Chemical Conversations – Strengths and weaknesses of Europe’s ARG ethylene pipeline

Sarah: Hello and welcome to this Chemicals Conversation podcast brought to you by Argus Media. This is going to be the first of three podcasts exploring the logistics of supplying ethylene to Europe and the export options from the U.S. In this first edition of the series, we will discuss the major ethylene pipeline networks in Europe, and specifically the ARG pipeline. I'm Sarah Rae, VP, Olefin and Derivatives, and I'm joined by Alan Williamson, our lead consultant for Ethylene and Derivatives Europe. Thanks for joining me, Alan.

Alan: Great to be here, Sarah.

Sarah: Right. So the background of this whole series of podcasts is that the European petrochemical industry is struggling. Demand hasn't really recovered following the post-COVID and European energy price crisis, and compared to other regions, we've got higher costs. Also, Europe's assets are older and all this new capacity coming on in Asia. And on top of that, European producers are going to have to invest a huge amount in terms of euros for carbon reduction and lack of political support for a CBAM not in place yet. So, you know, and as a consequence, we've seen the closure of two European crackers last year, with three more likely to be closed or idled in '25, and a whole number under strategic review.

Alan: Yeah, regrettably, yes, correct, Sarah, which basically means, you know, Europe now needs to add a close equivalent derivative consumption and import more derivatives in the form of polyethylene or PVC, or really produce and import more ethylene to keep the current derivative facets going. Personally, I think we'll probably see a bit of a combination of the two because we've already seen some derivative units slated for closure, while, you know, there are clearly others for the moment that their parent companies are showing that willingness to try and run on imports or from alternative supplies of ethylene.

Sarah: Yeah, absolutely. So the key infrastructure for doing that is import terminals, tanks and storage, which we're going to talk more about in our next podcast. But today we're going to talk about the pipelines that exist in Europe to facilitate moving that ethylene about, assuming that we can buy it economically.

Alan: Correct, yeah, there are a number of pipelines in Europe, really, and the main ones really are there's one in France, I believe it's called the Euro pipeline. It really runs from the south of France, up to the north west of France, from the Berre and Lavera crackers, which are owned and operated by LyondellBasell and INEOS respectively. And it goes up to Saint-Avold, I think it is, where Total Energy is used to operate the Carling crackers, which basically means that this pipeline has really supported the ethylene derivatives in that region, i.e. the northwest, to continue running once those crackers were closed in 2008 and 2015, respectively. It doesn't really interconnect with any of the other major pipelines, and there's only really one import terminal via FoSS [SP], but it does show that derivatives can be kept going from other alternative supplies, either via imports or really from the other crackers at the other end of the pipeline. There's also a major pipeline system in the UK, so really connects the crackers in Scotland, at Mossmorran and Grangemouth, with derivative consumers in Runcorn, and also down to the Tees area, where the Wilton cracker is. And then I know it quite well, because I used to work in that business, there's a little connection down to the Salt End [SP] site in Hull. And in northern Germany we have another pipeline that really connects, started with the Bohlen and Wittenhoffen [SP] crackers, and also the Leuna and Neutrace [SP] sites in Czech Republic. Plus, you know, there are a number of other smaller pipelines spread across Europe which connect local crackers with various derivatives and terminals.

Sarah: Yeah, that's right. But you know, I think, you know, really, when people talk about Europe, we talk about the main one being the ARG pipeline. So called because nobody outside of Germany can pronounce the full name. So what are the basics of this main pipeline, Alan?

Alan: No, you're right. The ARG is certainly the best known and I would say probably the most extensive pipeline network across Western Europe. I mean, it runs for approximately 495 kilometres from Belgium through Germany and The Netherlands, basically from Antwerp to Cologne, with a branch up to the Gelsenkirchen area.

Sarah: Okay, but does it connect in with others as well?

Alan: It does, it does. So there are a number of other links via either company-wned pipelines or even an ARG, even JV in the Netherlands and Belgium that links with other petrochemical sites in the ARA and southern Belgium areas. Plus, you know, in Germany and the southeast of Cologne, there are a series of company-owned pipelines which extend the network even further down to Frankfurt and Ludwigshafen and even on the way down to Berghausen, which is quite close to the Austrian border.

Sarah: So there's a continuous link potentially all the way from Antwerp, all the way down into that southern German pocket. Yeah?

Alan: Correct. Yeah, there is indeed. It's a long way.

Sarah: It's a long way. So who owns it though? Who owns the ARG?

Alan: Well, the current shareholders are BSF, INEOS, SABIC and a company called WestGas, which is actually part of Evonik, Evonik pipelines kind of business, which is quite key for Evonik.

Sarah: So do those guys get special deals?

Alan: Good question. But no, the ARG pipeline is really a common carrier, therefore accessible to all ethylene producers and consumers along its length and similar transport conditions really to avoid, you know, competition law problems, let's be honest. And I guess in anticipation of your next question, yes, the prices are basically therefore set on volume and distance transported.

Sarah: Okay, so this all sounds positive for somebody looking to import ethylene into Europe. You could put in a molecule in Antwerp and move it all the way down to the industry in Germany, in theory. Yeah.

Alan: In theory, yes, but it's not quite that simple. You would think that would be the case with a pipeline, wouldn't you? But the ARG doesn't really operate in that way. In reality, the ARG is more like a series of pipelines connected to pockets of production with consumption along its length, which allows the various suppliers and consumers to really better manage their normal ups and downs of production by being all connected. So it's acting far more like a local regional balancing system versus what we probably traditionally think of as a pipeline.

Sarah: Okay. I mean, tell us a bit more about that. That sounds, you know, that sounds odd, doesn't it?

Alan: It does. It does. And I know it's intriguing, certainly to some of our North American colleagues how it actually works. But, you know, typically when we think about a pipeline, we typically think about, you know, say a production unit or maybe an import terminal at one end and then receiving derivative unit or terminal at the other end. So naturally, any product that's introduced at one end, obviously, once the pipeline is full, effectively, you know, comes out the other end. Now, you know, depending on the length, etc., there may be a need for booster stations, which are basically pumps along the way to ensure efficient transport. It may even have the option to offtake or even add product along the way at various points. But effectively, we tend to think about a continuous flow of material from one end to the other.

Now, the ARG system really relies on the crackers and their tanks along its length to act as kind of a series of pumps and balancing points via, you know, their normal need to inject ethylene into the pipeline. But they need to do this in a coordinated way, which is, you know, quite a strength, but also a potential weakness. So let me try to explain a little bit more. In a normal month, each cracker is effectively expected, as you would imagine, to inject or pump into the ARG over the course of the month on a fairly ratable basis the same amount of ethylene, of course, as its customers will offtake from the ARG on the same month and on the same basis. So effectively balancing supply with demand and therefore maintaining the pressure in the pipeline, assuming, of course, all the pipelines are running and doing the same.

Now, as it's a common carrier system for ethylene that's pumped into the ARG, it's typically, therefore, consumed by local consumers, even if they're not the direct customer of the supplier. And this helps keep the system in balance, which is all coordinated by the ARG team themselves. Now, you know, I know personally, but we probably all know that plants don't always run ratably. Hence the ARG, what the ARG does very well is actually to just balance out these movements on any day-to-day imbalances by effectively asking various suppliers and consumers to make adjustments, large or small, to their inputs. You know, either to input more or to offtake more where possible, just to keep the overall system in balance. And the ARG really is set up to allow, you know, customers and consumers to really do this and also via swaps and purchasing materials to help cover, for example, [inaudible 00:08:47] or production issues. What it is not, though, and the ARG will tell you, it's not a storage system. So effectively supply has to equal demand within the pipeline. And that must be kept balanced to maintain the right pressure in each section. Otherwise, the system and the flows come out of balance and effectively you may not get the material out that you want to and you may not be allowed to put the material into the pipeline that you're also looking to do as well, Sarah.

Sarah: Oh, so it's like a cooperative really. And you mentioned that there's also a potential weakness. What's that?

Alan: Correct. Well, there are no booster stations on the ARG. So it does very much rely on the various crackers along its length, really running, you know, and some sites have more than one cracker. So, you know, this is normally the case. At least one cracker will be running, even if there's turnarounds going on or maybe an outage of a cracker in another area. So as long as these are running at rates to support local demand, then otherwise it gets out of balance and disrupts the flows. I think the best example of this was probably in 2018 when, in '19, when the industry had a very significant cracker shutdown season, which does happen on a kind of five-year, kind of five, six-year basis. But at that time, combined with multiple unplanned outages or restrictions, especially at the southern end of the pipeline. And this really resulted in a major shortage of ethylene at that end of the pipeline, even though theoretically there was ethylene available in the ARA area to support. But this material was unable to flow to the south, basically because multiple crackers along the length and in the same region were out at the same time, which really disrupted the flows, Sarah.

Sarah: No, I remember that as well. I mean, it was a difficult period, was it? And I recall the ARG have been talking about putting in and installing booster stations to try and avoid that in future. Did that happen?

Alan: Correct. They did talk about it, but so far, as far as I'm aware, nothing has changed. However, you know, to be fair, the ARG and its shareholders, this was not perhaps a simple or as cheap an option as people potentially thought at the time. You know, given the way the ARG was effectively designed, which we've just mentioned, you know, balanced by crackers along its length, where do you actually put a booster station is quite a difficult question. And these are not cheap. And hence factors like how the shareholders get a return on their investment come into play as well. Yeah?

Sarah: No, that's right. Nobody likes spending money on logistics, do they really?

Alan: Correct. Correct.

Sarah: And it's interesting, you know, you come back to the original question. So in theory, you could put imports into Antwerp and have it delivered to a customer in southern Germany on the ARG, right?

Alan: Yeah, absolutely. In theory, correct. But you need the right number of crackers running. You need the balance along the ARG to work. And then in theory, you can move the product. Although you probably won't actually physically move the product. As you say, it's a balancing system. So the balances need to work. However, you know, this is very inefficient and it's quite complicated. So it's very expensive and, you know, to be quite honest, you'll probably pay almost as much to move it from, shall we say the ARA area to southern Germany as you did to move it across the Atlantic, you know. So, which is why it rarely happens in practice. Most imported material stays in the ARA area. And, you know, and this is even before we get into the fact that the product needs to meet the ARG spec, as not all ethylene is the same so it would appear.

Sarah: That's another one, isn't it? I mean, at the time, you know, it happened again this year or sort of late, it's sort of parts of last year that the U.S. specification for ethylene, ethane and ethylene is not, does not generally meet the ARG spec, but by a combination of mixing product and running certain crackers, they load product that does meet it most of the time, but not always. Yeah?

Alan: Yeah, correct. Correct.

Sarah: Do you think that could happen again?

Alan: I think, you know, we have to say that if it's happened once, in theory it can happen again and, you know, and also to my kind of thinking, you know, if we get more and more ethylene produced in the U.S. for export, which doesn't meet the ARG spec, then, you know, it's going to become more difficult for enterprise to be able to balance it out. So, you know, I think for now it was definitely an isolated event, but, you know, certainly one that people are now more aware of and want to keep an eye on. Yeah?

Sarah: And couldn't the ARG just change its spec?

Alan: That could happen, but, you know, it takes this industry and downstream users quite a long time to get products approval and, you know, this is not an overnight job, it's just as simple as saying we change the spec. So I don't really see an incentive for the ARG to do this in the short to medium term at least. Yeah.

Sarah: That's true, especially given the role of the ARG to help balance the European cracker fleet versus imports. Yeah?

Alan: Yeah, yeah, correct. So, you know, to go back to your question, you know, yeah, if the right number of crackers are running on both sides of the Atlantic and the ethylene meets the spec, then, you know, in theory, you can move it to the southern Germany, but due to the complexity and expense of doing so, this doesn't really happen and it's not really a feasible long-term solution.

Sarah: As the other side to it is you have to then find import terminals.

Alan: So like I say, you also need to find an import terminal willing to import your ethylene, yeah, but that's going to be the subject of our next podcast, I believe. Yeah?

Sarah: Yeah, that's right. It is indeed. So maybe we should leave it for there and pick this up next time. So thanks, Alan, for your time today.

Alan: It's been a pleasure. I would just like to add though, you know, that in my experience, the team at the ARG do a really great job in ensuring that any product gets to where it's needed as efficiently and safely as possible. And, you know, in sometimes some pretty difficult operating situations and really the European industry would be a definitely much poorer place without them and the ARG pipeline. Yeah.

Sarah: That's really great points. That safety element is key to the industry through everything it does. Yeah, completely.

Alan: Correct.

Sarah: So that concludes today's podcast. We hope you found it interesting and any subsequent questions or comments are welcome. Meanwhile, we look forward to welcoming you to our next podcast in this series when we get to explore the logistics and terminal options for ethylene in Europe and the exports available from the U.S. So thanks, Alan, for sharing your insights. Logistics has always been at the heart of the understanding of the European ethylene market. So it's really interesting to explore that with more of the specifics. And if you want to learn more about our market coverage or the ethylene trade balance, which is covered in this podcast, then it's in our biannual ethylene analytics product that looks at production and trade upon a country, global and regional level with a ten-year forecast. So you can get in touch with us via our website. Thank you so much for listening.