* U.S. petchem industry switches to shale gas from naphtha
* Global naphtha glut grows, flows change
* Prices hit multi-month lows, increasing EU refiners' pain
By Julia Payne and Jessica Donati
LONDON, July 26 European oil refiners are set to
lose a vital export market because the U.S. petrochemical
industry is shifting away from reliance on oil products, notably
naphtha, and using cheap and abundant shale gas instead.
Exports to the United States and Asia are often the last ray
of hope for European refiners, crippled by high oil prices, poor
refining margins and depressed economies at home.
The past few years have seen minimal exports of European
gasoline to the United States because fewer Americans than
normal have taken to the roads in the holiday driving seasons.
But even if gasoline flows to the United States pick up as
the economy gains strength, exports of the key feedstock for the
petrochemical industry, naphtha, may never fully recover because
of the shale gas boom.
Naphtha is a major ingredient in making both the motor fuel
gasoline and ethylene used for plastics production.
The U.S. plastics-producing industry is increasingly
shifting away from oil-derived naphtha, choosing instead to run
plants on gases butane or propane. It is also investing billions
in plants that run on ethane, made from cheap shale gas.
"The new capacity in the U.S. will use ethane and replace
some of the naphtha cracking plants," said Pierre de Kettenis,
the executive director for the petrochemistry programme at the
European Chemical Industry Council.
Plastics is just one industry that is experiencing the
effect of the U.S. shale revolution, which saw gas output
soaring in the past decade and prices dropping to all-time lows.
Techniques for extracting gas have revolutionised the U.S.
natural gas industry by giving companies access to vast new
reserves that could supply the country's demand for 100 years,
according to industry experts.
The U.S. plastics industry is expanding for the first time
in decades as factories are able to cut production costs and
compete on a global scale.
Its switch from naphtha to cheaper alternatives is causing a
major reshuffle in global naphtha flows.
Europe produces more naphtha than it needs with traders
saying some 600,000-800,000 tonnes per month are available for
exports. Traditionally, three quarters of those volumes were
going to Asia and a quarter to the United States.
However, at least five cargoes of naphtha are crossing the
Atlantic to Europe this month in what traders say is a reversal
of the usual flow of trade.
"There is a new supply pattern emerging... the U.S. Gulf and
Caribbean is massively oversupplied, more so than Europe," said
a naphtha trader at a trading house. Producers in the Caribbean
basin are also normally exporters to the U.S. markets.
European and Asian naphtha prices hit near 18-month lows in
June as traders cited global economic concerns and weak plastics
demand as well as a mounting global glut of the product.
"There is a naphtha crisis worldwide," said another naphtha
Before the current price collapse, naphtha has traditionally
traded at level close to gasoline, making it one of the most
important products in refiners' value chain.
European traders say they are no longer counting on Asia,
the engine of oil demand growth of the past decade, to consume
all the unwanted naphtha as buyers are scaling down purchases to
cope with a slowdown in China.
Traders are also finding it harder to sell surplus naphtha
to Brazil, which normally mops up any cargoes left over in
"We will not pull any spot barrels (from Europe). The reason
is that shale gas is making naphtha look better (cheaper) from
the U.S. and the Caribbean," said a Brazil-based trader.
Experts predict the global naphtha glut will grow over time
as U.S. refiners will struggle to place it domestically and ramp
In the past three years, the U.S. split between ethane and
naphtha used in ethylene production has tipped to around 80-20
from 50-50, according to the association of American Fuel and
The ratio is set to tip further over the next six years as
companies including Dow Chemical and Exxon Mobil
are planning $25 billion worth of new projects, which will
mainly run on shale gas.