US methanol projects find economics changed on oil, gas prices
Tuesday July 12, 2016
Over the past five years, interest in US methanol production has exploded. There has been the reopening of mothballed plants, relocation of southern-hemisphere plants and billion dollar investments in brown and greenfield projects. These investments were all predicated on a unique pricing relationship: a historically wide natural gas-to-crude ratio.
However, this pricing relationship has been altered, changing the economics of methanol production in the US and raising questions about the future economic viability of US ethanol expansions. This piece outlines and analyzes the changing economic nature of the US methanol landscape and shows that methanol economics are not as rosy as they were a few years ago.
The increased price multiple between US natural gas, crude and methanol made methanol production economics favorable in the US. After methanol spent the past decade at a price multiple of less than 100x natural gas prices, it has averaged 112x since 2011, highlighting the value of turning natural gas into methanol. This has led to the proposals for nearly 34 million tons per year of new capacity to be added to the US market.
But our analysis shows that the economics of US methanol production have taken a hit in the lower oil price environment.
The IRR, or internal rate of return, is a metric used in capital budgeting to measure the profitability of potential investments. Hurdle rates for IRR vary but 10-20% is typically considered economically feasible. For example, the current IRR of a Permian oil well is 23%, the highest IRR of oil and gas basins in North America, based on Platts Bentek’s June 2016 IRR analysis.
For our analysis we considered the initial investment costs split between a construction timeline of two years, and natural gas for feedstock and methanol output for its first 10 years of operation.
The methanol projects in t...
But our analysis shows that the economics of US methanol production have taken a hit in the lower oil price environment.
The IRR, or internal rate of return, is a metric used in capital budgeting to measure the profitability of potential investments. Hurdle rates for IRR vary but 10-20% is typically considered economically feasible. For example, the current IRR of a Permian oil well is 23%, the highest IRR of oil and gas basins in North America, based on Platts Bentek’s June 2016 IRR analysis.
For our analysis we considered the initial investment costs split between a construction timeline of two years, and natural gas for feedstock and methanol output for its first 10 years of operation.
The methanol projects in t...