstock. It can import all of its feedstock requirements for petrochemical operations, but not, of course, for energy products that fall under MOIP controls. Under the proposed regulations, completely free access becomes effective with the 1972 allocation period. Until then, imports are limited to only 50% of a company's petrochemical feedstock requirements to phase in the program smoothly. With the access option, a company can't sell its imports as it can under the quota option. It can, however, save on transportation costs by exchanging them on a like-for-like basis for use in its own plant. It can also certify, or transfer, its import rights to a supplier. This upstream certification enables a company that can't use foreign feedstocks directly to receive the benefits of the access option. It also makes it possible for a company to operate competitively as a merchant olefin producer when unfinished oils are sold for petrochemical use instead of being used within the plant. In effect, it is similar to the current practice of "selling tickets," but certification demands a close and intimate relationship between the supplier and the certifying company. The line between petrochemical and raw material must be directly traceable. Of
course, the supplier must reduce his own import rights by the amount he receives through certification. Besides providing the option between quotas and access, the new regulations redefine some terms used in the present MOIP and add some new ones. The redefinitions have been sorely needed and have been recommended by the petrochemical companies, even some of the oil companies, and by the task force itself. The definition of a petrochemical plant has been changed so that the conversion limits for qualification reflect its output. Under the proposed quota option, a petrochemical plant will be one in which more than 40% by weight of its output must be petrochemicals or petrochemical feedstock for a downstream plant and in which no more than 25% of the output can be controlled energy by-products. The present MOIP rules say that, to qualify as a petrochemical plant, it must convert more than 50% of its input into petrochemicals. An alternate definition of a petrochemical p l a n t that more than 75% by weight of its output be petrochemicals—remains the same in the Chemco-PetroChem proposal as it is in the present MOIP regulations. The proposed regulations also offer a completely new term—the petrochemical access facility—for those who select the access option. As defined, a petrochemical access facility must consume crude oil or unfinished oils but can't be a refinery. It must either be ineligible for or elect not to choose the quota option. It must also convert at least 30% by weight of its inputs into petrochemicals or feedstock and no more than 30% of its input into controlled energy products. A petrochemical access facility also enjoys the alternate definition that more than 75% by weight of its recovered output be petrochemicals. Plants qualifying as a petrochemical access facility would get a breakon aromatics. A proposed new definition classifies benzene, toluene, ethylbenzene, and any xylenes as unfinished oils, regardless of grade. Present regulations exclude chemical-grade aromatics from the list of unfinished oils. This new rule would allow access plants to certify aromatic feedstock back to their suppliers as long as it is used for petrochemicals and not in gasoline. These, then, are the regulations that petrochemical companies hope will apply to them soon. And, barring any unexpected developments, these or regulations quite similar to them are the ones they will be living with instead of MOIP. One hitch that might develop, although it's unlikely, is that someone in the government
chain of command will want the regulations written to mesh with the tariff system proposed for oil imports by the majority of the task force. As written now, the Chemco-PetroChem proposal deals only with the current oil import situation. "It's tough enough to write a program for today's conditions," says one group spokesman, "without trying to write it for a system that doesn't even exist." Obviously, though, the petrochemical groups would want their program to be outside of any tariff regulations, just as they want it outside of MOIP. The tariff proposal of the task force majority shouldn't delay any new petrochemical program. The President did nothing about any major changes in the oil import program when the task force report was issued, and it's improbable that any major changes will be made very soon. In March, less than a month after the task force report was released, President Nixon cut back the volume of Canadian oil that could be imported without waiting for major changes in the oil import program. This was a high-priority item. The petrochemical feedstock situation is a high-priority item, and there's no reason to believe that it must wait for a major change in the oil import program. Certainly the petrochemical industry doesn't want to wait. One of its major arguments has been that decisions must be made now on plants that will be built several years from now. To make these decisions, it must be absolutely certain about its feedstock supply. Long
struggle
When the proposed regulations or reasonable facsimiles do, in fact, become law, they will put an end to the industry's long, hard, complicated, and controversial struggle to improve its feedstock position. The struggle really began back in 1959 when MOIP was bom, although at the time, the petrochemical industry didn't realize that it would become involved in an uproar that has international implications. Testimony, both favorable and unfavorable toward the oil import program, presented at an endless parade of Congressional and other government hearings, would fill a long row of file cabinets. The program is that complicated and controversial. It is important to understand the basics of MOIP, however, to appreciate how the petrochemical industry arrived at the threshold it now stands on. On March 11, 1959, acting under the national security provisions of the Trade Agreements Act of 1955, President Eisenhower established MOIP by issuing Presidential Proclamation
3279, a proclamation that has been amended several times since and will have to be amended again to accommodate the petrochemical program. The President acted because a flood of low-cost, imported crude oil and finished petroleum products was threatening to disrupt domestic oil exploration and production operations and, as a result, threaten national security. It wasn't a new problem; Washington had been hounded for years about the steadily mounting imports. When a stab at voluntary controls failed, mandatory controls became necessary. The mandatory controls restrict imports of crude oil and unfinished oils, finished petroleum products, and residual fuel oil to be used as fuel. The Department of Interior's Oil Import Administration (OIA), which administers the program, divides the country into six districts. Districts 1 to 4 cover the country east of the Rockies; district 5 includes the five western states, Hawaii, and Alaska. Puerto Rico, which lies within the U.S. customs area, is a numberless district all its own. In districts 1 to 4, the heart of the oil import program, licensed imports of crude, unfinished oils and finished products (other than residual fuel) are limited to 12.29c of estimated total domestic production of crude and natural gas liquids during the allocation period. Estimated overland exempt imports during the same period must be subtracted from the 12.2% quota. No more than 15% of the total crude and unfinished oil imports can be unfinished and imports of finished products are limited to 1957 levels. District 5 is an oil-deficit area and the import level for crude and finished products, including residual, is set to
make up the difference between estimated domestic supply and demand. Because the estimates have been very accurate, district 5 producers enjoy virtually complete import protection. A refiner receives licenses, or "tickets," to import based on a percentage of his refining inputs. Refiners that imported during the voluntary program—the so-called historical importers—can choose between an allocation based on refinery inputs or based on a fixed percentage of its last crude import quota under the voluntary program, whichever is larger. A ticket holder must run his imported crude and unfinished oils through his own refinery, or he can exchange them for domestic crude and unfinished oils that, in turn, must be run through his refinery. Oil companies can't sell their tickets, but they have worked up such an effective exchange system using variable exchange ratios that they are able to profit from the value of the tickets. This original, basic program soon became peppered with criticism and, over the years, was transformed into a patchwork quilt of changes, amendments, and exceptions. One particular target for criticism has been the historical importer feature, which favors some established importers. The historical importer rule is gradually being phased out of MOIP, but many think that it is being phased out too slowly. Another controversial feature of the program is the sliding scale, which governs all refiners except those with historic protection. The sliding scale makes proportionately smaller import allocations as the refiner's input volume increases, to the benefit of the smaller refiner. The sliding scale has been changed over the years, but the benefit still lies with the small refiner.
The proposed Chemco-PetroChem regulations would bring these changes: • • •
Give companies the option of choosing import quotas or unlimited access to foreign feedstock that they can use directly in their own plants. Permit the above option on a plant-by-plant basis; Take the petrochemical program out of the Mandatory Oil Import Program.
Those companies choosing the quota option could: a.
Import. 20% of their qualified imputs as crude or unfinished oils (27% starting in 1974), b. Receive a 100% allocation for exports. . c. Sell or exchange their quotas (with limited exceptions).
Those companies choosing the access option could: a.
Import 100% of their qualified imputs for use in their own plants (50% until 1972), b. Exchange their imports on a Hke-foMike basis. c. Certify, or transfer, their import rights to a supplier.
J U N E 15, 1970 C & E N
21
For instance, last year in districts 1 to 4, a refiner with less than 10,000 barrels per day (bpd) input received a 19.5% allocation. Refiners with more than 100,000 bpd input received only a 3 % allocation on the amount exceeding 100,000 bpd. Residual fuel oil, a low-priced product of crude refining, has been handled separately from the beginning of the program. Domestic supply has declined as refiners reduced their residual output in favor of more profitable products such as gasoline and jet fuel. Imports of residual into districts 2 to 5 remain subject to control. Because domestic supply can't keep up with demand, though, imports into district 1 (the East Coast) have been virtually free of control since 1966. There have been other complaints and there have been other patches added to the MOIP quilt, but until 1965, most of the changes still concerned how the total import pie would be divided among the oil companies participating in the control plan. Beginning in 1965, however, changes were injected into MOIP that had nothing to do with national security, the prime objective of the program. It was then, too, that the petrochemical industry found a way to crash into the tight circle of qualified oil importers. Even in the late fifties, the petrochemical industry assumed that future plants would be geared to naphtha. MOIP forced the industry to turn increasingly to natural gas liquids ( N G L ) . Throughout the early sixties, the industry prospered. Sales and exports soared; it was competitive with any other petrochemical industry in the world, thanks to an abundant supply of low-cost NGL that served as its primary feedstock. As the sixties ticked away, the industry woke up and realized that its enviable supply of NGL wouldn't last forever. If projections were correct, supply wouldn't be able to keep pace with demand in the years ahead. Overseas, foreign competition enjoyed access to low-priced naphtha and was becoming stronger in world markets. Although the petrochemical trade balance continued to increase, petrochemical imports sported a higher growth rate than exports. At home, oil companies had penetrated into the petrochemical business and were able to base at least part of their petrochemical production on low-priced, imported crude. Petrochemical companies had no import privileges. They wanted in. 22 C&EN JUNE 15, 1970
In December 1965, the petrochemical industry got in, hanging on the coattails of an oil company. Earlier that year, Secretary of the Interior Udall approved Phillips Petroleum's plans to build a petrochemical complex in Puerto Rico. Included in the approval was the right to a 50,000bpd import quota and the right to ship 24,800 bpd of gasoline to the mainland. Secretary Udali's action was a milestone in MOIP's history; for the first time, it was being used to promote, not national security, but the economic welfare of Puerto Rico and to stimulate employment there. Other oil companies condemned the action, but with a loophole opened at least eight companies crawled in with plans for petrochemical and refining operations in Puerto Rico and the Virgin Islands. Finally, on Dec. 10, 1965, President Johnson issued a new proclamation (Presidential Proclamation 3693) that brought three major changes to the oil import program: • It gave Interior Secretary discretionary authority to grant special import allocations to plants that he thought would promote employment in Puerto Rico. • It gave him authority to control imports of foreign oil into foreign trade zones, thus blocking one avenue to foreign feedstocks that at least two chemical companies, Dow Chemical and Union Carbide, tried to travel. • It gave him authority to grant import quotas to petrochemical producers. This proclamation pulled petrochemical companies into the magic circle of qualified importers, and the industry was given a quota of 32,000 bpd for 1966, its first allocation period. With this allocation in its pocket, the industry could concentrate on opening the gates to imports even wider. OLA increased the petrochemical industry's allocation each year (37,000 bpd in 1967, 69,000 bpd in 1968, 88,000 bpd in 1969, and 94,000 bpd this year). These increases had to come out of somebody else's pocket, and they did, primarily the large refiners', because total crude and unfinished oil imports still were limited by the 12.2% ceiling. Despite the increased allotments, the industry wanted something bigger. As early as 1967, Chemco, which then represented nine petrochemical companies (Du Pont didn't pull out of Chemco until last fall), started pushing for unlimited access to foreign feedstock. Even then, many other petrochemical companies recognized that Chemco's plan would favor the manufacturer-user of feedstocks more than the purchaser-user. The industry did sell the Government on its import-for-export plan. Under the plan, import-for-export
allotments would be outside the 12.2% limit and would supplement, not replace, existing petrochemical quotas. The amount of the import-for-export allotment would be proportional to the hydrocarbon content of the petrochemical exports. Secretary of Commerce Trowbridge and Interior Secretary Udall jointly announced the import-for-export scheme in December 1967, but the program was never launched. Many
controversies
When President Nixon came into office, the entire oil import program was filled with the smoke of many controversial brush fires. The petrochemical problem was only one of them. In March 1969, he created a Cabinet Task Force (the Shultz Committee, named after Secretary of Labor George C. Shultz, who chaired the committee) to make a comprehensive study of the oil import problem. Oil companies, petrochemical companies, consumer groups, and other interested parties responded to the task force's questionnaire with an overpowering flood of bulky submissions. It soon became apparent, if it wasn't already, that the petrochemical industry was only the tail of the dog and, in the case of oil imports, the tail wasn't wagging the dog. It was just as well that way. When the task force issued its 399-page report, a majority of the members recommended a major change in the import system to one based on tariffs instead of quotas. A separate report favored improving the present quota system and increasing the allotments under it. The task force agreed unanimously, however, that something had to be done for the petrochemical industry, although they differed as to what. President Nixon, in effect, did nothing about major changes in the program except to postpone them indefinitely. He formed a new committee (OPC) to study and set policy for the oil import program. He put OPC to work immediately to solve several priority problems on which there was general agreement among task force members. The petrochemical feedstock problem was one of them and this is why the industry is optimistic about quick results, now that it has agreed on a single plan. The task force study gave the petrochemical industry a good opportunity to polish up all of its old arguments and to add some new ones. It took advantage of the opportunity. So did the oil companies, since they believed that oil imports belonged to oil companies. Chemco submitted its basic proposal
for unlimited access to foreign feedstocks. Later, it joined 16 other companies in the 25-member AllChem group. AllChem's primary emphasis was on increased quotas, either inside the 12.2% limit or outside it. The group also pushed for immediate action on the import-for-export plan. Chemco members endorsed these steps as interim measures only and, eventually, pulled out of AllChem. The other members, primarily purchaserusers of feedstocks, regrouped into PetroChem. The differences between the two groups, however, were more tactical than strategic. They agreed completely on the nature and causes of the problem. Difficult
valley
The petrochemical industry now pictures itself walking deeper into a valley with a mountainous feedstock problem on each side. It looks one way and sees that the availability of NGL, its most important feedstock and a major reason why it has been able to dominate world markets until recently, will become tighter and that prices will increase. It looks the other way and notes that the alternate feedstockheavier liquids such as naphtha and gas oil—will be uneconomical unless petrochemical companies can import as much of the low-cost foreign material as they need. Without this foreign feedstock, say industry spokesmen, petrochemical companies will not be able to compete effectively, either at home or in world markets. They will be forced to build new plants overseas. As a result, the U.S. economy, employment, balance of trade, balance of payments, even national security, will suffer. Costs of raw materials are critical in pricing petrochemicals, especially basics and intermediates, says Chemco. Chemco estimates that costs of raw materials represent 53% of the total cost of making ethylene from ethane
(85% if the feedstock is gas oil). Feedstock accounts for 30% of the cost of converting ethane all the way to polyethylene. The petrochemical industry says that the difference between domestic and foreign crude prices, caused by the oil import program, is an indicator of the kind of savings they should be enjoying on their costs of raw materials. Posted crude prices vary widely, but for the sake of argument they are considered to be $3.50 per barrel for domestic crude and $2.25 per barrel for foreign crude. The $1.25 difference is equivalent to 0.4 cent per pound in the price of petrochemical feedstock. Chemco points out that this price differential is equivalent to 12% of current ethylene prices and 5% of polyethylene prices. Oil company people think that the petrochemical industry has gone overboard in stressing raw material costs. One oil company man estimates that hydrocarbons represent only 25% of raw material prices, 9% of petrochemical intermediates prices, and less than 2% of the price of finished petrochemical products. Standard Oil (N.J.) notes in its submission to the task force that prices of petrochemical intermediates and finished products generally have declined by about 25% or 2 cents per pound since 1960 without equivalent price cuts in domestic crude or gasoline prices. It says that other factors have a greater influence on petrochemical prices than raw material costs. Jersey's analysis shows that, of the estimated $20 billion worth of finished petrochemicals that will be produced in the U.S. this year from controlled hydrocarbons, only $700 million, or 3.5%, is the maximum value of the controlled hydrocarbons contained in them. All the rest is the value of nonpetroleum raw materials and value-added by manufacture. Jersey concludes, if hydrocarbons that originate from competitively priced domestic feedstock (primarily NGL) are considered, the savings in raw material costs that might result
U.S. production of natural eas will las demand through most of the 1970's Trillion ft3 I
Demand
i
Production
1970
1975
1980
from altering the oil import program would apply to only 1.25% of the value of all of the petrochemicals produced in the U.S. No protection Although the raw materials that the petrochemical industry wants to import are subject to controls, its finished products have no such protection. Domestic companies argue that they must compete in their home market against an increasing flow of imports with one hand tied behind their backs. They believe that the situation will be even worse when the Kennedy round tariff cuts become fully effective. The industry compares its position with the one that oil companies would have to face if present quotas on imported crude were maintained, but quotas on finished products such as gasoline were discontinued. Oil company people say that the tariff protection on finished petrochemicals is much higher than the estimated 0.4 cent per pound that the industry will gain by importing foreign feedstock. Mobil Oil, for instance, estimates that these cost savings for raw material amount to only 20% of the tariff on polyethylene. Jersey figures that the average tariff on all finished petrochemicals is six times greater than any advantage the industry can get from imported feedstock, and that it still will be four times greater even after the full Kennedy round cuts. Jersey notes that some petrochemical intermediates (benzene, toluene, xylene, and butadiene, for example) have no tariff and are internationally traded. However, U.S. exports of these products exceed imports by a substantial margin. The U.S. petrochemical industry may become vulnerable to increased imports of these intermediates, especially benzene, in the future. If so, Jersey suggests that the problem can be corrected by reclassifying the products as unfinished oils. This would subject them to MOIP controls. The petrochemical industry's plans are more ambitious than that. It wants more foreign feedstock, not only because of the cost savings but because crude-based feedstock will give petrochemical companies a flexibility that they can't get with NGL. These heavier liquids yield a greater mix of coproducts than NGL and the industry thinks that it is being denied a fundamental business option—the right to choose raw materials for maximum versatility. Chemco, among others, blames this feedstock inflexibility for the recent shortage of propylene and butadiene. Invariably, the controversy boils down to feedstock availability and price. Dozens of studies and hundreds JUNE 15, 1970 C&EN
23
of speeches have been made on the subject, and most of them agree that what the petrochemical industry has been saying is correct—that NGL will be shorter in supply and higher in price and that heavier feedstocks will become more important in the future. Estimates of the growth in demand for petrochemical feedstock throughout the seventies vary from 7 to 10%, with most of them zeroing in at 8.5 to 8.8%. On the other hand, most analyses indicate that natural gas production in the U.S. will increase at 3% per year through 1975 and then level off at about 25 trillion cu. ft. Less gas was found per dollar spent on exploration in the sixties than there was in the fifties, and this trend is expected to continue. Therefore, there will be less exploration. The gas reserves-toproduction ratio, which has been declining, will continue to decline. Consequently, the supply of NGL will also level off beginning in the mid-seventies, and its growth rate until then probably won't even match that of natural gas. One consultant, David N. McClanahan, tabs NGL growth at 2% per year through 1975. The reason for this is that the liquids content of natural gas is dropping. Newer gas fields have been drier than the old ones, and even the old ones are becoming drier. The pressure on NGL prices, therefore, is all upward. Posted spot prices for Gulf Coast propane already are reflecting this. They rose from 3.5 cents per gallon last August to 5.5 cents a few months ago. Prices under longterm contracts, of course, are lower but they, too, are rising or soon will. The alternate use of LPG in the fuel market probably can bid the price up without fear of losing out to other fuels. Jersey agrees that demand for petrochemical feedstock is growing faster than natural gas supply. Yet it told the task force that it doesn't see a shortage of NGL in the future. The company says that long-term contracts are available on the Gulf Coast at prices that will keep U.S. ethylene producers internationally competitive. Supplies of these feedstocks should be adequate until the mid-seventies. Beyond that, says Jersey, new supplies should begin to move into the country from Alaska and Canada, supplies that other forecasters haven't taken into consideration. These new supplies will ease the pressure on Gulf Coast NGL so that it will continue to be a competitively priced petrochemical feedstock. Naturally, petrochemical companies 24 C&EN JUNE 15, 1970
don't share Jersey's confidence about new NGL supplies or its contention that NGL prices will continue to remain competitive along the Gulf Coast. Some companies indicate that longterm contracts (10 years) now have clauses in them that call for reopening price negotiations every three, four, or five years. If Gulf Coast prices for propane were 3 to 3.5 cents per gallon, propane would be competitive with European naphtha selling at 5 to 6 cents per gallon. That's just about the level at which European naphtha has been selling recently, although there now are indications that the price is slipping below 5 cents. In fact, the prices of domestic NGL and European naphtha are going in different directions. Petrochemical demand on naphtha will increase in Europe, but prices should remain relatively low because of Europe's lower gasoline demand and higher fuel oil requirements per barrel of crude. European refiners also are running lighter crudes from Libya and Algeria and dipping deeper into the heavier end of the barrel for liquid cracking stocks. Meanwhile, NGL prices in the U.S. will increase. Propane is now selling along the Gulf Coast at 5.5 cents per gallon. Projections made only a few years ago didn't anticipate that price level until the mid-seventies. These are the trends that worry domestic petrochemical companies. At one time, their low-cost feedstock, coupled with their larger plants, gave them the competitive edge on their foreign competitors. Now, with foreign plants coming on stream that are as large as those in the U.S., domestic companies have lost both of their advantages. Getting their hands on more foreign feedstock will return at least one of these advantages to the domestic producers. Dr. Robert B. Stobaugh, Jr., Harvard lecturer and petrochemical adviser to the task force, made a comprehensive study of the oil import program's effect on the petrochemical industry for the task force. In it, he outlines how these costs of raw material affect ethylene production costs. Dr. Stobaugh, who has a wealth of industrial experience and isn't considered "a long-haired academician" by people in the industry, picked ethylene because it is the largest volume petrochemical and because most of the controversy concerns olefin feedstocks. His calculations already are out of date as a result of price changes, but they illustrate the problem. Dr. Stobaugh estimates that the "cost" of producing ethylene in the U.S. from NGL or liquefied refinery gas (LGR) is 2.3 cents per pound. In Europe, using naphtha (and recover-
ing the aromatics from the dripolenes), it is 2.4 cents. He defines his "cost" as the price required to earn a 20% aftertax return (including profit and depreciation) on gross investment. Actual market price to a large consumer, he says, is 3.25 cents. Naphtha
beckons
That is how things stand now. If naphtha prices in Europe remain low or go lower and NGL prices in the U.S. rise, the effect on ethylene production costs is obvious. Some ethylene producers, therefore, think that they will have to turn to naphtha. If they do it will have to be imported naphtha because it is cheaper than domestic. Although European naphtha sells for about 5 cents per gallon or less, domestic naphtha is worth 8 to 10 cents, reflecting the higher gasoline values in the U.S. relative to Europe. This price differential should remain as long as U.S. crude is priced above world prices and lead remains in gasoline. Dr. Stobaugh's ethylene "cost" figures reflect these raw material costs. European producers still would be able to make ethylene at 2.4 cents per pound. The "cost" to U.S. producers using domestic naphtha would be 3.0 cents. If U.S. companies could get access to foreign feedstock, however, their "cost" would drop to a competitively attractive 1.7 cents. If U.S. producers turn to naphtha, they will be faced with an entirely different, more complicated set of economic conditions. Naphtha as a feedstock yields a lot more coproducts than NGL (60 to 70% from NGL and 200 to 300% from naphtha). Computing ethylene costs isn't enough. The value of coproducts, such as propylene, butadiene, and fuels, must be considered along with feedstock costs and plant size. It is a difficult task, and it is a risky task because huge investments are at stake. Dr. Stobaugh looks at the cost of producing an olefin mixture in his report for the task force. He chose as his "standard olefin mixture" the ratio of ethylene, propylene, and butadiene as reflected by the estimated market for these products in 1980. His results are startling. Even under today's conditions, U.S. producers are not competitive with their European counterparts. Using LPG or LRG, their olefin mixture cost is 2.9 cents per pound; it is 2.5 cents in Europe using naphtha. If American companies have to switch to naphtha under the current MOIP controls, their position will get worse. The cost of producing the olefin mixture will rise to 3.2 cents. If import controls are loosened for petrochemical companies and they can use foreign naphtha, their
Access to foreign feedstocks would lower the cost of producing ethylene in the US. Qosts of \ producing Standard ethylene* olefin mix6 Cents per pound
Situation and feedstock U:$. LOCATION* Present oil import program LPG or LRG U.S. gas oil U.S. naphtha Unlimited access to foreign feedstock European naphtha European gas oil EUROPEAN LOCATION European naphtha European gas oil
2.3 2.4 3.0
2.9 2.9 3,2
•1.7 \L3
2.5 2.3
; ;
2.5 2.8
!
2.4 .2.9 .
» Price required to earn a 20% after-tax return (including profit and depreciation) on gross investment &The mix of ethylene, propylene, and butadiene estimated to be consumed in the U.S. in 1980. « East Coast location for plants using imported feedstock. Gulf Coast location for others. Source:
Stobaugh report to task force ,
cost will drop to 2.5 cents, the same as it is in Europe, says Dr. Stobaugh. Naphtha is also the feedstock for aroma tics, and more aromatics will be produced in naphtha-based ethylene plants, both in the U.S. and overseas, in the years ahead. Demand for aromatics for petrochemicals in the U.S. is expected to grow 10% per year during the seventies. Because these plants won't be able to meet the demand, aromatics prices will have to remain high enough to justify producing them by reforming. European aromatics capacity hasn't caught up with demand there yet, but it is being built up very rapidly. The new, large-scale units being built in Europe, coupled with their low-cost naphtha feedstock, means that in a few years aromatics prices in Europe will be lower than in the U.S. Just how much lower is hard to say, but Dr. Stobaugh estimates that the difference may be about 2 to 3 cents per gallon. In another five years, it's very likely that Europeans, particularly the West Germans, will be exporting benzene to the U.S. Before this happens, present U.S. exports of benzene derivatives, such as cyclohexane and styrene, will dry up. Puerto Rican benzene plants, built to supply the European market, could supply mainland U.S. with additional benzene until the European imports are needed. Imports and exports of the other aromatics, particularly o- and pxylene, aren't as sensitive to raw material costs as is benzene, but they will be in the future, says Dr. Stobaugh. The cost differential of 0.4 cent per pound (equivalent to the $1.25 per barrel differential in foreign and domestic crude under MOIP) will have a strong in-
fluence on trade patterns of aromatics and their derivatives because they have low unit values. Without even knowing the exact effect of raw materials costs on exports and imports, it is reasonable to expect a significant impact on the U.S. trade balance. If U.S. consumption of basic aromatics and first derivatives is $2.5 billion in 1980 as expected, a shift from exporting the equivalent of 15% of this consumption to importing 57c of it will cost the trade balance $500 million that this country can't afford. Trade
emphasis
Both Chemco and PetroChem have played heavily on this theme, trying to convince Washington that the industry needs more foreign feedstock. They play up the fact that the petrochemical industry contributes substantially to the balance of trade. The petrochemical trade surplus in 1968 was $1.3 billion, compared to a surplus of only $868 million for all manufacturing. They point out that foreign competitors have been steadily gaining ground in the world market place. European and Japanese petrochemical companies already have seized 75% of the world export market. Without cheaper raw materials, U.S. companies claim that they will be undersold in Third Country markets and probably lose some of their home market to import competition. If the industry can obtain the necessary foreign raw materials, its 1980 trade surplus will be $600 million higher than it will be without the foreign feedstocks. Oil companies don't buy these arguments. They don't think that getting more foreign feedstock will help U.S.
petrochemical companies to increase their exports or protect themselves from imports because there are more important factors than raw materials that affect world trade flows. Tariffs, nontariff barriers, marketing and transportation costs, technology, and local investment incentives all have an impact on world trade flows. Compared to these, raw material costs are insignificant. Increasing the petrochemical industry's access to foreign feedstocks, therefore, will not help the industry's trade balance, but it will hurt the trade balance of the petroleum sector. Mobil Oil suggests that if the Government finds that the petrochemical industry isn't competitive with foreign companies in the future, it can grant a special import quota for feedstock directly and exclusively related to the industry's increase in exports. This proposal is much more limiting than the import-for-export plan offered by Chemco and PetroChem but the oil companies think that their proposal avoids windfalls by limiting the quota to increases in exports, not total exports. The positions of both the oil companies and the petrochemical companies have been documented in bulky reports prepared by two respected consulting firms; Arthur D. Little's study supports the petrochemical industry view and Stanford Research Institute's analysis confirms the oil companies' position. Because Dr. Stobaugh's study was made directly for the task force, it is presumed to be neutral. His conclusions agree with the petrochemical industry's although he doesn't think that the balance of trade benefit in 1980 under a free access program will be quite as large as Chemco says it will. Dr. Stobaugh says that, with total petrochemical trade (imports and exports) estimated at about $7 billion by 1980, it isn't too difficult to realize that even small changes in prices could produce large changes in trade flows over a period of years. The effects of these changes are difficult to quantify because they can be very small for finished products, very large for basic petrochemicals, and anywhere in between for intermediates. Because of this, Dr. Stobaugh's estimate of the increase that can be expected in the 1980 petrochemical trade surplus if a free access program is adopted ranges from $300 million to $620 million. Plis "best estimate" is $450 million (see table on page 26). The balance of trade argument probably carried a lot of weight in persuading Washington that the petrochemical industry should have access to foreign feedstock. The overall trade surplus was only $1.2 billion last year; it had been as high as $7 billion in 1964. JUNE 15, 1970 C&EN
25
With the balance of payments still a lingering problem, the country can't afford to lose anything in its trade surplus. This may be why the petrochemical feedstock problem has a high priority in OPC, and it may prove to be the reason that the gates to foreign feedstock will be open wider much sooner than most people expected. What
next?
The big question, then, is what happens after the petrochemical industry receives the right to increased foreign feedstock. There are no simple answers, because, if the plan that OPC approves resembles the Chemco-PetroChem plan, petrochemical companies will have a lot of flexibility in deciding what they do. Their options can be made on a plant-by-plant basis. Obviously, the volume of imported feedstock will increase. Dr. Stobaugh agrees with Chemco's estimate that 1980 petrochemical feedstock imports would be 240,000 bpd if present controls were continued. Changing to an unlimited access program, which is not the same as the Chemco-PetroChem plan, would raise these imports to 590,000 bpd (340,000 bpd for olefins and 250,000 bpd for aromatics). This is his "best" estimate, and it is considerably lower tlian Chemco's figure of 860,000 bpd. Dr. Stobaugh's "probable high" is 790,000 bpd and this is much closer to the Chemco figure. Little wonder, then, that the oil companies are concerned. If Chemco is right, 1980 imports of petrochemical feedstock will be greater than the 700,000 bpd of crude and unfinished oils that are imported into districts 1 to 4 under the entire oil import program today. The petrochemical groups don't look at it that way. They point out that current imports under the petrochemical quota represent only 0.7% of total U.S. demand for petroleum products. Even with the huge increases projected for petrochemical feedstock imports by 1980, they still will be only 5 to 6% of the estimated U.S. oil consumption (18 to 20 million b p d ) . Dismantling
the controls on foreign feedstock, say the petrochemical groups, won't make a dent in the fender of total domestic petroleum demand and certainly won't jeopardize national security. Mobil, however, doesn't believe that these percentages mean a thing. Rather than compare petrochemical feedstock imports with total domestic petroleum demand, Mobil thinks that the comparison should be between the petrochemical industry's imports and total imports of oil. Based on Humble Oil's estimate that U.S. imports of all oil will reach 4.9 million bpd by 1980, Chemco says that petrochemical feedstock imports will be 18%. Dr. Stobaugh thinks that imports of petrochemical feedstock in 1980 under a free access program would be a whopping 25% of his estimated 2.4 million bdp oil import total. In its submission to the task force, Chemco says that a flash flood of imported petrochemical feedstock need not be feared if controls are relaxed because it will be uneconomical to change existing plants from light liquid feedstock to a heavy imported feedstock such as naphtha. However, Chemco was thinking in terms of an access program for those few companies that can use the imported feedstock directly. The Chemco-PetroChem plan, if adopted, could throw such neat projections as this out of kilter. Plants that can use naphtha directly will start importing heavy liquids, but there are very few of them. Dow at Bay City, Mich.; Union Carbide at Taft, La.; En jay at Baton Rouge, La.; and Mobil at Beaumont, Tex., are the only such plants. Monsanto's Chocolate Bayou plant in Texas is a special case; it runs on gasoline condensate. Two plants that should be on stream soon (Shell at Deer Park, Tex., and Gulf at Port Arthur, Tex.) are designed for heavy feed. The complex that Sun Oil recently announced for Marcus Hook. Pa., is also designed for heavy feed. Meanwhile, plants that can't use feedstock directly will still be able to import crude and trade it for light domestic feedstock as they do now. Only they will be able to do much more of it under the Chemco-PetroChem plan, and they will be able to do it right away. Or they can sell it. Aro-
Effects on U.S. petrochemical net trade balance Negative Positive Millions of dollars
Increase in exports Decrease in imports Increase in raw material imports Net increase in trade balance
26 C&EN JUNE 15, 1970
$
$490 220 260 450
matics units, which use naphtha but do not qualify for quotas under MO IP, will qualify as an access facility under the proposed regulations and will start importing naphtha. Even the oil companies stand to gain. True, they will lose some merchant feedstock sales to petrochemical companies and what they do sell will probably be at a lower price, but oil companies will also be able to import more feedstock as petrochemicals producers, and when it comes to using heavy feedstocks, the oil companies have an inherent advantage. They are in a better position than the chemical companies to get the most profit out of a barrel of crude because they have ready-made markets for the by-products that go into fuel. As a result, the oil companies can be highly competitive in their petrochemical pricing. This should increase their share of the petrochemical market. Sun Oil's proposed $100 million petrochemical complex at Marcus Hook, Pa., is a good example of what's in store. Designed to run on naphtha or gas oil, the plant will produce 750 million pounds of ethylene per year. Because of the heavy feedstock, it will also crank out 500 million pounds of propylene, 160 million pounds of butadiene, 15 million gallons of benzene, and 10 million gallons of toluene yearly. Sun is providing a kicker by building into its complex an alkylation unit to produce high-octane, unleaded gasoline. Other
possibilities
Sun's plans for Marcus Hook put the spotlight on two other points. One is that future petrochemical plants won't have to be tied to the Gulf Coast, but can be built closer to major markets. There already is a trend in. this direction. BASF has plans for a naphtha cracker at Beaufort, N.C., but it is waiting for the outcome of a hassle over pollution control. Others are considering East Coast locations and approval of the Chemco-PetroChem plan could help them complete their plans. Northern Petrochemical's plant at Joliet, 111., will be the largest gasbased complex built away from the Gulf Coast since World War II. The other lesson that can be learned from Sun's plant is that gas oil may be the sleeper in the feedstock picture. Sun's plant is designed for either gas oil or naphtha. Estimates vary, but bv 1980, from 30 to 50% of U.S. ethylene will be produced from heavy liquids. This demand alone is bound to push world naphtha prices upward. A more economical feedstock may be gas oil. Gas oil by definition is heavier than naphtha; its boiling point varies
Petrochemical firms see much more foreign feedstock in their future L000 barrels per day Petrochemical import allocations
1980a 1980b
1980c 66 a
67
68
69
70
Year
Chemco estimate under a free access program Stobaugh report to the Task Force, assuming a free access program
Can you afford to overlook a resin that costs loss than 30 per lb?
American Bilsonfte.
b c
Chemco estimate of current regulations apply
from 400 to 1000 °F. It also has a lower value than naphtha. Dr. Stobaugh estimates that U.S. producers can make ethylene 0.6 cent per pound cheaper using domestic gas oil rather than domestic naphtha (2.4 cents vs. 3.0 cents per pound). Using imported European feedstock, the saving is 0.4 cent per pound (1.7 cents vs. 1.3 cents). Of course, if refiners are forced to take lead out of gasoline, everybody will have to recalculate his feedstock projections. Nelson E. Ockerbloom and Aubrey M. Kirby of Sun Oil hinted at the possibilities at a recent joint meeting of the American Chemical Society and the Chemical Institute of Canada in Toronto. They said that, if lead goes, there will be an increasing demand for virgin light distillates that are rich in aromatic precursors. And under lead restrictions, low-octane, straight-run gasoline will be released from the gasoline pool and could then become an alternate feedstock for olefins. There are other imponderables in the feedstock picture. Petrochemical companies don't put much faith in shale oil, tar sands, or coal as economical sources of feedstock in the near future. Some day, however, these alternate petrochemical feedstocks may, indeed, be economical. The petrochemical industry, however, doesn't want to wait for all the pieces to the puzzle. All it wants right now is a guarantee that it can import almost as much foreign feedstock as it needs to make petrochemicals. Then, the industry can get on with the job of planning future expansions. By getting together under the umbrella of a single, unified set of proposed regulations, Chemco and PetroChem may have guaranteed the guarantee.
You can purchase reprints of C&EN articles Copies of this feature Petrochemical Feedstock and selected other articles are available.
American Gilsonite may be an excellent replacement for the high cost resin you are now using. Write for free sample:
AMERICAN GILSONITE COMPANY 1150 KENNECOTT BLDG. SALT LAKE CITY, UT. 84111 TELEPHONE (801) 3280311
| | Petrochemical Feedstock | | Paint Industry I i Reinforced Plastics: L - ' 1970-75 I I Consumer Chemical — Specialties 1 to 49 copies—50 cents each 50 to 299 copies—40 cents each Prices for larger quantities on request
To:
REPRINT DEPARTMENT ACS Publications 1155—16th St., N.W. Washington, D.C. 20036
FROM:
HIGHEST RETURN on PRECIOUS METAL RECOVERY! Engelhard's advanced refining methods assure highest purchase price or return of the recovered metal catalysts and industrial residues.
Call (201) 242-2700
Name
Street
City
State
'W.'MWI.'M.J.T Zip Code ENGELHARD
Amount enclosed $_
INDUSTRIES
DIVISION
ENGELHARD MINERALS & CHEMICALS CORPORATION 113 ASTOR STREET, NEWARK, N E W J E R S E Y 07114
An Equal Opportunity Employer
J U N E 15, 1970 C & E N
27
