With natural gas prices in Europe more than double costs in the U.S., Ineos Group AG has a novel solution: start fracking.
The world’s fourth-biggest petrochemical manufacturer bought a license last month to look for fuel around its refinery in Grangemouth, Scotland. That complements a deal by Ineos to import gas from the U.S., a step followed by other chemical companies in Europe such as Borealis AG and Saudi Basic Industries Corp. Scotland will vote Sept. 18 on whether to stay in the U.K.
Producers of everything from fertilizers to plastics are looking for new energy sources at a time when options are limited. Shale exploration has helped boost supply and depress prices in the U.S. In Europe, the U.K. and Poland have embraced fracking — blasting water, sand and chemicals to harvest fuel embedded deep underground — while most of the rest of the continent, citing environmental harm, has not. The challenge has become urgent given the European Union’s dependence on Russia for 30 percent of its supplies, much via pipelines in Ukraine.
“If Europe doesn’t develop indigenous shale, then it will not have an energy-intensive industry in the next 20 years,” Tom Crotty, an Ineos director, said in an interview in London. “It’s that black and white. We will kill the industry.”
Scotland may hold 80.3 trillion cubic feet of shale gas, according to the British Geological Survey. The Scottish government proposes “a cautious and considered approach” to unconventional resources, as opposed to the U.K. government’s plans to allow drilling below people’s homes and land, according to the Scottish National Party, the largest in the region’s parliament.
The EU faces the risk of industry drain due to lower energy prices in the U.S., Energy Commissioner Guenther Oettinger said in June. Thirty million jobs in energy-intensive industries are in peril, according to the Paris-based International Energy Agency. The bloc’s share of sales in the 3.1 trillion euro ($4 trillion) global chemicals industry dropped to 18 percent in 2012 from about 30 percent in 2004, according to the European Chemical Industry Council.
Natural gas prices in the U.S. have fallen as the shale gas revolution boosted output by 27 percent in the six years through 2013, according to IHS Inc., an Englewood, Colorado-based research firm. The benchmark price in the U.K., Europe’s biggest market, is more than double the price in the U.S.
EU gas output fell 58 percent between 2001 and 2012, Eurostat figures show. The conflict between Russia and Ukraine threatens to disrupt supplies this winter, echoing similar disputes that caused shortages in parts of Europe in 2006 and 2009.
Shale gas output in the U.K. and Poland won’t be enough to reverse the decline in European domestic gas production, the IEA said in June.
“We’re not developing indigenous gas supplies,” Crotty said. “We’re massively dependent on Russia, and the political instability is growing and not diminishing. All of that points to gas prices in Europe increasing.”
U.K. gas will average 52.5 pence a therm in 2015, compared with 48.2 pence a therm this year, Citigroup Inc. said in a July 14 report.
The U.K.’s support for shale exploration enabled Ineos, based in Rolle, Switzerland, to consider fracking. Other projects are hampered by national restrictions. Shale gas requires millions of gallons of water laced with acids and other additives, and environmental groups including Food & Water Watch in Washington and Amsterdam-based Greenpeace International have sought bans because of concerns about drinking water contamination.
Energy costs are reducing the EU’s ability to attract investment in everything from chemicals to steel, said Steinar Solheim, an official with the International Federation of Industrial Energy Consumers and vice president of energy sourcing at fertilizer maker Yara International ASA in Oslo.
“Nobody will even think about investing in a new ammonia plant in Europe these days,” Solheim said. Ammonia is used to make fertilizers.
Since 2009, the majority if not all the investments to develop new ethylene projects have been outside Europe, said Elena Nadtotchi, a senior credit officer at Moody’s Corp. in London. Ethylene is a gas that helps make chemicals used in plastics and detergents.
Energy accounts for more than 50 percent of the cost of making petrochemicals, according to the IEA. Ludwigshafen, Germany-based BASF SE, the world’s largest chemical company, said it will for the first time allocate less than half of its investments to Europe over the next five years. Ineos won’t build any new facilities on the continent, Crotty said.
Meanwhile, across the Atlantic, “excellent economics” are attracting investors for new ethylene plants in the U.S., which when ready in about three years will increase competition for manufacturers in Europe, Nadtotchi said.
Investors plan to spend $124 billion on new and expanded petrochemical factories in the U.S., according to the American Chemistry Council.
“With output that far outstrips demand growth in the U.S., huge amounts are going to be targeted for export,” said Ineos’s Crotty. “Where is it going to export to? Well, Europe is looking pretty attractive.”
To keep up with the competition, Ineos, which uses ethane as its feedstock, signed a series of 15- to 20-year contracts to ship the gas from Pennsylvania’s Marcellus field to its facilities in Europe. The first shipment is expected to arrive at the company’s Rafnes plant in Norway next year, cutting ethylene production costs there by about half, Moody’s estimated in an April 15 report. Grangemouth is scheduled to get its first Pennsylvania ethane in 2016, Crotty said.
Ineos moved into the fracking business by buying a 51 percent stake in a shale license from Reading, England-based BG Group Plc. Dart Energy Ltd., a Brisbane, Australia-based driller, owns the rest of the claim.
Ineos said it will poke around for gas in the 329 square kilometers (127 square miles) around its Grangemouth refinery. The facility almost closed last year as a shortage of feedstock meant its cracker, which processes ethane to make ethylene, had been running at less than 50 percent of capacity for the past two years, Crotty said.
“The issue we faced was a straightforward one of lack of supply,” he said. “Had Grangemouth closed last October, it would have had a massive impact. We’ve got 800 jobs in the petrochemicals site, but you are probably talking about five to 10 times that number of jobs in the community.”
There’s no sufficient data from U.K. test wells to determine how much shale gas can be recovered and at what cost, according to a July report by the National Grid Plc, which operates the country’s energy system. Without production from shale rock, the U.K. may need to boost its dependence on gas imports to 91 percent from 56 percent by 2035, exposing the nation to global prices for the fuel, the report said.
Europe will take longer than the U.S. to develop its shale gas resources because of tougher structural and regulatory conditions, Fitch Ratings said in a report last month.
“We anticipate five or more years of exploration are required to identify the economically viable reserves if any, following which we expect another five to eight years before production actually takes place,” Stephane Buemi and Josef Pospisil, analysts at Fitch in London, said in an Aug. 26 report.
Chemical makers in Europe have found alternative energy sources. While Vienna-based Borealis said it’s not currently considering fracking, it signed a 10-year agreement with Denver- based Antero Resources Corp. to ship 240,000 tons a year of ethane from the Marcellus and Utica fields in the U.S. to its facility in Stenungsund, Sweden, starting in 2016, said Markku Korvenranta, executive vice president of base chemicals.
Sabic, based in Riyadh, will convert its facility in Teesside, England, to shale gas as feedstock, with changes ready by 2016, the company said Aug. 21.
“Borealis for sure, and I believe the same for all of the industry, will have to take some measures to remain globally competitive,” Korvenranta said. “It’s surprising that the politicians and the EU are not more pronouncedly in favor of shale gas exploration. It will be one way of addressing the decline in natural gas production.”
