Chemical Industry Summary
The Q4 earnings reporting season will be in full bloom by the final week in January. While Q4 results will likely represent a mixed bag of year-on-year financial performance, the consensus is for 2017 to show improvement in key economic drivers and industry prices and volumes. Earnings growth estimates for US companies for 2017 are typically in the 10-15% range, depending on leverage to specific drivers. Inorganics including TiO2 and chlor-alkali are showing the greatest improvement in volume/pricing trends while integrated olefins/polyolefins are showing potentially flat to modest declines in 2017.
Macroeconomics and Geopolitics
Americas
The inauguration of President-elect Donald Trump is scheduled for Friday, January 21stand the new administration is rapidly taking shape. In total, nearly 4,000 political appointees will be nominated to fill key roles in the new administration. Confirmation hearings are in progress and if current nominees for top posts are confirmed, this cabinet will have a high proportion of members with business experience. The outlook is for major changes in energy, environmental, and trade policy for the US in 2017/2018. The final (third) estimate for US Q3 GDP came in at 3.5%, 0.3% above the second estimate and 0.9% above the original consensus estimate. The Atlanta Fed is now predicting Q4 GDP growth at 2.8%, up 0.4% from the last estimate, as the economy continues to improve. This estimate is at the upper end of the blue-chip consensus range. The Conference Board expects the full-year GDP growth of the US economy in 2016 to be 1.6% and to improve to 2.3% next year.
The US jobs report for December came in at 156,000 jobs added, down 22,000 or 12% from the November number of 178,000 jobs added. On a YTD basis, the US has added an average of 184,000 jobs per month, down 16% from last year. Unemployment in December ticked up 0.1% to 4.7%. The workforce participation rate was only 62.7%. For January, the consensus forecast calls for the addition of 250,000 jobs.
On December 13th, the Fed raised interest rates for the first time by an increment of 0.25%. The Fed has also given guidance that three more potential increases will be considered in 2017. The consensus view is for a cumulative interest rate addition of 0.5% in 2017. In December, the US manufacturing PMI index improved to 54.3, up slightly from November. However, the December result was the highest in nearly two years and reflects increased business confidence.
In December, US auto sales of light cars and trucks were 18.3 million units, the highest level in over 10 years. This number was up 3.1% for the month and 5.1% over 2015. For the entire year, sales of autos and light trucks were nearly flat with 2015 and averaged 17.4 million sales on a seasonally-adjusted annual basis.US housing starts in November were 1,090 thousand on a seasonally-adjusted basis, down from a very strong 1,340 thousand rate in October. In its December forecast, the NAR (National Association of Realtors) greatly increased its forecasted housing starts for years 2017 and 2018 to 1.311 and 1.419 million starts. If these predictions are seen, this would represent roughly a 10% per year increase in housing starts for both years. Existing home sales in December were 5.61 million. Average housing prices for existing home sales in December was $234,900, up 6.8% from last year. Mexico’s PMI in December of 50.2 was down from 51.1 seen in November and is in flat growth territory. Canada’s PMI of 51.8 recorded in December was up incrementally from the 51.5 recorded in November and was at a 5-month high. Sales and jobs were up, and inventories were down in December.
Brazil’s manufacturing sector recorded a December PMI of 45.2 representing a six-month low, with no leading indicators moving in a positive direction. The Brazilian manufacturing sector has been in contraction territory for nearly two full years. In its Q4 forecast, the IMF expects Brazil’s GPD to fall 3.2% in 2016, following a 3.8% drop last year. The IMF does not expect a return to 2% growth until 2019.
Europe
The UK’s Prime Minister Teresa May gave a policy address on Brexit on Monday January 16th, she stated that this will be a “hard exit” from the European Union with no carve-out exceptions for specific industries. The British pound remains under pressure and recently hit 31-year lows trading near US$1.20 and €1.136 per pound.
The ECB will meet late this week and little change is expected to be seen in the current quantitative easing policy targets. In its last meeting, the European Central Bank extended its quantitative easing program beyond its initial horizon of March 2017 indicating that it would keep buying European debt until at least December 2017.
All countries in the Eurozone showed strong month-on-month improvement in manufacturing sector activity in December. The composite manufacturing PMI for the region was reported at 54.9, up strongly from the 53.7 level seen in November. Several countries reported multi-year highs. Greece was again a laggard, but still recorded a manufacturing PMI of 49.3, in neutral growth territory. Similarly, Eastern Europe and Russia showed positive manufacturing trends in December. Russia’s manufacturing PMI registered a 69-month high at 53.7 in December. The fourth quarter PMI index of 53.2 was the strongest in 5.5 years. Poland’s manufacturing sector has been in expansion for nearly two years. The Czech Republic’s manufacturing sector has now recorded five months in expansion territory.
Asia
In the second half of 2017, China’s economy has appeared to stabilize and governmental actions to cool growth appear to have met success. This week, the initial Q4 GDP result will be released and will likely be in the neighborhood of the 6.7% GDP growth seen in Q3. China’s manufacturing sector’s improvement continued to accelerate in December. The December PMI index was recorded at 51.9, with the rate of improvement the strongest since 2014. China’s auto production in November was 3.01 million vehicles, up 14% from the same month in 2015, and at the highest level all year. The last two months have recorded a 7% improvement from last year. On a YTD basis, auto sales of nearly 15 million are up 14% from last year, a significant rebound from 2015 which saw 24.5 million vehicles produced. Asian commodity chemical prices are influenced by increasing feedstock pricing that has helped offset improved availability and inventories.
Thus far in January, Far East Asian HDPE blow modeling prices have recently increased by US$40-50/MT, to a level of nearly US$1,150/MT. Spot ethylene prices in SEA are currently near US$1,000/MT, up about US$75/MT since early December. In the last month, spot propylene pricing in SEA has accelerated significantly. Since the beginning of December, prices are up nearly US$250/MT to a level of US$900-925/MT. PP prices have also moved, but not as significantly. Current injection molding PP in SEA is near US$1,050/ MT. Thus, the spread for PP has shrunk from US$300/MT to closer to US$200/MT. Chinese propylene prices have remained volatile, recently trading in a range of US$800/MT to US$900/MT.
Feedstock – Crude Oil
The crude oil futures market continues to be optimistic with bets of rising oil prices far outnumbering those of falling oil prices. The NYMEX futures December price for WTI on Friday Jan13thwas US$56.36 representing a potent increase of US$4.00/Bbl. From today’s spot pricing by the end of the year. Investors are optimistic that the recently announced production cuts will re-balance global supply and demand by late 2017. However, with the overhang of long positions in the futures market and the potential of a shortfall of production cuts versus targeted levels, CMR believes that a downward price correction could come swiftly. In addition, US-based shale oil producers have shown the ability to ramp up production quickly, and the current price of crude is near many producers’ break-even points.
As of January 13th, WTI spot prices in the US were near US$53 per barrel, approximately flat with last month. There was some momentary improvement in global oil pricing when Saudi Arabia announced that December production cuts were ahead of target. However, there is considerable skepticism that other OPEC and non-OPEC producers will follow through on achieving their targeted cuts. For the week ending January 6th, US crude inventories not in the SPR (Strategic Petroleum Reserve) totaled 483 million barrels, down 0.6% in the month and nearly identical to last year.
The DOE reported US crude production for the first week in January at 8.9 million barrels per day, up about 200,000 Bpd from recent weeks, as shale-based production responds to incrementally higher pricing. Current US crude oil production is down 6.8% from the peak production of 9.6 million barrels per day seen in July 2015. The total reduction of crude oil production in the US has been near 700,000 barrels per day as compared to the recent supplier-announced cuts of 1.2 million barrels per day by OPEC.
Drilling and completion activity for oil and gas in the US is accelerating with improving oil prices. For the week ending January 6, Baker Hughes reported that the US total rig count (oil and gas-directed) was up again to 665 rigs. This number is 6.6% above last month’s count. Since the beginning of May of 2016, the total rig count is up 65% from the May-2016 low of 404. The May number represented the lowest US rig count since this indicator was started in 1991. For the last few months, the percentage of oil-directed rigs has been steady at nearly 80%.
Feedstock – Natural Gas & NGLs
US natural gas prices in the last month have held reasonably steady at near US$3.50/MM BTU. This reflects a recent trend of cold weather that has increased gas demand and has continued a draw-down on natural gas inventories. As storage inventories peaked in November, gas prices neared US$2.00/MM. The week ending January 6 saw a strong 151 billion cubic feet (Bcf) of gas withdrawals from storage. Working gas stocks are now 3,160 Bcf, 10% less than a year ago and nearly the same as the 5-year average (2012-2016).
With the increase in US gas prices, ethane spot prices have traded near US$0.25 per gallon, with a recent softening of about 2 cents/gallon. This level is near the energy parity level, on a dollar per MM BTU basis. However, this is below the “floor value” for ethane which is US$0.05-0.07/gal above natural gas reflecting transportation and fractionation costs. The oil-to-gas price ratio is currently near 15.5 to one, reflecting equivalent strengthening in both gas and oil prices. As a reminder, the economic equivalent price for cracker feedstock is near 8:1. US ethane crackers currently remain advantaged, but not by a large margin as in the near past.
For the week ending January 6, the EIA reports that US propane/propylene inventories were 79.7 million barrels, down 20% from last month, and down 13.3% from a year ago. In November 2015, propane inventories peaked, ahead of the new export capacity addition. The current inventory trends reflect improved domestic demand (weather-related) and increased export capability. Spot prices for propane are currently near US$0.73/gallon, up about US$0.40 per gallon from last year, reflecting better export volumes and increasing year-on-year crude oil prices.
US Olefins & Polyolefins
US contract ethylene prices for December settled up 2 cents/lb. and resulted in a net transaction price of 28.25 cents/lb. For the month. Ethylene price increases reflect the recent increase in feedstock prices, both for ethane and crude oil-based feeds. Spot prices for ethylene in December averaged 25.6 cents/lb. and thus far January has moved closer to 30 cents/lb.
US contract propylene prices settled down 4.0 cents/lb.in December with contract pricing at US$0.30 per pound for chemical grade and US$0.315/lb for polymer grade. January spot prices for propylene have been under upwards pressure and have increased US$0.05-0.10/lb.
The US contract butadiene price settlement was split in December with three settlements up 10 cents/lb. and the fourth up 21 cents/lb.The contract price of 62 cents/lb.is over twice the level of 29 cents/lb. seen last March.
CMR forecasts that US ethylene cash margins for US light crackers will be US$0.16/lb in Q1, up about 2 cents/lb. Q4based on higher ethylene pricing and co-product contributions.
In December, US contract PE prices fell an additional 2 cents/lb following a drop of 3 cents/lb.in November. This drop gives back all of the 5 cents/lbs. Increase that was seen in September. Thus far, it appears that contract PE prices will be flat in January. For February, US PE producers have proposed an increase of 5 cents/lb. For PE. This increase will be necessary to offset increasing costs.
US exports of PE in November of 375 thousand MT were flat with October, but down 16% from last year due to low inventories and limited availability. On a YTD basis, net exports were up 6.5% from a year ago. Total export volumes from the US represent 24% of industry capacity. US polypropylene exports in November were 83,000 MT, up 21% from a year ago. Imports of 19,000 MT were flat with October volumes and were half the levels seen in the February through May 2016 period when US prices surged.
Contract prices for US PVC in December rolled over and appear likely to do the same in January. However, producers have proposed PVC at up to 4 cents/lb.in February, the start of the peak demand season. CMR believes that oil prices and ethylene will need to firm to justify the entire increase and that a weak cost environment will not help support increases.
US General Purpose Polystyrene (GPPS)prices appear to have been flat in December after having fallen 2 cents/lb.in November. The contract benchmark price for GPPS is near US$0.93/lb. Prices for both styrene monomer and polystyrene look to be headed up in the first quarter on the strength of increasing crude prices and the increased number of scheduled turnarounds. The January benchmark contract price for benzene is US$2.72/gallon, up US$0.37/gallon from December.
European Olefins & Polyolefins
For January, European the contract ethylene price settled up €45/MT to a level of €985/MT. Spot prices for ethylene in NWE have recently firmed about US$100/MT in the last two months to a range of US$900-950/MT. Contract European propylene prices were up €45/MT for January, at a level of €770/MT. Spot propylene prices for NWE have recently increased by €100/MT, and are currently near €735/MT.
European contact butadiene prices for January were up strongly, by €140/MT from December to €940/MT. This is the highest level since September 2014. European spot butadiene prices are up approximately US$900/MT since early December.
The European benzene contract price for January is up €175/MT to €806/MT. European spot benzene has recently tracked increasing oil prices and is now trading near US$775/MT, up US$140/MT since November 1.
Polyethylene prices in Europe have recently increased. HDPE injection molding grade for NWE is in the area of €1,225-1,250/MT on a spot basis, up €75/MT in the last month. In mid-December, LLDPE spot prices in NW Europe have recently increased €75/MT from early December to a level of near €1,200/MT.
Global Chlor-alkali
The US Chlorine Institute reported that the effective operating rate for US chlor-alkali in November was 84%. The year 2016 has seen a gradual improvement in caustic prices in part due to improving rates and also due to higher export prices and lower availability of material from international sourcing. Announced price increases of US$50/short ton (ST)are being implemented in Q4, although the entire amount may not be seen.
Eurochlor reported chlorine production numbers for November 2016, with a production of 780,000 MT, flat with last year. Operating rates were reported at 81.8% in November. Year-to-date European chlor-alkali production is running 2.5% behind 2015. In November, caustic stocks were reported to be 196,000 MT, 18% below last year and 9% below October levels. Inventories are beginning to reflect permanent shutdowns and conversions associated with the phase-out of mercury cell technology units. CMR believes that during 2016 and 2017, 31% percent of European mercury cell capacity will be shut down, representing 8% of total European capacity. Only 10% of existing mercury cell plants are undecided at this point, representing 3% of European industry capacity. 60% of mercury cell capacity will be upgraded to membrane technology.
AMERICAS
SABIC, ExxonMobil to build ethylene project in Corpus Christi, Texas
SABIC and ExxonMobil have chosen Corpus Christi, Texas for their proposed US$10 billion ethylene project due to the easy access to shale gas fields as well as the proximity to pipeline networks
Comments: ExxonMobil and SABIC have worked on multiple partnerships in the past, the latest being an elastomers project in Saudi Arabia that started up in 2015. The US joint venture allows SABIC to expand its polyolefin production into North America, as well as secure economical and abundant natural gas feedstock. ExxonMobil is preparing to start up a new capacity in USGC in 2017and the joint venture with SABIC will prepare the company for the next wave of PE expansion. The proposed ethane cracker will have 1,800KTA capacity and may produce polyethylene and MEG.
MIDDLE EAST & AFRICA
Iran to build a pipeline from Miandoab to Tabriz by 2021Iran breaks ground on a pipeline project connecting Tabriz Petrochemical Co. and Miandoab Petrochemical Co. The pipeline project is scheduled to be completed by 2021. The pipeline will transport ethylene produced in Miandoab Petrochemical Co. to Tabriz Petrochemical Co. which manufactures a wide range of chemicals.
Comments: Liquefied Petroleum Gas (LPG), light naphtha, and heavy naphtha are the main feedstocks for the complex. A major portion of the feedstock is supplied by Tabriz Refinery and the rest by Tehran Refinery through pipeline and petrochemical companies in southern Iran by truck. The intended ethylene pipeline will enable Tabriz Petrochemical Co. to produce petrochemicals with higher value-added products. The company also has planned nine new petrochemical units to be added to the complex to utilize the ethylene supplied by Miandoab. The Iran government is keen to accelerate petrochemical investments in the Tabriz region by offering a 30% discount on the gas feedstock to new plants in the region.
Iran seeks foreign investment for petrochemical Projects
Iran seeks foreign investment for petrochemical projects Iran is seeking foreign investors to participate in building 28 petrochemical projects in various roles. It is estimated needs US$32 billion in foreign investment for those projects.
Comments: Iran is seeking to encourage foreign investment in joint or individual investor participation in building the projects. The less restrictive Iran Petroleum Contract (IPC) model is supposed to be attractive to foreign investors as compared to the old buy-back model, which limited non-Iranian participation to 7 years and paid contractors a fixed fee unrelated to production rates. The new IPC model is supposed to have a 25-year term and a fee structure more flexible than that of the buy-back model. Since the removal of UN sanctions, many foreign investors have shown keen interest in Iran due to the available opportunities in the country.
ASIA PACIFIC
Sinopec, Kuwait Petroleum began construction of the JV ethylene complex in Zhangjiang
China’s state-run petrochemical giant Sinopec and Kuwait Petroleum Company have commenced their JV petrochemical project with a total investment of US$849 million. An 800KTA ethylene facility and a 10,000KTA refinery will be built under the first phase and are expected to be completed by 2020.
Comments: The vertically-integrated petrochemical project between Sinopec and Kuwait Petroleum was first initiated in 2005 and has experienced huge delays due to environmental review and relocation due to protests from the public in the originally-selected site. Not counting the Sinopec-Kuwait refining project, there are seven mega refining hubs to be built under the 13th Five Years Plan. Facing competition from those projects and a potential oversupply of refined oil products, Sinopec/Kuwait decided to downsize the project scale from the originally proposed refinery capacity of15,000KTA to 10,000KTA as well as ethylene capacity from 1,000KTA to 800KTA.
Petronas chooses LBI’s technology for Malaysia HDPE Project
Malaysia-based Petronas has selected LyondellBasell’s Hostalen Process for its 400KTA HDPE facility. The HDPE plant is part of Petronas’s Refinery and Petrochemical Integrated Development (RAPID) complex located in Pengrang, Johor, Malaysia.
Comments: Refinery and Petrochemicals Integrated Development (RAPID) aims to build a world-scale integrated refinery and petrochemical complex. The proposed refinery will have a capacity of about 300,000 barrels per day. The refinery will supply naphtha and liquid petroleum gas feedstock for the RAPID petrochemical complex. The petrochemical units, on the other hand, will enhance the value of the olefinic streams coming from the RAPID steam cracker by producing various merchant grades petrochemicals products such as polyethylene, polypropylene, synthetic rubbers, and other petrochemicals products. The RAPID project will enable Petronas to produce high-value-added petrochemical products and establish new areas of growth for years to come. The Hostalen technology is a low-pressure slurry process for the production of high-performance multimodal HDPE grades typically targeting Film, Blow molding and Pipe applications.
China’s Fund Energy starts up a new chemical complex in Changzhou
Chinese private-owned Fund Energy officially launched its methanol-to-olefin (MTO) unit and an associated 300KTA polypropylene (PP) facility located in Changzhou in late December.
Comments: Fund Energy was founded in 2010 by a multi-industries company, Fund Holding, in response to China’s goal to develop coal-based polyolefin production and is China’s first producer of polypropylene using propylene manufactured via the MTO process. With China’s strategy in the development of the coal-to-chemical industry, the challenge facing these producers is the oversupply of the Chinese commodity chemical market. The production integration toward high value-added chemicals, such as PE and PP, has become a popular differentiation strategy taken by several coal-to-chemical players, including Fund Energy. With low crude oil prices erasing the competitiveness of coal-based chemical producers, many Chinese coal-based polyolefin suppliers strategically develop specialty grades that rely on imports for higher profit margins.
Korea’s KPIC targets 2Q 2017 for the cracker expansion project
Korea Petrochemical Industry Co (KPIC) is likely to schedule the capacity expansion work at its Onsan cracker in the second quarter of 2017. The expansion will allow KPIC to increase ethylene capacity by 330KTAto 800KTAand propylene capacity by 160KTA to 510KTA.
Comments: Korea Petrochemical Industry Co. (KPIC) is a major ethylene supplier in Korea and offers propylene, a C4 stream, raw C5stream, aromatics, polypropylene (PP), and high-density polyethylene (HDPE). The ethylene capacity project is expected to increase KPIC’s market share in the Korean ethylene market from 6% to approximately 10%. Other Korean petrochemical producers, such as LG Chem and Lotte Chem, also have ethylene capacity expansion projects underway in response to the government’s call for upgrading production. LG recently announced an ethylene capacity addition project at its Daesan naphtha cracker to increase ethylene capacity by 230KTA by 2019. Lotte Chem is planning to raise its ethylene capacity at the Yeosu site by 200KTA by 2018. These ethylene expansion projects are to secure raw materials needed for the development of high-value-added products as well as to respond to increasing competition from China.
Korea to restructure petrochemical Sector
According to Business Korea, the South Korean government has decided to initiate a petrochemical restructuring plan addressing oversupplied petrochemicals. The plan is to encourage the development of Korea’s petrochemical production toward high-value-added products and expand export demand-rising regions, such as Latin America and Africa.
Comments: Korea’s petrochemical industry is export-oriented and relies on imported natural resources as feedstock. Consequently, the Korean petrochemical industry is inevitably affected by the volatility of crude oil prices and is sensitive to global demand for petrochemicals. In the past few years, Korean petrochemical players have actively cooperated with natural resource-rich countries for petrochemical projects that helped Korean players gain access to cost-advantaged feedstock. For example, LG Chem is scheduled to start up a natural gas-based 840KTAethylene production unit and an 800KTAPE plant in Kazakhstan in 2019. Lotte Chemical plans to build natural gas-based chemical plants in Surgil, Uzbekistan, which will produce 390KTA of HDPE and 80KTA of PP. Lotte Titan Chemical is evaluating building an ethylene production facility in Indonesia. The national plan that aims to reduce output on oversupplied chemicals and upgrade production toward high value-addition, is expected to help Korean players stay competitive and continue to grow against global giants that both have a feedstock cost advantage and well-position in niche markets, such as Dow-DuPont and BASF.
Philippines’ JG Summit to build and start-up three petrochemical projects by 2021
The Board of Investment (BOI), a Philippine government agency responsible for the promotion of domestic investment, has approved three petrochemical projects proposed by JS Summit Holding. These projects include one US$84 million project for the production of butadiene and raffinate, one US$60 million project for manufacturing aromatics and C8+/C9+ cut, and one US$193 million cracker expansion. All these projects will be located in Batangas City and are scheduled to be fully operational by 2021.
Comments: JG Summit Petrochemical Corporation (JGSPC) currently operates polyethylene and polypropylene plants in the Philippines with a capacity of 320KTA and 180KTArespectively. The investment decision was made to expand the country’s manufacturing industry. With the new projects, JGSPC’s product portfolio is set to expand into C4 and higher hydrocarbons. These expansion projects will target increased revenues from additional petrochemical exports. Currently, exports account for about half of the total segment revenue. Since most of the supporting infrastructure has already been built, the expansion will only increase operational cost-effectiveness. New downstream plants for aromatics and butadiene will target import substitution in the domestic market.
COAL-TO-CHEMICAL
Zhongtian Hechuang began commercial production at Inner Mongolia CTO Complex
Chinese private-owned Fund Energy officially launched its coal-to-olefin (CTO) unit located in Ordos, Inner Mongolia in late 2016.
Comments: State-owned giants ChinaCoal and Sinopec are the majority owners of Zhongtian Hechuang Energy (ZHE). ZHE was formed in 2007 in response to China’s national plan for the coal-to-chemical industry. The coal-to-chemical complex is part of the Coal Deep Processing Demonstrative Project supported by the government and has two associated coal mines with a total output of 25,000 KTA. The project is by far the largest vertically integrated coal-to-olefins complex in China, which starts with coal and ends with polyolefin products. Currently, the development of China’s coal-to-chemical has slowed due to a combination of environmental concerns and the lack of downstream product competitiveness. The start-up of the complex will not only increase China’s self-sufficiency in polyolefins but also encourage coal-to-chemical players to further integrate toward high-value-added products. There has been an argument that China’s PE and PP market might soon be oversupplied. The oversupply situation has not yet materialized because of the delayed start-up of several projects and the replacement of imports.
BIOBASED
BioAmber, CJCJ form a JV for bio-succinic acid Production
BioAmber and Korea’s CJ Cheiljedang Corporation (CJCJ) have signed a letter of intent (LOI) for the formation of a joint venture for bio-succinic acid production in China. Under the agreement, the JV will be 35% owned by BioAmber and 65% held by CJCJ, and plans to produce up to 36KTA of bio-succinic acid. The definitive agreement is expected to be signed by mid-2017and production is set to begin in Q1 2018.
Comments: BioAmber has also applied for incentives from U.S. and Canadian governments to build a second, much larger facility in North America. The agreement with CJCJ would allow Bio Amber to gain access to China’s succinic acid market while incurring minimal capital costs. CJCJ gains access to now-proven technology as well as a way to utilize its fermentation facility in China more effectively.
SHALE GAS DEVELOPMENT
The arrival of US shale gas to Japan
The first US shale gas-derived liquefied natural gas (LNG) has arrived at a thermal power plant owned by JERA (Japan’s Energy for a new era combining the strengths of Tokyo Electric Power Group and Chubu Electric Power Group) in Joetsu. The import of LNG is to satisfy the increasing demand for electricity from non-nuclear sources. Tokyo Gas also aims to import US shale gas starting in October 2017.
Comments: U.S. exports of LNG out of Cheniere’s Sabine Pass terminal first started in February 2016 with a shipment to Petrobras in Brazil. Most of the cargo has gone to Latin America and Europe. Japan is the largest importer of LNG, representing almost 35% of the market. Declining demand growth in Japan and South Korea, the second largest importer, along with massive capacity additions in Australia has led to an oversupplied market. JERA has taken advantage of the buyer’s market and maintained the contract flexibility to redirect cargos when arbitrage opportunities arise. Japanese utilities are expected to be major customers of U.S. LNG as more export plants come on-stream in the next several years.
Iran discovers shale gas in its Southwest Territory
National Iranian Oil Company (NIOC) found a shale gas reserve near Zaoris Mountains in Lorestan province. The exploration project is being executed in four phases. Iran still needs to determine whether it would move forward with shale gas production.
Comments: Iran holds the world’s second-largest natural gas reserve after Russia. The rich natural gas resource gives Iran cost-advantaged competitiveness to develop a petrochemical industry where the Iran government has a stated goal to reach total petrochemical production output of 180,000KTA by 2025. The discovery of shale gas reserves in western Iran is expected to strengthen its confidence in developing the petrochemical industry as its national plan. However, currently, the Iranian Gov’t is more focused on seeking foreign investment for petrochemical projects. Therefore, the drilling of shale gas reserves is not expected to happen in the near term due to a lack of focus and the high capital expenditure required for drilling.