The petrochemicals industry has been one of the great success stories in the GCC’s strategy to diversify from its historical reliance on crude oil sales.

Petrochemicals exports generate annual revenues of almost $60bn and account for about 53 per cent of all non-oil exports from the six-country bloc, according to the Gulf Petrochemicals & Chemicals Association (GPCA).

But regional and global trends have left the region with major obstacles to surmount if it is to maintain the same level of growth it has enjoyed over the past decade.

Gas shortage

The most immediate regional concern is a widespread lack of availability of cheap natural gas, an abundance of which was the cornerstone to the GCC’s rapid rise in the petrochemicals sector.

In Saudi Arabia and the UAE, major petrochemicals schemes purely based on the use of ethane crackers to produce large quantities of polyethylene and other ethylene (C2) derivatives could be largely a thing of the past.

This has led to the development of mixed feed crackers – which use ethane as well as heavier liquid feedstocks such as naphtha – and the integration of petrochemicals complexes with the refining sector.

The biggest example of this trend is Sadara Chemical Company’s estimated $20bn chemicals complex in Jubail Industrial City 2 on the east coast of Saudi Arabia, which is expected to be fully operational in 2016.

Sadara, a joint venture of state-owned Saudi Aramco and the US’ Dow Chemical, is building 26 manufacturing plants with the capacity to produce more than 3 million tonnes a year (t/y) of commodity and specialty chemicals products.

Diverse products

In addition to the standard C2 plastics chain, the complex will be able to produce such diverse products as amines, glycol ethers, isocyanates, polyether polyols, propylene glycol  and polyolefin elastomers.

“Heavier feedstocks are not as selective in producing ethylene so they produce more co-products such as propylene [C3], C4s [butadiene chain] and aromatics,” says Andrew Spiers senior vice-president, Middle East, at US-based consultancy Nexant. “You can’t ignore these streams anymore because they are material to the competitiveness of your project.

“Those alternative feedstocks do not give you as much of an attractive ethylene cost structure as if you cracked ethane. The new projects are not going to be as financially attractive as the original ones, but I don’t think they need to be. However, there must be more emphasis on adding value to the co-products to make it more attractive.”

In addition to the input costs of using more expensive liquid feedstock, investors in GCC chemicals projects are also facing higher capital expenditure to build new operations, especially given the amount of additional plants needed to process co-products.

The trend of using heavier feedstock is moving GCC producers into value chains that are new to the region, which brings its own challenges in terms of penetrating export markets. The GCC does not have the same cost advantage in producing new ranges of chemicals that it does with C2 and C3 chemicals.

Sadara expects 60 per cent of its sales to go to customers in the Asia-Pacific region, 15 per cent to the Middle East and Africa and 15 per cent to be shipped to the European market.

Stronger competition

The cost of shipping over long distances means that GCC exporters of non-C2 and C3 chemicals will face stronger competition from domestic producers in these import markets.

“The derivatives being produced [in the GCC] also have to be exported because the regional market is also not big enough to absorb them all… so GCC manufacturers will have to export products that are more difficult to export,” says Spiers.

Spiers sees a growing trend of using heavier feedstocks, but with a component of ethane, with the latter making the project more attractive to investors.

The ethane-based chemicals component generates maximum return on investment, while the heavy feedstock component aids industrial diversification and job creation.

Another key project in the GCC planned to use heavy feedstock is Abu Dhabi Chemicals Company’s (Chemaweyaat’s) aromatics complex in Ruwais, Abu Dhabi, which is undergoing its front-end engineering and design (feed) phase.

Integrated complexes

Meanwhile, two refineries planned by Abu Dhabi’s International Petroleum Investment Company (Ipic) – at Fujairah in the UAE and Duqm in Oman – are anticipated to have integrated petrochemicals complexes built alongside them.

As well as regional challenges such as feedstock supply and diversification, GCC producers will be affected by changes in the global supply and demand balance.

The growth of unconventional gas production in the US has revolutionised the American petrochemicals industry and exports are expected to grow significantly in the coming years.

The US has 10 ethane crackers planned to come on stream, including eight on the Gulf Coast and two in the northeast, according to petrochemicals information group ICIS.

Among the US cracker projects where derivative capacities have been announced, the bulk of products will be in polyethylene, making them competitors with the GCC’s existing ethane-based operations.

“The world only needs so many projects every year,” says Spiers. “If the US is more attractive then more projects will be built there than other places and they will be backed out somewhere else.”

We are going to see a resurgence in exports from the US competing with Gulf export volumes in importing markets. Those projects that some people might have been eyeing in Asia or perhaps the GCC might not be built here or delayed. We will have to wait and see how the deluge of projects plays out.”

China slowdown

Producers will also be looking with concern at import markets, most notably the possibility of a slowdown in Chinese economic growth.

Nexant sees Chinese demand as the biggest driver of global future investment in the chemicals industry. China’s current capacity for commodity plastics is about 63 million t/y, but by 2023, its demand is expected to have expanded close to 100 million t/y, leaving a big opportunity for exports to plug the supply gap.

Any slowdown in Chinese growth could see these demand forecasts retreating, leaving exporters in the GCC and elsewhere competing for a smaller share of the market.

Although the GCC faces tougher challenges over the next decade after a period of rapid growth, the region is likely to remain a major player in global export markets as it grows its domestic petrochemical-consuming downstream industries.

“We have seen a massive upswing in terms of investment in the GCC and it is probably unlikely that this pace will continue because it has been such a big boost,” says Spiers. “The region still has a robust future… it just has to develop in light of these global trends. It has to structure the projects accordingly to take advantage of changing opportunities.”