Grangemouth –A Taste Of What Is To Come for European Chemicals
Today, INEOS announced that it would close the Grangemouth petrochemical complex in Scotland with the loss of around 800 jobs. This comes at the end of a lengthy dispute with unions around pay, flexible working agreements and a change in pension policy. The union has rejected the proposed changes and management has elected to close the facility. The petrochemical facility is adjacent to a refinery jointly owned by INEOS and PetroChina. The company has indicated that the refinery will continue to operate, but without the petrochemical plant to consume streams of product from the refinery it is inevitable that the refinery will be less profitable going forward – calling into question its future also.
Grangemouth has just over 1 million tons of ethylene capacity and on paper is one of the few ethylene units in Europe that stands a competitive chance in a low cost shale gas world. Grangemouth was rebuilt in the early 1980s to consume NGL’s coming from the BP Forties field in the North Sea and is one of few European NGL based ethylene facilities. Like INEOS’ site in Norway, Grangemouth has suffered from a decline rate in NGLs from the North Sea. This year INEOS announced an agreement with Range Resources to buy ethane from the Marcellus field in the US and ship to Norway. At the time the company also indicated the possibility of doing the same thing at Grangemouth, but has maintained that the operating costs at Grangemouth were not competitive because of among other things a defined benefits pension plan. The company estimated that it would take around $400m of investment to make Grangemouth competitive, including building ethane import facilities, but that it was not willing to spend the money without an agreement to address the other costs at the site.
It is a binary outcome for Grangemouth – without the investment to allow the facility to access more NGL’s, the plant becomes an inefficient oil fraction based ethylene plant in a high oil price environment – another one on the European hit list. The losses that INEOS is making today would simply increase as the local NGL availability declines further. Paradoxically, it is probably the cheapest facility in Europe to upgrade such that it remains competitive globally.
Because of the last point, we do not believe that Grangemouth will close longer-term. Either some last minute deal will be struck between the unions and INEOS, or a third party will step in and buy the facility, spend the money to improve the ethylene unit and restart.
INEOS are taking a hard, but practical line here. Europe is in trouble competitively in the petrochemical environment that looks most likely for the medium term – see prior research. Consequently, there is no point investing to improve a facility unless you are confident that you can command a meaningful competitive edge over those that will run a break-even and ultimately set pricing. There are plenty of other facilities in Europe that have much bleaker looking economic futures than Grangemouth in our view, but we doubt whether many managements will take similar hard/practical steps to INEOS.