The Impact of Shale Gas on Energy Markets

Further written evidence submitted by INEOS Olefins & Polymers UK (ISG 10a)

1. INEOS is submitting supplement ary evidence having recently completed construction of an ethylene storage facility in Europe, and signed an international ethane supply agreement, which will enable the company to import petrochemical feedstock derived from US shale gas. We wish to draw the Committee’s attention to these new developments to illustrate the dramatic effect that shale gas has had on the price of petrochemical feedstock in the USA, and establish how important it is to the petrochemicals industry to have access to competitively priced raw materials .

2. Having access to competitively priced feedstock (such as ethane and propane) is essential for the petrochemicals sector to thrive. The North Sea has provided affordable feedstock for many years, allowing the UK petrochemicals sector to prosper, but reserves are now dwindling, causing prices to rise and eroding the competitiveness of the industry.

3. At the same time, the Middle East and the USA are sourcing ethane from cheap natural gas rather than naphtha, meaning prices of feedstock are significantly lower than in Europe. This in turn means ethylene production is much more competitive in these locations. The average cash cost of producing a tonne of ethylene (year end 2011) in the Middle East was $300, in the USA $625, and the rest of the world $750-1250.

4. The competitiveness gap with the USA is widening as a result of the USA deriving ethane from cheap shale gas. This has led to massive investment in ethylene crackers and downstream petrochemical facilities in the USA, while Europe is not seeing this sort of investment. The price differen ce in ethane is n ow so dramatic that it makes business sense for INEOS to import ethane from the USA rather than buying it in Europe, even though this requires very significant investment in infrastructure, and importation itself involves additional costs.

5. INEOS has invested $80m in an ethylene storage terminal in Antwerp to allow us to access more competitive feedstock from outside Europe . Construction finished last month and the facility will be fully operational in the last quarter of 2012. The 1m tonne/year facility will enable INEOS to import ethylene from a wide range of international sources for use as raw material in our European businesses.

6. INEOS has also recently signed supply and infrastructure agreements that will secure a significant volume of ethane feedstock from the USA for use in our European crackers. This comprises a long-term deal with Range Resources-Appalachia LLC for the lifting of ethane from the Marcus Hook Facility from 2015, and Pipeline Transportation Services and Terminal Services Agreements for the shipping of ethane from Houston, Pennsylvania. It is expected that when complete, the project will transport approximately 70,000 barrels per day of ethane and propane sourced from the Marcellus Shale.

7. These large investments and long-term agreements are a clear indication of the importance of competitively priced feedstock to INEOS, and the competitiveness gap that currently exists between Europe and the USA as a result of the extraction of shale gas. Shale gas has been a ‘game changer’ in the USA when it comes to feedstock prices. Extraction in the UK is an opportunity to replicate these benefits that we cannot afford to miss.

8. Extracting shale gas in the UK would lower domestic feedstock prices allowing the petrochemicals sector to compete more effectively without having to import feedstock at considerable expense. This would support the UK gas industry and promote investment in cracking and downstream petrochemical facilities in the UK, as has been seen in the USA, driving economic growth and recovery.

November 2012

Prepared 29th November 2012