METHANOL: Making the most of it

When Riyadh decided in the mid-1970s to deploy its associated gas for the development of a petrochemicals industry, one of the first products to emerge from Jubail was methanol. Thirty years on, the substance has been eclipsed by other, more lucrative alternatives such as liquefied natural gas (LNG) and ethylene. Nevertheless, the region enjoys the same unmatched global competitiveness in methanol as in these commodities, and regional capacity is being ramped up fast.

For the smaller Middle East gas producers, whose resources are insufficient to launch or expand LNG capacity, methanol makes sense because it requires less gas for projects to be economically viable. Hence the Salalah methanol project in Oman or Egyptian Methanex Methanol Company's (EMethanex's) planned plant at Damietta. 'In our recent study, we examined different ways for the region to monetise its gas, and the conclusion was that if you have a very large gas supply, there is no question that LNG is the most effective use,' says Graham Hoar, senior consultant at Nexant. 'But if you don't, it makes sense to go down the methanol or ammonia route.'

But for gas-rich states, methanol represents a diversification play. So Qatar is upgrading the Qatar Fuel Additives Company (Qafac) methanol complex at Mesaieed, Saudi International Petrochemical Company (Sipchem) brought on stream a methanol plant in late 2005 and Iran is developing worldscale methanol plants at Zagros and Kharg Island.

Market conditions are ripe for such expansion. As with all petrochemicals, the Middle East's methanol industry enjoys gas prices a fraction of those elsewhere. 'Recent margins in the region are staggering,' says Hoar. Trinidad, a major methanol producer, pays $1-1.5 a million BTU for feedstock - extremely cheap by global standards but well above Saudi prices of $0.75 a million BTU. The last market price gas-based methanol plants are shutting in North America and have already closed in Western Europe and Japan. In 2006, the Middle East accounted for about 9 million tonnes a year (t/y) of capacity out of a world total of 44 million t/y, compared to just 3 million t/y remaining in the US, a similar amount in Western Europe and about 10 million t/y in Asia, mainly China. 'After the US, China is the next laggard in competitiveness,' says Hoar. 'The country maintains many old, small uneconomic plants.'

And the scale of methanol projects has undergone a step-change in recent years. From 2,000-3,000 tonnes a day (t/d) of capacity being the norm, worldscale plants now produce about 5,000 t/d. With the increased size of projects comes the drawback of increasing price volatility. 'If one plant breaks down, that's 5 per cent of global output lost,' says Hoar. Conversely, each new worldscale plant adds 5 per cent, making the industry especially prone to volatile cycles - as prospective producers pile in during periods of high prices and end up creating a substantial glut. The cycle is currently in the upward swing. 'Methanol moves freely and cheaply around the world, so global prices track each other very closely because of the big arbitrage opportunities,' says Hoar. 'In a few years we will reach the cycle's trough because of over-investment during the good years.'

Demand is strong at present, in spite of fears of depression following the ongoing US phasing-out of methyl tertiary butyl ether - which absorbs the second largest proportion of methanol production - as a gasoline additive. 'This did dampen demand but its impact was mitigated by the phased withdrawal and because China took up some of the slack,' says Hoar. Demand for formaldehyde, the main product of methanol and mostly polymerised to make resins, is also rising fast. Hunger for the third major product, acetic acid, is growing on the back of increasing demand for vinyl acetate monomer and purefied terephthalic acid, used in the manufacture of polyester for