Sector News

Ineos sends Europe a fracking message about gas; next stop, upstream

July 21, 2015
(Platts) – As the champagne bottles smashed into the side of the two newly-built ships that in November will bring the first cargo of US shale gas into Europe, billionaire chairman of Ineos Jim Ratcliffe sent a clear message to European lawmakers whose energy policies have stalled his plans to frack for gas in Europe.
Emblazoned down the side of the two freshly-named vessels — the Ineos Insight and Ineos Ingenuity — were the words “Shale Gas for Manufacturing” and “Shale Gas for Chemicals.”
On what Ratcliffe called the “second most important day” for Ineos after buying BP Chemicals business in 2005 for £5 billion, the company took a major step towards a five-year dream to create a virtual gas pipeline across the Atlantic.
In 2012, with US ethane trading at around a quarter of the price of European naphtha, Ineos’ business was under threat from competitors in both the US and the Middle East, both of which had access to much cheaper feedstock.
Taking a view that politicians would stall any plans to drill for shale gas in Europe, they chose to import it instead.
The strategy involved negotiating multiple ethane supply contracts, underwriting the construction of a 300-mile pipeline to carry the gas from the Marcellus field in west Philadelphia to the Marcus Hook terminal in the east of the state, building two enormous storage tanks in Europe and underwriting the construction of eight new ships.
Last week the first of those vessels, which will continuously ship gas from the US to Norway and the UK, were named in a 90-minute formal ceremony held at docks near Shanghai, China where they were assembled.
The sheer complexity and ambition of the strategy taken on by a company that was near bankrupt six years ago is a bold move that Ratcliffe thought necessary just to keep his business competitive.
Vindicating that decision is the fact that since then both Austrian producer Borealis and Saudi state-owned company Sabic, envious of the economics, have done the same.
To bring US gas across the Atlantic, Ineos has spent, or more accurately committed to spend, at least $2 billion, half of that on eight ships and the rest on import terminals and gaining access to pipelines.
No one from Ineos would say how much that translates into shipping costs per ton, but the vessels have the capacity to carry 1.6 million mt of gas per year for 10-15 years and they cost around $70 million each to build.
Even with operational costs, sources have said freight will be “a lot less” than the $150-200/mt for each Atlantic journey that the alternative feedstock propane cargoes cost, according to two industry sources that are familiar with the deal.
Moreover, the ethane supply contracts were signed at a price linked to naphtha when naphtha was trading at four times the price. It’s now just twice the price.
And Ineos has signed supply contracts with more producers than the two that have been named publicly — Range Resources and Consol Energy — and in fields other than Marcellus. That means should production rates fall off a cliff at in western Pennsylvania and suppliers default on the molecules, Ineos will be limited in its exposure.
It all boils down to the fact that if crude doesn’t average below $40-45/b over the next 15 years, Ineos should be in the money. Yet for the cash spent, Ineos could have drilled more than 200 wells in Europe.
While this deal may shift the Swiss firm to the left of the European cost curve, it will still linger to the right in the global picture. And so Ineos is keen to drive costs down further, and that involves going upstream in Europe.
It has already hired leading experts in fracking and acquired licences to drill in vast areas of the UK from central government. It hopes to get more this year when the government announces the winner of the 14th round of applications for onshore gas and oil drilling.
But before drilling can start, local politicians must be convinced. Europe’s public is far more hostile to fracking than in the US. Late last month local government in northern England rejected plans by Cuadrilla to explore for gas in Lancashire. Meanwhile, Scotland has announced a moratorium on exploration until further work has been done on the impact.
David Cameron, UK prime minister, may yet step in and rejig planning laws to overrule local decisions, no doubt a move supported by Ratcliffe, but that is likely to roil residents who fear fracking will destabilize their homes and comes at a time of heightened distrust of Westminster politicians.
No firm wants to start operations where they are unwanted, not least because it harms their reputation and can drive up costs. But without cheap feedstock on a more permanent basis, Ineos and Europe’s petrochemical industry will be starved of investment and die a slow death.
So unlike all other firms seeking to drill for gas in the UK, Ineos said it would not pay communities to explore for gas. Instead he would give a far more generous 6% of the revenue from any successful well, potentially worth hundreds of millions more.
And after forcing financial institutions to restructure debt to keep the company alive in 2009, defeating powerful union bosses in a dispute over pensions, twice in 2009 and 2013, who would bet against Ratcliffe being successful on his newest venture upstream?
The next round of licences is expected to be announced after the UK summer. And if Ratcliffe, once labelled “JR” after the manipulative oil tycoon in the hit TV show “Dallas,” is successful in gaining more acreage, it won’t just be European politicians he will be sending a message to. It will be the UK and European gas market in which his 17-year old firm will become a major player.
By Andrew Allan 

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