Abu Dhabi's petrochemicals vision

24 July 2009

With the fourth-highest crude oil and gas production in the Gulf, the emirate is aiming to create a completely integrated industry that can compete with the best in the world.

Speaking at the MEED Abu Dhabi Mega-projects 2009 conference in May, Ali al-Dhaheri, project co-ordination manager at Abu Dhabi National Chemicals Company (Chemaweyaat), was frank about the progress of the emirate’s petrochemicals industry to date.

“The sector is relatively underdeveloped compared with neighbouring countries,” he said. “This is despite having the fourth-highest crude oil and gas production in the Gulf.”

The point is a fair one. The UAE holds the world’s fifth-largest oil and gas reserves, the vast majority of which - about 90 per cent - are in Abu Dhabi emirate. But the emirate has only one petrochemicals producer, Abu Dhabi National Polymers Company (Borouge), which has been producing 580,000 tonnes a year (t/y) of the basic plastic polyethylene at its Ruwais plant since 2001, and 600,000 t/y since 2005.

By comparison, the leader in the region, Saudi Arabia, produces about 10 million t/y of polyolefins, polyethylene and polypropylene, the basic materials used in plastics. Iran, Kuwait and Qatar all produce more petrochemicals products than Abu Dhabi.

The development of a petrochemicals industry has long been seen as the best route for oil and gas-rich countries to both diversify their economies and create jobs. Saudi Basic Ind-ustries Company (Sabic) has been the leader in the region’s petrochemicals industry since the mid-1970s. The company is now the biggest listed entity in the Middle East by market capitalisation.

Speaking at the conference, Al-Dhaheri did not dwell on the past for long. “We are trying to develop the world’s largest integrated petrochemicals complex,” he said. “Our goal is to grow [our] business to become one of the region’s top chemicals companies.”

If anything, this was an understatement. When in September 2007 the emirate named petrochemicals as one of the key engines for the growth of its economy under the Abu Dhabi 2030 masterplan, few could have imagined the scope of its designs for the sector.

At the time, a basic outline of the plan detailed only two planned expansions of the existing Borouge production line, with the addition of new polypropylene and low-density polyethylene capacity over two phases ending in 2014.

But in reality, there were far bigger plans than these. By October 2007, US consultant Jacobs Engineering Group had presented Abu Dhabi with a masterplan detailing a long-term vision for the sector. This includes more plastics production, a vast industrial city with 12 world-scale petrochemicals production complexes, and an industrial centre for the production of finished goods.

By March 2008, the Abu Dhabi Investment Council (Adic) had signed a memorandum of understanding with state-owned Inter-national Petroleum Investment Company (Ipic) and Austria’s Borealis for the formation of Abu Dhabi National Chemicals Company (Chemaweyaat), which will develop Chemicals Industrial City, the most ambitious part of the vision.

Diversification scheme

By February 2009, an emiri decree had been issued officially announcing the company, with Ipic and Adic taking 40 per cent each, and Abu Dhabi National Oil Company (Adnoc) taking the remaining 20 per cent.

Chemaweyaat’s remit is not just to become the biggest petrochemicals producer in the region, according to sources close to the project. “It is part of a huge diversification scheme,” says a senior executive at one international firm that has worked on the development of the project.

“Because of a large supply of domestic raw materials, feedstocks like gas and oil, Abu Dhabi can control the downstream product cost basis for the entire industry. It would be possible for the emirate to dominate the global petrochemicals market by 2030.”

In another presentation prepared in 2008, Chemaweyaat set out the basic principles behind such an ambitious move into the sector.

The first was to increase the industrial output of the emirate, allowing it to move away from a long-term reliance on oil revenues.

The petrochemicals industry would also encourage the development of further downstream activities to take advantage of the emirate’s oil riches, with local and international companies producing speciality chemicals and end-user products such as automotive parts.

This in turn would optimise the distribution of revenues and employment created by Abu Dhabi’s mineral wealth, and make the emirate a centre for new technologies.

Integration is another part of the strategy for developing the industry on such a grand scale. Petrochemicals production has traditionally come from one of three basic feedstocks: ethane and propane as either gases or liquids, and naphtha, which is produced from crude oil.

Each can be broken down, or cracked, into basic chemicals. Ethane yields only the olefins propylene and ethylene. Naphtha can produce ethane and propane along with the ‘aromatic’ group of chemicals - benzene, toluene and the xylenes, among others - which are used in packaging and white goods.

Ethane is generally produced as an associated gas, during the extraction of crude oil from the ground. Naphtha, meanwhile, is separated from crude oil during the refining process used to make petroleum and other products.

In the past, petrochemicals producers bought naphtha, ethane or their by-products from refiners and oil and gas producers, converted them into basic products and then sold them on to more specialist producers who would further refine the product.

In recent years, however, an increasing trend has been for oil producers and refiners to develop their own petrochemicals capacities, or for petrochemicals producers to buy into refiners and move into more specialist areas.

This logic has resulted in major oil and gas producers like France’s Total becoming major players in the European styrene market, and traditional petrochemicals producers like Germany’s BASF and the US’ Dow Chemical Company becoming refiners - buying crude oil on the open market, selling on the energy products from their plants, and using the raw materials for petrochemicals production.

With central management teams, more efficient energy use, and a limited exposure to commodity prices, integrated refiners and petrochemicals producers who move into high-value speciality production both save money and make it. BASF coined the term now most commonly used to describe the integration of different petrochemicals processes - verbund - and estimates that it saves about E500m ($707m) every year at its petrochemicals complex at Ludwigshafen in Germany.

Integrated production

Abu Dhabi’s plans take the ‘verbund’ concept to the extreme. State oil and gas production feeds into government refining and petrochemicals companies, which in turn directly supply specialist plastics and chemicals producers in industrial zones linked to export hubs.

Abu Dhabi’s early reticence in developing its downstream industry is now its strong point, says Connie Evans, sales director at US automation consultant Honeywell, which worked on the first two phases of the Borouge scheme, and on the development of Chemicals Industrial City.

Rather than build up its plans piecemeal, the emirate will create a completely integrated industry from scratch over a period of 20 years.

“It is nice to have a blank piece of paper, and that is what the government has here,” says Evans. “It has the luxury of planning every step as the industry grows. It has control over every step of the process.”

While the emirate increases its oil and gas production in preparation for the return of global demand, it will also raise its refining capacity through state refiner Abu Dhabi Oil Refining Company (Takreer).

Borouge will take the emirate’s existing supplies of ethane and propane and turn them into basic plastics, while Chemaweyaat will take naphtha and move into more specialist  markets such as polycarbonates, used in consumer electronics casings, or even polymethyl methacrylate, also known as plexiglass.

Both companies will feed into Abu Dhabi Polymers Park, a plastics conversion industrial park for international plastics producers, while giant new logistics operations will be put in place to transport the finished goods.

Ipic has become a key player in the development of the Abu Dhabi petrochemicals industry, making strategic acquisitions targeting international firms with expertise and technologies in the sector to ensure that in the long term, the sector truly functions on a world scale.

“Our goal is to grow our business to become one of the region’s top chemical companies, and in concert with Ipic’s businesses, to be in the top 10 chemical companies globally,” said Al-Dhaheri at the MEED conference.

“It is not just the size of the plans that are staggering,” says one international industry consultant. “It is the detail and the timescale that is so impressive. This has been throughout, on every conceivable level. Essentially, they want to pull the oil out of the ground and have it on a container ship as an auto part or a toy a few days later. And I think they might just be able to do it.”

Regardless of the efficiency of the scheme, the scale of Abu Dhabi’s plans has given some industry observers cause for concern.

The petrochemicals industry is largely driven by automotive makers and construction, with the US a key market, says Paul Hodges, chairman of UK-based petrochemicals consultant International Echem. Given the current economic downturn and a raft of new petrochemicals plants that are due to start up in the Middle East over the next two to three years, there is little room for new producers.

“There was a lot of euphoria [when Chemaweyaat was first planned] in 2007,” says Hodges. “But…it was a bubble. The US is not going to be able to sustain 2.2 million new houses being built every year, and 15-17 million new cars being sold, as was the case then.

“If you look at the case of 2.2 million new houses being built each containing $16,700 worth of different types of chemicals, including paints, furnishings, coatings and plastics, now we have moved down to about half a million [houses] being built. We have lost tens of billions of dollars worth of chemical sales. The market was 15-17 million new cars, GM’s [US automobile manufacturer General Motor’s] new plan is based on 10 million new cars. Each car is $2,700 worth of all sorts of chemicals.”

Hodges says that with its considerable cash reserves, Abu Dhabi has the option to grow the industry through several different routes, rather than focusing on developing its in-house production. “The role of the new megacomplexes needs to be reconsidered,” he says. “There are other strategies available here that would enable you to use your oil wealth and diversify the economy, and it might be more viable than putting all your eggs in the basket of building new capacity - like merger and acquisition activity. Ipic’s purchases so far have been very astute. What is wrong with buying up existing high-quality assets in key markets at a relatively cheap rate and moving your feedstock into those?”

Cost advantages

The use of naphtha has also raised doubts about Abu Dhabi’s petrochemicals strategy. Much of the Middle East’s petrochemicals industry has been grown on the relative cheapness of the ethane it produces in the process of extracting oil. As it is not traded as a commodity globally, there is no set price, making it essentially free for oil producers.

Naphtha, however, is traded globally and is inextricably linked to the price of gasoline, meaning that producers who use it are at a disadvantage to their ethylene-based competitors.

“Ethane gives you feedstock advantage, no doubt about it,” says Hodges. “If you use ethane, you can sell polyethylene anywhere in the world for $400 a tonne, which is below the cost of naphtha at the moment.”

Chemaweyaat’s strategy in particular is more to do with providing longevity than capturing the cost advantage of ethane. “Abu Dhabi is not the sleepy little town it once was,” says Honeywell’s Evans. “It wants a diversified, vibrant economy. It wants to know that one day, when the oil runs out, it will be able to sustain and grow its economy. At the same time, it is busy trying to build a showcase - an example of what is possible.”

“Chemaweyaat has a separate mandate [from Borouge] to create a broad-based chemicals industry within the emirate,” explained Al-Dhaheri at the MEED conference. “We want to develop a wide range of chemical products based on the other hydrocarbon reserves that we have. The key product chains for us are in the aromatics, C3 [propane] and C4 [butane] chemistry, which cannot be viably addressed using ethane feedstock and require the use of either naphtha or liquefied petroleum gases.”

Al-Dhaheri had no doubts about the com-pany’s or the emirate’s future success. “We are open for business,” he said.

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