Honeywell Taps Shale Boom With Plastic-Production System

Honeywell International Inc. (HON) is tapping into a shale-drilling boom by selling customers such as Dow Chemical Co. (DOW) a technology to convert propane found alongside natural gas into a raw material for plastics.

Propylene, used in products from plastic milk jugs to auto parts, is in short supply, and a total of 14 million metric tons of new annual capacity is needed by 2016 as oil refineries produce less of the chemical, said Rajeev Gautam, chief executive officer of Honeywell's UOP unit. The gap will be filled by turning propane into propylene, he said.
"That market has really taken off," Gautam said in an April 5 telephone interview. "This thing is booming here in the U.S. as well as in China."

The UOP unit accounted for 5.4 percent of sales last year at Morris Township, New Jersey-based Honeywell, whose diverse industrial products include automation controls, turbo engines and fibers. The unit has won 10 projects to sell its Oleflex technology for propylene plants in the last 18 months, including a Dow Chemical program to convert shale gas-derived propane. UOP cashes in through licensing of technology, providing service and supplying chemical catalysts.

Record natural-gas production in the U.S. and oil prices exceeding $100 a barrel are helping to make UOP a "jewel of an asset" for Honeywell, Deane Dray, an analyst with Citigroup Inc. in New York, said in an April 9 telephone interview.

'Whole Arsenal'

"There is a whole arsenal of proprietary technology within UOP," said Dray, who recommends buying shares of Honeywell. "They are well positioned to benefit from both oil and gas."

Honeywell rose 0.9 percent to $57.08 at the New York close. The shares have gained 5 percent this year, compared with an 8.8 percent advance for the Standard & Poor's 500 Index.

Honeywell's Performance Materials & Technologies business generated 2011 sales of $5.66 billion, of which about 35 percent came from UOP, according to a company presentation in New York on March 7. Performance Materials reported segment profit for the year of $1.04 billion, or 18 percent of sales.

UOP was once a 50-50 joint venture with Dow Chemical's Union Carbide unit. Honeywell bought full control in 2005 for about $825 million.

UOP also is benefiting from the production of heavier crude oils as higher-valued light oil becomes scarcer. The unit has technology that boosts the refining output of heavy crude by about 6 percent, Gautam said. The company has also developed technology to produce plastics raw materials from coal, and sold the first license for that process in China.

"There's a big boom going on," Gautam said. "For us, the opportunities are in all parts of it."

Gasoline Additive

The technology to make propylene from propane gas has its roots in the production of a material in methyl tert-butyl ether, a gasoline additive. Production of MTBE has been suspended in the U.S. because the substance contaminated groundwater, Gautam said.

Now the same kind of conversion process will be key to making up for declining production of propylene during oil refining as companies dedicate more of the hydrocarbon mixtures called naphthas to production of fuel instead of petrochemicals. That's because some petrochemicals are being made from cheaper ethane that's also found along with natural gas in processes that don't produce propylene, Gautam said.

Shale-gas production is making propane more plentiful in the U.S., and countries such as Qatar and the United Arab Emirates have an abundance of propane from oil and natural-gas production. These producers are shipping the gas to China, where the most new propylene plants are being built.

Propane currently is priced at about $920 a metric ton in the Middle East, and propylene fetches $1,730, according to data compiled by Bloomberg. That makes the conversion from propane profitable, Gautam said.

"It pays back the investment really quick," he said. "The potential is big for us."