Hurricane Ida impacted the people and industry of Louisiana significantly and has stressed an already challenged chemical market.. What impacts did it have on the feedstocks, exports, and chemical workers? Join your host Victoria Meyer and her guest John Stekla on how Hurricane Ida changed the petrochemical chemical industry and how it will recover. John is a petrochemicals industry expert, with 30+ years of experience. He is also the director at PERIN Resources. Listen in on today’s episode to know more about the impact Hurricane Ida had, the prices of natural gas, feedstocks, and much more.

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The State Of The Petrochemical Industry Post Hurricane Ida With John Stekla

Our guest is John Stekla of PERIN Resources. You have known John in episode eleven of the show. I have invited John back to talk about current events in the chemical industry. John, welcome to the show.

Victoria, thanks for having me back. I’m very flattered and pleased to get the second invitation.

I love talking with you and getting your insights and in-depth knowledge of what you see in the market, customers and suppliers that you talk to. I’m delighted to have you here. Chemical producers and markets are still feeling the effects of Hurricane Ida, which hit Louisiana on August 29, 2021, causing significant damages to homes and businesses and knocking out power to over one million customers, including many chemical producers.

Tropical storm Nicholas, which flirted briefly with being a Category 1 Hurricane, temporarily, and then quickly diminished back down to a tropical storm. It came to the ground on the Texas Coast overnight. It’s causing significant rain, wind event, and power event for the region for the Greater Houston area and Louisiana, and all the people and plants that are in its path.

We are still awaiting the true impact of what it means economically, businesses and people, etc. What we do know is that it’s a disruption to the already volatile chemical market and a market that has been pretty significantly disrupted since 2020. What do you see going on in the market? Let’s start a little bit pre-Hurricane Ida. What was the market like if we go back to the middle of August 2021 before Ida struck? We will then talk a little bit about what you see now.

TCSP 24 | Hurricane Ida

When we first spoke, there were significant dislocations between a number of the markets. Even geographically between Eastern Louisiana and Texas, there was a significant spread in the ethylene price between Louisiana and Texas. The butadiene and propylene markets were tight. While there was some grudging improvement is the only way I could put it towards settling some of those issues, Ida has ripped the band-aid, the scab and has re-exposed those wounds. It’s having a very significant effect and impact on the overall chemical markets.

If you bear with me to let people know that if you want to look at the amount of US capacity impacted or shut down due to Ida, it ranges from a low of about 14% for benzene production to 44% of styrene, Caustic soda, and chlorine are about 30%, PVC is about 41%, about 16% of ethylene, about the same for P-GP, in the 20% for butadiene and ethylene oxide, and the low ethane for polyethylene. It has a significant impact on a number of the chemical markets.

One of the things that we have seen is the spread on the ethylene price between Choctaw Hub, which was used in Louisiana in the Mississippi River, and the hubs in Texas, it’s at $0.14 a pound, which is extraordinary. In normal times, we haven’t seen it in a while. Your differential will be much closer to the cost of the pipeline transportation cost of about $0.02 to $0.03. That’s where you would normally see Louisiana a little bit higher but to see this level is truly an extraordinary situation.

What impact has Hurricane Ida had on the petrochemical industry?

Typically, when a hurricane comes in, it will have three impacts on a chemical producer. First, it could have impacts on the feedstocks coming in, whether it be truck rail or even pipeline. Secondly, it could be damage to the actual production units. Thirdly, we generally call it logistics. It can be road issues, rail issues, and power issues affecting your production.

One of the things that we are seeing as one of the greatest impacts is the people impact. We sometimes lose sight of the fact that everyone that works at a chemical plant has a family. The hurricanes aren’t indiscriminate. They affect everybody. One of the big issues that you will see is that people are having trouble getting workers to be able to come back in, even to assess the damage.

To be a sole source supplier you need commitment and a lot of responsibility.

Shell Norco is still getting enough power back with people in to assess what their damaged situation is. It’s not just the plant operators and maintenance guys. It’s your truck drivers. We lose sight of that. It’s the rail line mechanics and stuff. Indiscriminately, all of the people are having an impact on it. There’s no way around those types of issues.

Labor was already stressed in a lot of places. You mentioned trucking. The labor markets for trucking across the US and the globe have been stressed. This is an additional significant stressor on the people and employees that would be supporting the industry in that area.

I recalled that they changed the rules for truck drivers with the number of hours that they could be on the road. The net impact was to take about 15% of the trucking capacity out of the market due to the limitation of people’s hours. That made trucking very tight. Truckers have been able to pick and choose the routes that they want. They might want to go to a nice city but they could choose not to. They could choose to do that as opposed to going someplace else.

It is much more of an issue in between equipment being flooded and drivers taking care of their families. It is a mess. We were trying to raise some new trucking and they said, “We can get in this, but the earliest we can take care of your loads is September 16, 2021.” They were already projected and fully booked for a couple of weeks out. That creates a lot of issues.

That’s challenging and it’s all interrelated. You need all pieces of the puzzle. You mentioned these three areas, feedstock, production and logistics. Can you touch on anything in those areas? What’s going on in the world of feedstocks?

The hip bone is connected to the leg bone and the leg muscle is connected to the foot bone. There are a lot of interconnections. The one area I wanted to highlight in this discussion is the natural gas space. When Ida came in, we shut down about 70% to 80% of the Gulf of Mexico for oil and gas production. Normally, you would expect to see a boost in prices. We have seen domestic prices go from about 3.80% to about 5.25%. We have seen a significant cost that increased.

You would assume that would be a production on the supply and demand balance, but it’s not. Our consumption is about flat in June 2021 as the latest data compared to 2020. What has happened is that we are exporting a whole lot more natural gas. In the first months of 2021, we exported about 10% of our natural gas production, which is about a 40% increase in 2020.

TSCP 24 | Hurricane Ida

What’s driving that?

We are looking at the spot prices, for example, the Korean-Japan marker. We have seen their price go from about $5 in 2020 to $18. In Europe, it’s even more dramatic. They went from about $3.80 to over $21. It’s almost 6X the price of natural gas. It is crazy and a couple of reasons why. In Europe, inventory levels are lower than where they normally are at this time of the year. They are trying to build their inventories. They had a cold winter in 2020, so they consumed more. They are not getting as much gas from Russia, which is a shock. There are a lot of demands to build up their inventories.

Power prices had been very up. The dedication to renewables is challenging to them. I don’t think they are seeing quite the amount of output. It’s what Texas saw back in February 2021. They’re not seeing the amount of output from the renewables as they had expected. This is one of the things that the audience needs to pay attention to going forward for the balance of 2021 into 2022. The US natural gas inventories are about 70% where they were in 2020. They are running about 7% below the five-year average. Our inventory levels are low.

Normally, this time of the year, we are injecting a lot of natural gas into our wells to build up for the winter demand. We are only injecting about 60% of the volume needed to rebuild inventories to the five-year average. We are not injecting enough to be able to build our inventory stuff. What does that mean? It means we are not going to have as much inventory. We have cold snaps and other issues. We could see some very significant increases in natural gas. I won’t be shocked to see a double price of over $10.

As we talk about natural gas, it has a knock-on effect on power. It’s on the ethane to feed the crackers and other feedstocks.

As a marketing company, offer values like knowledge, experience, relationships, and options.

When you look at the ethane price, which is our primary feedstock for ethylene production, it has increased from $0.17 to $0.18 a gallon to about $0.38 a gallon. Every $0.10-gallon move in ethane price increases your ethylene cash cost by a little over $0.04 a pound. All of a sudden, we are seeing ethylene cash costs increase by $0.08. It’s strictly due to natural gas because ethane has only two uses for it. You burn it as fuel or you can run it through a cracker and make ethylene out of it.

The natural gas price sets the floor. As the floor of natural gas comes up, it’s pushing the ethane price along with it. When you look at the profitability, if you want to call out of ethane, it’s what we call the extraction value, which is the sales price over its alternate or BTU burn value and it’s still low-single digits. It’s not like ethane has become tight. The price is going up, so there’s no margin in the ethane business. We will see that add-on effect with the way it goes. As your ethylene cash costs go up, that determines your export capability be successful.

I would assume, even with these rising costs, the US is still at the front end of the cash-cost curve. Is that true?

That is true. Canada, as well as the Middle East, will have significantly lower prices. That’s because their ethane and feedstocks are not set by free-market dynamics like they are in the US. That adds an element of risk in the US because it’s set by supply and demand. Canada and the Middle East are set by a formula, which is low at competitive levels. Let’s put it that way.

We will stay tuned and talk more about this. You will tell us how your crystal ball turned out on this.

It’s a little murky.

Mine has been murky for a long time. That’s what I tell people.

One of the things, though, is that a lot of these impacts in natural gas are paralleling what happened probably in 2020. There’s an impending train wreck that we could see the inventory and production were going down. It all came to a head back in February 2021 when the freeze hit Texas and Louisiana and we saw prices spiked at unbelievable levels. It certainly bears watching what goes on in natural gas because it will affect all of us at home as well as business-wise.

TSCP 24 | Hurricane Ida

You mentioned that if we look at the petrochemical production across the US but concentrated in Louisiana and the US Gulf Coast, post-Ida, we had somewhere between 14% to 44% of production shut down for various reasons related to power, people and feedstock, etc. What’s the effect that that has had on the market? I have certainly seen some shutdowns where people are restarting. There’s still a lot of force majeure declarations that are still out there. The reality is we have only passed the storm hitting much less, so we are still deep in the recovery phase. What do you see are the impacts on the markets that you guys deal with?

If I had been able to answer that question successfully, I would be retired by now. I don’t see a whole lot of relief released with prices. We are seeing strong inflationary pushes. We are still able to export, although ocean freight is expensive. We haven’t yet seen a lot of imports coming in to blunt the overall demand, although we have seen the spot price of propylene come down quite a bit. We hit the inflection point or the high prices killing off demand.

Since so much of it goes into nonwovens, which leads to PPE, a lot of it can depend upon where the COVID pandemic plays out if we see another demand. You watch all the football games over the weekend. There’s not a lot of demand for masks out there. That is starting to ease back on some of the outgrowing demand. We will start to see a little bit of easing, at least in that one chain. In some of these other product areas like styrene, it was fairly tight to snug. A shutdown like this would make everything tight at least probably through the balance of 2021. Prices generally will see support on that.

Ethylene will go up. It reflects the spot price and the cash cost production. It’s going to continue to drift up as natural gas props the costs up. We will see a few cents increase in there. We will see a few cents increase in propylene at least one more month into September 2021, but then the forecast is we will begin to see some easing of that. One of the things I wanted to mention as well, Gulf Coast refining operating rates fell from about 92.5% down to 75% as a result of Ida. They went from 92.4% to 75.7%. Anything coming out of a refinery is going to be tighter as well. That’s propylene. It could be benzene. It’s another impact of a feedstock.

Hurricanes aren’t indiscriminate, they affect everybody, physically and mentally.

To summarize, the market was already in many ways tight. Although from what I hear, it was starting to ease and come into a better balance before we experienced Hurricane Ida and tropical storm Nicholas, which we don’t know the results yet of what that’s going to look like. It has been a year with a lot of volatility. There have been a lot of supply chain disruptions.

One of the things that when I talk to people, they say is, “How are you managing the shortages and disruptions that are around longer lead times?” There are a lot of discussions around the impact of relationships in that you favor your customers that maybe you have had a long-term relationship with from contracts or secured contracts with. When we talk about disruption in the markets, is it more significant in the spot market? Is the spot market a good place to be? Is it also affecting the contractual customers? Is it changing the way people contract business?

Let me answer the second part first in terms of the contractual approach. People are revisiting issues like just-in-time inventories and sole sourcing. For a lot of the products, we are in the contract negotiation period, we are recommending that they use more than one supplier. Being a sole source supplier, you have a certain commitment and there are a lot of responsibilities. We think that for these security operations and especially geographically separate them.

Let’s say you have one supplier from the Golden Triangle in Louisiana and another from the Houston area, it would be an unusual circumstance to see both places be impacted by the same storm. We think some geographic flexibility from your supplier portfolio. It’s probably a good thing, as well as keeping at least a minimum of two solid suppliers that have the ability to step up.

It’s because of the tightness, if you have the product, the spot market is a great place to play in. It’s a bad place to be if you are buying. It’s a good place to sell but honestly, there were not a lot of spot products available. Typically, a lot of your purchase contracts will have a range. People start lining up at the upper range. It takes a lot of materials that might normally be in a spot market out of it. The spot market volumes have not been robust. Let’s put it that way.

Everybody is working to fulfill their contract obligations. It doesn’t leave a lot of room for that spot market. PERIN, you guys sit in the middle of a lot of transactions. You are relying on the producers to produce and your customers to purchase, which in times like we are experiencing now with a lot of outages across the industry because of weather events, it can put the squeeze on you, I would imagine. How do you guys approach it? How do you think about managing that? How do you think about the risk? How do you respond to that?

That’s a real challenge for us as a marketing company. The value we bring is knowledge, experience, relationships and options. Let’s say in refinery propylene. We will have a number of different outlets we can go to if anyone has an issue. We think of their security in the offtake, especially for some products that are byproducts. Refinery propylene is probably still a byproduct. You need to make it move.

We think we bring a lot of value in having that but that is one product that is a challenge as well. When you look at the price of a propylene molecule in a refinery stream at $0.36 or $0.38 a pound, and then you look at that same propylene molecule in a polymer grade propylene stream at $0.90, the people who produce the RGP are saying, “How do I get a piece of that odd?”

Do you see some investments then coming in?

There are not so many investments but people are revisiting what they have done historically. Sometimes, I understand the attractiveness when we look at those prices. Especially in the propylene space, there are two classes of consumers. Some consumers can take refinery propylene and consume it directly. Those are the guys that make Cumin or Oligomer, Propylene Trimer or Tetramer.

A lot of the contracts are long-term based on net market price. They can’t pay a lot more for the propylene molecule. If you have someone with a splitter who says he can buy the refinery propylene and upgrade it to polymer grade propylene, they are the ones that can afford to pay much higher prices. It is a balancing act between providing security of offtake and the maximum return. It can get to the point where we are going to see the people that can afford to pay higher-priced refinery propylene start to seriously buy it away from the rest of the market. That’s going to be an issue as well for some of those people. We are trying to navigate some of those things.

We continue to work and provide guidance, and a little bit of consulting if you want to call it that way to some of the new projects coming on. We are advising about how to handle logistics, “Let’s look at your offloading sites. Do you have enough room for the trucks to turn around? Have you got the right connections?” It’s the educational value that we bring as well that we are trying to utilize to maintain our position. That’s a challenge.

What should we be looking for concerning recovery? Are we going to see recovery in 2021? We are fast approaching the fourth quarter, which is in 2021, hasn’t turned out the way anybody anticipated it would. What’s our recovery in the petrochemical markets? Even thinking specifically about the US Gulf Coast, is it going to be a rocky fourth quarter? Do you think things are going to start settling out? This is with the John Stekla murky crystal ball. What should we be watching for to understand where we are in this market?

The single most important thing is the weather, “How can we forecast what the weather is going to be?” In 2020, the poor people in Louisiana got hammered a couple of times. That’s the one thing we can’t control. Assuming we don’t see any more major weather events, we have some turnarounds scheduled for September 2021. In October 2021, they will be back on stream. I would think that our production side would start to recover.

In a month or two, we should see most of the production down the path because of the force majeure because they have had damage. I don’t think they have a good assessment of what the damage is but we will begin to see those things. By the end of 2021, we will get everything lined out. We’ve got a new cracker coming on at Bayport Polymers. That will add even more polymers to the business. We’ve got the Shell Monaca plant getting ready to start up.

What’s the timing for the start-up of that plant?

Let’s call it the 2nd or 3rd quarter in 2022. They are going to start bringing some hydrocarbons probably in January 2022 for certain preloads and stuff. They are making fine progress there. That will be interesting for the polyethylene market because they theoretically should dominate that mode with this quadrant of polyethylene due to their superior positioning as well as lower costs. They should be in a strong position not only to take care of that whole Northeast market but also to put a lot of the export market.

That also helps with the geographic diversification out of the US Gulf Coast. It helps to create a bit more diversification across North America, which will be beneficial.

Stay tuned. We can’t anticipate the black swan events that happen. The weather is typically those. The US producers, the Gulf Coast guys, know what they are doing. Once they get the people and power back, they are good at running their operations. If you take the Route 190 Bypass around Lake Charles at the top of the bridge, you still have light poles that are bent over a 45-degree angle from one of the hurricanes in 2020. Right in line were the Lotte Plant and the Westlake Plant but they did not have a lot of damages. We build robust hardware. Logistics issues are the ones that determine a lot of the success in coming back in speed.

This has been great, John. I appreciate you taking some time to talk with me and our readers. Thanks for joining us.

It’s my pleasure. Anytime. Thanks.

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About John Stekla

is a Director at Perin Resources. John is a petrochemicals industry expert, with 30+ years of experience at leading companies including Gulf Oil Chemicals, Chevron, Oronite, CMAII and Williams. John and his expertise are well-known throughout the chemical industry.

“The chemical business runs throughout my family as I married a customer and my son got his degree in chemistry and is currently finishing up his MBA at the U of Buffalo. His first job out of college was in chemical sales just like dad.”