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August 2005 Headlines

The August US Gulf-Houston Ship Channel Natural Gas Index rose about 7.5% to $7.39 USD/MMbtu. Most of the immediate interest has turned to studying current crude oil and natural gas pricing for its impact on future pricing. The current spikes are averaging strong premiums to past pricing trends. Forward gas pricing for the winter period is breaking records, with December and January prices escalating above $10.00+ MMBtu. As of the close of business on 12th August, the daily US Gulf Henry Hub prompt cash natural gas price was $9.60 USD/MMBtu. October, November, and December 2005 Nymex gas prices are posted at $9.608, $9.966 and $10.319 USD/MMBtu, respectively. US natural gas inventory levels for the week ending 5th August 2005, as issued by the US Energy Information Administration on August 11, were at 2463 Bcf (billion cubic feet), an increase of only 43 Bcf from the previous week. Stock levels are now only 6.4% greater than the 5-year average and just 0.3% greater than the level posted for this week last year.

At the start of the month, the August US Gulf-Houston Ship Channel Natural Gas Index rose about 7.5% to $7.39 USD/MMbtu. Before the recently renewed price hikes in crude and natural gas, there was still some upward price momentum pushing natural gas to higher and uneconomic levels for remaining US methanol producers. The current price spikes are averaging strong premiums to past pricing trends. Forward gas pricing for the winter period is breaking records, with forward December and January prices escalating above $10.00+ MMBtu. As of the close of business on 29 August, the daily US Gulf Henry Hub prompt cash natural gas price was at a fixed level of $9.84 USD/MMBtu. This was unchanged from the prior day's quote due to the closure of the terminal and suspension of the reference pricing. Upon reopening, the Henry Hub quotation closed on 31 August at $12.65 USD/MMBtu, a nearly $1.20 USD premium to the forward month Nymex quote.

On 30 August, Methanex Corporation disclosed plans to close its Kitimat, BC units in early January 2006, as high natural gas prices have made them "no longer economically viable." Methanex is indicating that, if they can get further agreements in place, they will move to close the facility earlier. The closure of the methanol and associated ammonia plants will incur pre- and post-tax charges totaling approximately $35.0 million USD. The company also announced that it was in talks with a third party concerning certain Kitimat assets, the sale of which could help defray the costs of the plant closures. They have mentioned keeping some of the terminal tanks located there to supply the regional markets. In a related note, Pacific Northern Gas (PNG) announced that, because of the impending closures at Kitimat, Methanex has cancelled their Firm and Interruptible Gas Transportation Service Agreement with PNG. As a result, Methanex must pay PNG in the region of $23.3 million on the 28 February 2006 termination date. Methanex's contract with PNG was originally set to expire on 31 October 2009.

The North American Free Trade Agreement (NAFTA) special arbitrator Tribunal panel rejected the $970 million USD claim filed by Methanex, based on California's decision to ban the gasoline additive MTBE. A formal official US Department ruling on the decision is pending. Methanex had originally filed a claim of harm under official NAFTA guidelines in June 1999. The first submission under NAFTA guidelines by Methanex was partially overruled in August 2002. The company filed a fresh pleading and second amended statement of claim in November 2002. A spokesman for Methanex said the company is now reviewing the decision and exploring its options.

The recent extreme high cost of crude oil will impact regional natural gas pricing and the cost to produce methanol for a number of European companies. Certainly, the global price trend on methanol is steady to down. We anticipate the Q3 average global price trend will be 7-8% lower in the current quarter versus the previous period. The significant adjustment in Asian pricing is affecting all markets. However, when faced with rising costs, European producers will shortly find themselves in a cost/margin pinch. The approach of the Q4 contract period is near and all of these thoughts are becoming preliminary discussion points for contract talks. Clearly, producers would like to see contract price hold stable or even rise, but consumers are still under margin pressure and have witnessed a declining methanol price in other markets. At this early stage in the debate, some consumers are referencing the events of the last quarterly discussions and talk of seeking a similar €10 decline in the Q4 contract. It's early though, and full discussions/nominations should be forthcoming in a few weeks.

On 4 August, Foster Wheeler announced that subsidiary Foster Wheeler Italiana S.p.A has formed a strategic alliance with Methanol Casale S.A. of Switzerland to provide technology and engineering to the methanol production industry. Foster Wheeler specializes in engineering, procurement and construction, while Methanol Casale is a supplier of production technology. The partnership is aimed at creating a sort of "one-stop shop" for new projects, with the alliance capable of dealing with "business development and proposals through front-end design and EPC project execution."

Asian markets continue to be influenced by lower spot bids-to-buy coming from China. Domestic production levels in China declined in July, but marketers are uncertain if this is due to the summer slowdown in demand or the reduced competitiveness of smaller domestic producers. Shanghai Coking is returning to production, but other smaller units are noted to be dropping out. New, larger Chinese facilities will be coming online in early Q4. Demand throughout the region is still considered weak, linked to soft formaldehyde. Higher demand is coming from new acetic and MMA capacity now coming online.

On Monday August 8th, 2005, US President George W. Bush signed The Energy Policy Act of 2005 into law. As previously noted, the legislation lacked any MTBE liability protection for producers and blenders, but did include a provision allowing future MTBE liability suits to be sent to federal courts, where cases would have to meet more rigorous standards than that found in state courts. However, following the formal signing of the bill, refiners are beginning to line up to discontinue use of MTBE in fuels. Both Valero Energy and Sunoco Incorporated have announced that, because of the passage of the US energy bill, they intend to eliminate MTBE entirely from their systems in order to reduce vulnerability to liability lawsuits. With the Energy Policy's provision to remove the 2% oxygenate requirement in May 2006 (270 days after endorsement), Valero expects to halt MTBE production and blending, cutting its gasoline totals by an estimated 60,000 bbls/day. More companies are said to be reviewing options with respect to both the production and blending of MTBE in the US, with others anticipated to take the same route as Valero.

On 24 August, Huntsman Corporation announced that its subsidiary Huntsman Petrochemical Corporation had shut down the PO/MTBE unit at Port Neches, Texas for unscheduled maintenance and repairs. The outage, expected to last 48 days, has prompted the company to declare force majeure. The Port Neches facility has a nameplate capacity of 260 million gallons of MTBE and 525 million pounds of PO. A separate MTBE extraction unit at the site is still operational and will not be affected by the outage.

With the lack of legal protection and the removal of the oxygenate mandate in the new US Energy Policy Act of 2005, several refiners are already preparing to eliminate MTBE from their fuels. This month, Valero Energy and Sunoco Incorporated publicly acknowledged that MTBE would be completely phased out of their systems in order to reduce their legal vulnerability. Valero stated that it will halt MTBE production and blending when the oxygenate requirement expires in May 2006. Because of this, the company anticipates it will lose around 60,000 bbls/day of gasoline initially. Meanwhile, other companies are said to be evaluating what actions they will take, with some investigating alternative octane sources, such as alkylate, iso-octane and iso-octene production. Many expect more announcements to come. According to early estimates, the US gasoline market could see a total volume loss of 1.6-2.0%, a disconcerting prospect in the face of uncertain supply and rising energy prices.

The addition of the first new methyl methacrylate monomer (MMA) production capacity in years is affecting the Asian market. Lucite's 95,000 tonne/year plant was brought online in China during the end of the second quarter. More recently, Sumitomo Chemical's new MMA plant (80,000 tonne/year) at Jurong Island, Singapore officially started at the middle of this month. A third production train is also being evaluated for the Singapore location. Sumitomo is also expanding their JV LG MMA plant in Yeochun, Korea by adding a second production train of 75,000 tonnes/year. This next phase expansion is anticipated to be complete in early 2008. The MMA business sector is indicated to be under both supply/demand and pricing pressure. New capacity in Asia, combined with softer demand offtake and lower methanol feedstock pricing, has triggered some renewed pressures on the industry.