Downstream - Gulf leads petrochemicals growth

30 December 2010

As Middle East oil producers look to build on their access to low-cost energy and feedstock, the centre of gravity of the global petrochemicals market will shift eastwards

The next decade will witness a significant change in the way the Middle East’s petrodollars are spent. Previously, the major oil exporters concentrated most of their effort and investment into developing the infrastructure to fully exploit their hydrocarbon reserves. But increasingly, their money will be directed to diversifying their industrial bases.

Oil and gas production will continue to play a dominant role and most of the new industrial capabilities being developed will be downstream from refineries and require some form of hydrocarbons as feedstock.

Low-cost advantage for manufacturers in the Middle East

Petrochemicals manufacturing is set to constitute the main part of the region’s industrial base in 2020, due to the Middle East’s access to low-cost energy and feedstocks.

According to regional projects tracker MEED Projects, local producers are planning to spend $330bn on construction contracts for new downstream facilities over the next 10 years.

The traditional petrochemicals suppliers in North America and Europe will increasingly struggle to compete against the low production costs of the modern, world-scale facilities in the Middle East.

By 2020, the global centre of petrochemicals production will have shifted to the Middle East, where energy and feedstocks are cheap, and China and India, where demand is greatest.

The transition is already occurring. In 2009, despite the financial crisis forcing many chemicals manufacturers in Europe and the US to cut production and even close facilities, petrochemicals capacity grew in the Middle East by about 3.7 per cent. Most of the additional capacity was in ethylene production, which is the basic building block for many other chemicals.

According to Dubai-headquartered Gulf Petrochemicals & Chemicals Association (GPCA), 4 million tonnes a year (t/y) of ethylene capacity was added in the Middle East in 2009.

And more ethylene capacity is under construction; another 7 million t/y of capacity will be added over the next five years, with nine new crackers due to come onstream by 2013-14. Five crackers will be located in Saudi Arabia, two in Iran and one each in Qatar and Abu Dhabi.

The Middle East accounts for 25 per cent of global ethylene capacity being added in 2009-14. Once the projects are completed, the region’s share of the world ethylene market will stand at 20 per cent.

Middle East producers are expected to have a 16 per cent share of the global chemicals market by 2015 and a 20 per cent share by 2020.

Despite the strong demand worldwide for ethylene exports, the latest petrochemicals projects planned for the region aim to create higher value and more diverse products. Many producers have been forced to move down the product chain due to a growing shortage of gas. In particular, ethane is in short supply and new allocations are nearly impossible to come by.

Alternative feedstocks are being used instead, such as butane, propane and naphtha, and these produce a much broader range of petrochemicals.

Over the next decade, some industry experts believe that naphtha will take on greater prominence as a major feedstock for chemical production in the Middle East. For oil rich countries that lack gas supplies, naphtha offers governments a viable solution.

But as naphtha is more expensive than gas, producers need to build huge plants to capture economies of scale and maintain their competitive advantage, and where possible integrate them with refineries to cut costs.

Integrated schemes for refineries and petrochemical plants

Speaking at the GPCA Forum in Dubai in December, Saudi Aramco’s chief executive officer Khalid al-Falih called on producers to move away from gas-based feedstocks and look at integrating refineries with petrochemical plants, stating that such a move offered product diversification and value addition.

“This area of the business has significant room for growth in the Gulf and Saudi Aramco intends to take an active role in realising those opportunities,” he said.

GCC planned petrochemical projects
 NameBudgetCapacity Completion date
Saudi ArabiaAramco Dow$15bn3.7 million-t/y2015
Saudi ArabiaPetro Rabigh$4bn2.4 million_t.y2015
Saudi ArabiaSaudi Kayan$8bn4 million-t.y2013
QatarRas Laffan Olefins Complex$6bn2 million-t.y2015
UAEBorouge Phase III expansion$6.25bn2.5 million_t/y2014
KuwaitEquate Olefins III $3bn2 million-t/y2016
t/y=tonnes a year. Source: MEED Projects

Producing chemicals from naphtha is also labour intensive. When comparing gas cracking to liquid gas or naphtha cracking, the latter produces significantly more co-products than the equivalent amount of ethane and therefore involves more downstream processing. In this way, the petrochemicals sector can help states achieve their targets for job creation. Furthermore, with the huge reserves of hydrocarbons to draw upon, financially attractive economies of scale can be reached.

As the largest economy in the region, Saudi Arabia is leading the way with its downstream development plans. The kingdom’s petrochemicals production capacity increased by some 6.3 per cent in 2009.

Saudi Basic Industries Corporation (Sabic), as well as Saudi Aramco, are planning a series of megaprojects over the next five years.

Sabic is currently ranked number four in the list of the world’s leading chemicals producers, but its Vision 2020 plan is to become the number one. The company is targeting total production of about 130 million t/y by 2020.

Sabic is 70 per cent owned by the Saudi government, while the rest of its shares are listed on the Saudi stock exchange.

Saudi Aramco is also planning to build up a strong downstream presence. The state-owned oil giant is teaming up with a number of Sabic’s competitors to build petrochemicals complexes in the kingdom.

The US’ Dow Chemical is partnering Aramco on a $15bn petrochemicals scheme to be developed at Jubail in the Eastern Province. Other joint ventures include major projects with Japan’s Sumitomo Chemicals and the US’ ExxonMobil Chemical.

Aramco is looking to produce a higher value, more diverse product mix from both PetroRabigh and Aramco Dow than have previously been produced in the region. The products will include polyurethane building blocks, metallocene-based elastomers, glycol ethers, solution polyethylene, methyl/polymethyl methacrylate, nylon, and ethylene propylene rubber.

Such is the importance of increasing its industrial base, Saudi Arabia is fast-tracking the development of several new gas fields to support the programme.

Gulf trend

Across the rest of the region, the growth in chemicals capacity is not as aggressive as in Saudi Arabia, but other countries have similar visions to boost production and increase their industrial base. In particular, Abu Dhabi has bold ambitions for its petrochemicals industry. Over the next five years the oil-rich emirate plans to become one of the world’s leading petrochemicals producers by more than doubling the volume of its exports.

The [region] should use petrochemicals as the base on which to build its economic growth over the next decade

Abu Dhabi National Chemicals Company (Chemaweyaat) is planning a new 10 million t/y petrochemicals complex, known as Tacaamol, to come onstream in 2014. This will include a 1.45-million-t/y naphtha cracker, fed by feedstock from the Ruwais refinery, and a second phase that uses propane and butane to produce higher value-added products such as polycarbonates. It will feed into the new Abu Dhabi Polymers Park, a planned plastics conversion park for international plastics producers.

Most Middle East countries are pursuing an economic model that encourages industry while increasing employment opportunities. As part of this, many are looking to develop clusters of converting industries close to production facilities. Abu Dhabi Polymers Park is planned to be an industrial zone comprising 60-65 plots, where local and international investors can build plastics conversion plants. The aim is to produce 1.4 million t/y of plastic goods at the park by 2015, generating $4bn of investment in the process. In Saudi Arabia, PetroRabigh will also have an associated 2.7-million-square-metre industrial park to convert its plastics output into semi-finished or finished goods.

Al-Falih believes that the Middle East should use petrochemicals as the base on which to build its economic growth over the next decade.

Ambitious targets to grow petrochemicals industry

“The time has come for chemicals to step up and take their rightful place as a pillar industry by growing petrochemicals downstream … with the aim of more rapidly expanding and diversifying our economies,” Al-Falih said at the GPCA Forum. He called for the region’s petrochemicals industry to grow – from the current level of $40bn to $150-200bn by 2020, and to raise research and development spending from 1.5 per cent of sales to 5 per cent by 2020.

Saudi ethylene feedstock
f=Forecast. Source: Alpen; CMAI

The Aramco chief executive’s words were met with cautious optimism by delegates at the conference, although some expressed doubts that such ambitious targets could be hit within the relatively short time-span of a decade.

“There are two ways of operating if you want to be successful in the petrochemicals industry,” a GCC-based industry expert says. “You either build your plant close to the market or close to the feedstock.”

“However, if this region wants to grow at the rate [Al-Falih] suggests then there needs to be a market for the products in this region. The further downstream you move the harder it is to ship the products.”

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