Abu Dhabi: Closing the gap on regional giants

13 June 2008
Despite having the world’s fifth-largest gas reserves, Abu Dhabi has been slow to develop its chemicals sector, but a planned£20bn-plus megaproject at Taweelah is the beginning of a major transformation.

In the rapid growth of the region’s petrochemicals industry over the past five years, Abu Dhabi has been a relative laggard compared with the quick-paced developments of Saudi Arabia, Qatar and Iran. This is a little surprising given the UAE’s substantial gas reserves of 214 trillion cubic feet, almost 200 trillion cubic feet of which lie in Abu Dhabi. This is 4 per cent of the global total, giving the federation the fifth-largest gas reserves in the world, and provides the ideal springboard for petrochemicals development.

With a small population and massive oil reserves, historically there has been little incentive to develop a local petrochemicals industry. Aside from the urea-based fertiliser production at Ruwais Fertiliser Industries (Fertil), set up in 1982, it was not until 1998 that Abu Dhabi entered the basic chemicals industry with the creation of Abu Dhabi Polymers Company (Borouge).

Boosting capacity

The first phase of Borouge, a joint venture of Vienna-based Borealis and state-owned Abu Dhabi National Oil Company (Adnoc), came on stream in 2002 and was an immediate success. Using cheap ethane feedstock to produce 450,000 tonnes a year (t/y) of polyethylene (PE), the complex was expanded in 2005 to increase production to 600,000 t/y.

In 2006, Borouge announced plans to build a second-phase complex that will produce polypropylene (PP) in addition to two further PE units. The facility is due to come on stream in 2010, and Borouge recently announced plans for a third cracker to start production in 2013.

Despite Borouge’s success, Abu Dhabi’s petrochemicals production is still lower than any other Gulf state except Bahrain. All this will change over the next five years however, following the launch in April of what has been described by its sponsors as “the largest integrated petrochemicals complex ever built”.

The $20bn-plus complex will be built at the industrial area of Taweelah, equidistant from Abu Dhabi and Dubai. It will be developed by Chemaweyaat, a joint venture of Borealis and two Abu Dhabi state-linked entities: International Petroleum Investment Corporation (Ipic) and Abu Dhabi Investment Council (Adic).

The facility will be one of the few in the world to combine olefins, aromatics and fertiliser production in one complex. It will produce more than 7 million t/y of products ranging from basic commodity polymers such as PE and PP to advanced plastics such as polycarbonate and acetone (see table).

The complex will have three main elements: a 1.4 million-t/y aromatics plant fed with nearly 3 million t/y of heavy and medium naphtha, a 1.4 million t/y cracker also supplied with 3 million t/y of light naphtha and a 520,000-t/y urea plant. A range of 18 different products will be produced in total, making it far larger than the estimated $10bn Saudi Kayan Petrochemical Company complex in Jubail, currently the largest single-phase chemicals complex in the world.

The most crucial decision for the Taweelah project has been the use of crude-derived naphtha as chosen feedstock. Traditionally, the region has used the ethane feedstock formula. Ethane is supplied to Gulf developers at subsidised prices as low as $0.75 a million BTUs, compared with costs as high as $7-8 a million BTUs in Europe and the US.

This gives Gulf producers an unbeatable cash-cost advantage over their international competitors and is one of the main reasons the region is quickly becoming the dominant player in the industry.

Subsidising prices

While ethane has been supplied to Borouge, the rising demand for gas in power generation has meant Adnoc could not guarantee ethane supply for Taweelah. Just 1.1 million t/y of ethane is understood to be available in future once Abu Dhabi’s $5bn integrated gas development (IGD) comes on stream in 2011. The vast majority of this has been allocated for Borouge’s third cracker. Conversely, Abu Dhabi has no shortage of naphtha, exporting about 8 million tonnes in 2007. The advent of IGD and the 400,000-barrel-a-day (b/d) refinery at Ruwais, planned by Abu Dhabi Oil Refining Company (Takreer), will increase that by 50 per cent.

Naphtha has the added benefit of opening up production to aromatic and advanced chemical products that cannot be derived from ethane alone.

But because naphtha is produced from crude in the refining process, its cost is linked to the price of oil. As this reaches record prices so does the price of naphtha, making it more expensive than using ethane, essentially wiping out the cash-cost advantage over non-regional competition.

One answer, as with ethane, is for the state to subsidise the feedstock supply. But unlike ethane, naphtha is exported globally, and trade rules make it difficult to allow subsidies.

For example, following its World Trade Organisation (WTO) accession in 2006, Saudi Arabia is understood to have been compelled to phase out its natural gas liquid feedstocks discount from 2012.

Moreover, Abu Dhabi’s principal naphtha source is Takreer’s Ruwais refinery, about 350 kilometres west of Taweelah. To deliver the feedstock, a dedicated pipeline will have to be built at considerable cost.

So why not develop the complex at Ruwais alongside Borouge? Abu Dhabi wants to develop Taweelah as a strategic alternative to Ruwais. A major port is being built there and one of the world’s largest aluminium smelters. There are also plans to develop a plastics conversion park at Taweelah to attract downstream manufacturers. The conversion park concept is gaining prominence. Downstream plastics manufacturing is far more labour-intensive than upstream chemical production.

The presence of customers close to production also means the producer need not worry about marketing its output, always an issue when production is far from the main end-customer bases of the Far East, Europe and the US.

Sovereign guarantees

The huge cost of the complex is another important factor. Assuming Chemaweyaat wants to finance the deal on a conventional 70:30 debt/equity basis, it will require project finance of at least $10bn. Considering the global liquidity crunch, it is far from certain that this will be available although the presence of a government-linked sponsor should ensure the banks obtain enough sovereign guarantees to supply the credit required.

With the Taweelah project approved and the feedstock allocated, the complex will soon enter the development phase. Australia’s WorleyParsons has been contracted to provide project management services for the front-end engineering and design; and engineering, procurement and construction elements.

Process technology licensing has already been completed on some of the production units and tendering for the technology supply covering other process units such as the aromatics, melamine, urea, ethylene oxide and air separation units will start soon.

The first engineering, procurement and construction (EPC) tenders are expected to be issued to contractors from the summer of 2009, once a final investment decision is taken. The complex should come on stream in 2013.

While Chemaweyaat claims it will be the largest complex in history, it is unclear whether it will surpass the planned Ras Tanura integrated refinery and petrochemicals complex planned by Saudi Aramco and the US’ Dow Chemical Company, which can lay claim to being the world’s largest industrial project.

The Taweelah scheme, however, is just the beginning. Abu Dhabi is understood to be planning a second phase at Taweelah to produce products such as polybutylene terepthalate and propylene oxide using propane and butane feedstocks, as well as output from the first phase. Such projects are likely to be carried out by Adic in a joint venture with different international partners. After years of lagging behind its neighbours, Abu Dhabi is now trying to catch up fast. It has the feedstock, infrastructure, finances and, most importantly, the will to do so. Now, only time will tell if it can deliver on its targets.

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