Ethylene – Unlikely to Be a Quick Fix for Williams
Yesterday’s tragic incident at the Williams Ethylene facility in Louisiana should be put into context from an event perspective before it is possible to draw conclusions about its market impact. Ethylene producers and consumers rallied in the market after the news, which would be expected, but the medium and longer-term implications should be thought through more carefully.
Fires on ethylene facilities are not uncommon, but are far less common than they were 20 years ago. This applies globally, not just in the US. Explosions and fires on an operating unit are very rare, and those that cause fatalities even more so. Most incidents on these units occur either during a maintenance period when the unit has already been shutdown and there are more people working on a facility, many of whom may not be intimately familiar with the plant, or during the plant start-up and/or shutdown procedures. There are so many active and redundant safety systems on these units that to have an incident when the facility is at steady state is very rare. The number of people injured suggests a very large and unpredicted explosion involving a great deal of escaped hydrocarbon – allowing the explosion to impact people quite some distance from the plant.
Consequently, regardless of the damage to the facility, it would be short sighted to assume that it will be back up and running soon. Regulators are going to want to understand the exact cause of the explosion and this investigation may take time. Williams may have to make changes to the plant and to the site itself to meet requirements of an investigation.
The damage may not be simple to fix either. Fires on these facilities do more damage to electrical systems than they do to the structure itself and the rate determining step for a restart is generally repair of the electrical systems and some pumps/valve. An explosion can cause structural damage, and if this extends to a high cost piece of equipment, such as the ethylene column itself or the compressor system, it can be many months before a replacement is available or a repair is made. Companies building these facilities in the US for start-up in 2017 are ordering some of these critical components now.
If we assume that the plant is out of commission for 6-8 months we can draw some possible conclusions:
- This will keep the ethylene market tight in the US, but not critically tight. The facility is around 2% of North American capacity, but we are not running at capacity today, so the market will rebalance – see chart. Ethylene prices will likely rise near-term and this will have a positive impact on Q3 and Q4 results for US ethylene producers – DOW, LYB, WLK, EMN and to a lesser extent DD (more limited leverage).
2. The same group might also benefit from lower NGL pricing as the capacity to consume ethane has come down. This market is already oversupplied, and prices could weaken here relative to natural gas, decreasing margins for NGL fractionators
3. Counter-intuitively, ethylene consumers will also probably benefit. Ethylene derivative producers historically have better luck raising prices if they can point to a supply shock and their profits generally rise in a rising ethylene price environment – AXLL would be a clear beneficiary, if past dynamics are repeated here.
The real wild card would be an investigation that draws some more generic industry conclusions and raises standards for everyone. This could impose shutdowns and costs on other producers as they meet some new code. The shutdowns would keep the market tight, which might offset any costs of compliance – but this is a very unlikely scenario from our experience.