Last week the price of ethylene dropped from the low 50s per pound down to the low 40s. In a big flip-flop, propane has been the preferred feedstock for petrochemical plants on the Gulf Coast for a couple of weeks now (it had been ethane for the most part of the last 3+ years). And the petchem market hit ethane where it hurts, whacking the price down to 29.875 cnts/gal on Friday according to OPIS. A month ago that price was 50 cnts/gal. In October of last year the price was almost $1.00 (see graph below). This is good news for petchems, right? Well, it all depends on the margin that the petchem realizes on the feedstocks that are run. So to figure that out, let’s get to Part III of our series on the economics of petrochemical feedstocks.
In Let’s Get Cracking - Part II we noted that economic preferences for different feedstocks are measured in terms of pounds of ethylene produced. The feedstock with the highest margin per pound of ethylene is the most preferred feedstock, and the calculation is based on the following formula:
[Price of ethylene per pound] – [Cost of feedstock per pound of ethylene produced] + [value of byproduct credits per pound of ethylene produced]
This formula puts the preferences for different feedstocks on an apples-to-apples basis. It is simply the price of ethylene per pound, less the cost of producing that pound of ethylene, PLUS byproduct credits. The byproduct credits reflect the value of all the other products that the cracking process yields besides ethylene.
As an example, we said that the ethylene yield from a pound of ethane is about 78%, which means one pound of ethane cracked equals about 0.78 pounds of ethylene. Cracking ethane also yields just over 3% propylene and 19% other products (butadiene, benzene, fuel gas, and a variety of other petrochemical products.
In today’s blog we’ll take a deep dive into the math to see how the formula works to compute the margin for cracking ethane at a typical Gulf Coast olefin cracker.
|Check out Kyle Cooper’s weekly view of natural gas markets in Natural Gas Projections Do Not Anticipate Storage Containment Issues.|
First we need to get more precise with our yields. The aforementioned 78% ethane yield is actually 77.7% for the typical Gulf Coast cracker. Our calculations are going to be based on what it takes to generate a pound of ethylene. Thus the quantity of ethane required to generate a pound of ethylene is 1/.777 = 1.287 pounds of ethane. (For you accountants, we grossed up the ethane needed to generate a pound of ethylene.)
Now we get to some unit conversion gymnastics. Jog some of those synapses from school a few decades ago - 1 metric ton = 2205 pounds. There are 742 gallons per metric ton of ethane. Thus a gallon of ethane weighs 2.972 pounds [2205 / 742 = 2.972.) I could have just told you that the ethane conversion from gallons to pounds is 2.972, but wasn’t this more fun?
The price of purity ethane in Mont Belvieu on Friday was 29.875 cnts/gal, or $0.29875/gal. To convert this price to ethane in cents per pound, divide by 2.972 [29.875 / 2.972 = 10.5 cnts/lb.] Remember that it takes 1.287 pounds of ethane to make a pound of ethylene. So that means that the cost of the ethane per metric ton of ethylene is 12.94 cnts/lb. [10.5 * 1.287 = 12.94] To keep things simple we’ll round that number to 13 cnts/lb.
The price of ethylene on Friday according to PetroChem Wire was 42 cnts/lb. So the gross margin after ethane cost for the typical Gulf Coast cracker is 29 cnts/lb. [42 – 13 = 29] That’s a pretty healthy margin in any business. But it is far from the whole story. Now we need to calculate the byproduct credits.
As we discussed in Part II, when you crack a molecule of ethane in an olefins cracker you get other products along with the ethane. You get fewer byproducts when you crack ethane versus other feedstocks, so that makes our calculation here a little easier. There are six primary byproducts produced when cracking ethane: propylene, butadiene, butylene/butane, benzene and fuel gas (hydrogen). For the purist, we are leaving out tiny byproduct yields of toluene, xylene, pygas, etc.) The yields per pound of ethylene cracked for our typical Gulf Coast ethylene plant are shown below:
Propylene = 3.6%, Butadiene = 2.5%, Butylene/butane = 1.1%, Benzene = 1.1%, Fuel Gas = 19.5%
The next thing we’ll need to figure the byproduct credits are prices for each of these products. Estimated prices that we’ll use for each of these products (and the sources for our best guess prices) are: Propylene = 45.375 (PetroChem Wire refinery grade), Butadiene = $1.52/lb (Dewitt US Final Low Contract Price for butadiene for April), Butane = 137.1250 (OPIS), Benzene = $3.82 (PetroChem Wire) and Fuel gas = 2.326 (closing price of July NYMEX futures natural gas).
The next step is to multiply the price (in cents per pound) of each of these byproducts by the yield of that byproduct, then sum the total. That will give you the total value of all byproduct credits. Propylene is 45.375 * .036 = 1.63, Butadiene is 152 * .025 = 3.8. For the other byproducts we’ll need to convert the prices into cents per pound equivalents before doing the calculation.
To get the total byproduct credit, just add them up 1.63+3.8+.31+.57+1.08=7.40 cnts/lb. We add the byproduct credit to the 29 cnt/lb gross margin calculated above [29 + 7.4 = 36.4.] That is the gross margin with byproduct credit. With ethylene at 42 cnts/lb, that is 86%. Still a very good number.
If you are still with me, congratulations. You must really like this stuff. But we are not through yet. Because we’ve only covered margin after feedstock costs. We still have variable costs like catalyst expense, process chemicals, fuel, electricity, cooling water, and steam. At today’s prices these costs all work out to be about 4 cnts/lb Deduct that from gross margin with byproduct credits and we have total variable margin. Most feedstock decisions are made based on this total variable margin. We’ve just calculated ethane to be 36.4 – 4 = 32.4 cnts/lb. This is the value that would be compared to the margins of other feedstocks to determine which is the best feed or combination of feeds for a particular unit. The mix of feeds actually selected depends both on feedstock economics and unit capacities at a plant.
Depending on the unit, there are another few cents of fixed costs that can be allocated to compute a fully loaded margin. While this is helpful in determining the relative profitability of individual units or companies, it typically is not directly applicable to feedstock decisions which are made on variable cost economics.
Totally confused by all of this? The spreadsheet shown below lays out the calculations in a more orderly fashion. You can download this spreadsheet at the link below. For some reason this download does not work for a few of our RBN members. If you have a problem with the download, just email firstname.lastname@example.org and we will email a copy to you.
At this point we are through the basics of petrochemical feedstock economics, but we’ve only done the simplest of the feedstocks – ethane. So for the hard core energy fundamentals analyst, there is more to come in Part IV. But we’ll give it a few days before inflicting the next installment on all of our readers.
[BTW – Bentek’s Daily NGL Market Monitor includes a section which calculates petrochemical feedstock equivalencies each day. The formulas and yields are similar to those shown here, but are not exactly the same. Contact Bentek for more information on the report]
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