After years of barely a week going by without a contract being awarded on a petrochemicals scheme, in 2008 there was a sharp slowdown in announcements of new petrochemicals projects.
According to Gulf projects tracker MEED Projects, more than $9bn worth of engineering, procurement and construction (EPC) contracts were awarded in the petrochemicals sector in 2008. This is about half the $18.2bn worth awarded in 2007, and lower still than the $22.2bn awarded in 2006.
A combination of rising EPC costs and a shortage of ethane feedstock allocations has caused the regional industry to slow down and regional producers to re-evaluate their positions.
The shortage of ethane feedstock has been felt most in Saudi Arabia. Previously the main driver of growth in the region’s petrochemicals industry, the stricter allocations of ethane have resulted in the kingdom coming close to running out of feedstock.
Other countries face a similar feedstock supply crunch. But nonetheless, there have been a series of major project advances that have helped to entrench the region’s position as the new leader in global chemicals production.
In Saudi Arabia, bids were submitted for the EPC element of Saudi Arabian Mining Company’s (Maaden) ethylene dichloride venture with Sahara Petrochemical Company. The Jubail complex will be the region’s first for ethylene dichloride, a feedstock producing polyvinyl chloride.
Saudi Aramco and Dow Chemical Company also announced further progress on the massive $25bn Ras Tanura refinery and petrochemical complex in July.
Qatar has been further increasing its regional and global standing, with Honam Chemical Corporation and Qatar Intermediate Holdings close to awarding the cracker contract on their planned ethane/naphtha production complex at Mesaieed.
Plans are also taking shape for similar complexes planned by Qatar Petroleum in a joint venture with the UK’s BP and the US’ Exxon Mobil Chemical.
In May, Abu Dhabi announced plans to build the world’s largest petrochemicals complex, at Taweelah, with the emirate’s International Petroleum Investment Company (Ipic) partnering with Swedish plastics giant Borealis.
Valued at $11bn, some sources say costs on the project could rise to as high as $20bn by the time it is completed.
The first phase is expected to have a total output of more than 8 million tonnes a year (t/y) of various petrochemicals, including 1,450 t/y of naptha, transporting a relative industry laggard to the forefront of the sector.
Capacity expansions and new projects may have slowed, but 2008 has proved yet another bountiful year for the Middle East’s petrochemicals producers. However, they are trying to come to terms with an increasingly bearish market that is suffering the effects of a massive turnaround in energy pricing after crude oil dropped from a high of $147 a barrel in July to less than $50 a barrel in November.
“We have the makings of a disaster for the petrochemicals industry over the next 18 months to two years,” says Darren Smith, projects manager at US petrochemicals consultant Chemical Markets Associates (CMA).
There is a significant amount of capacity coming on line in the Middle East and China at the end of 2008 and throughout 2009, in excess of the yearly demand growth for these products. While this in itself would not cause margins and prices to come down, combined with reduced demand growth because of the global financial crisis, it could have a seriously negative impact.
Clearly, much will depend on the shape and form petrochemicals demand takes as the global economy comes to grips with its financial problems. Of all the regions, the Middle East will be best placed to weather the storm, considering its cost competitiveness and ready access to cheap feedstock. “They will still be able to make money, just not as much as they have been used to over the past three or four years,” says Smith.
Looking ahead to 2009, the issues that are likely to hit Middle East petrochemicals projects are funding uncertainty, supply/ demand uncertainty and feedstock shortages.
In respect of feedstock, the supply of low-cost ethane is limited. Projects are for the first time being planned on heavier feeds to increase competitiveness, as well as for feedstock integration.
As the global petrochemicals industry comes to terms with a slowing global economy, the current phase of booming projects in the Middle East is drawing to a natural close.
“The major glut of projects is to be completed in 2008 and early 2009, with the tail extending into 2010,” says Phillip Leighton, director of petrochemicals at the UK’s Jacobs Consultancy. “The next round of projects for 2014 are in early planning phases. Although contractors’ project workloads are still relatively high, the outlook for the coming year is much poorer than three months ago.”
Most analysts expect Middle East investment in 2009 to be at a significantly lower level than this year, especially if oil prices continue to slide.