Kuwait can be excused for taking things slowly. A relatively small local population and enormous oil revenues do not make a restive combination. The country’s approach to its petrochemicals sector has been similar, with the steady development of a business model based on low-cost production and investment in good technology and people. This strategy has worked until now.

The collapse of the K-Dow deal dealt a serious blow to Kuwait’s hopes of becoming a leader in petrochemicals

According to regional projects tracker MEED Projects, there are only two engineering, procurement and construction projects planned or under way in Kuwait’s petrochemical sector. Their combined value is $3.7bn – much lower than in the UAE, where $12.6bn-worth of contracts are under way and another $21bn are being studied.

Third cracker in Kuwait

Some $3bn of Kuwait’s planned investment is on a single scheme – a third olefins cracker. A feasibility study by US consultants Jacobs Engineering is expected to be completed by the middle of this year. A final investment decision is due to be made by Petrochemical Industries Company (PIC), a wholly owned subsidiary of Kuwait Petroleum Company (KPC), before the end of 2011, sources told MEED in December.

Cyclical trends in refining margins and a thin band of margin operation for profitability make integration essential

Bakhit al-Rashidi, KNPC

Equate, a US-Kuwaiti joint venture, already operates two crackers, which kicked started the country’s relatively young petrochemical sector. The company is a joint venture of the US’ Dow Chemical Company and three Kuwaiti firms – state-owned PIC, Boubyan Petrochemical Company and Qurain Petrochemical Industries Company. However, it remains unclear if Equate will be involved in the new venture.

The establishment of Equate at Shuaiba in 1997 was PIC’s first joint venture with Dow. On the back of its success, the partners launched Equate II, integrating the Kuwait Olefins Company, the Kuwait Styrene Company and Kuwait Paraxylene Production Company, to produce a total of more than 5 million tonnes a year (t/y) of petrochemicals products.

Equate II’s 600,000-t/y ethylene glycol plant, the largest single train in the world, came on stream in August 2008, followed by a second ethane steam cracker in November 2008. This took its ethylene capacity to 1.7 million t/y.

Dow and PIC have not always agreed on terms of business. In December 2008, the partners fell out, bringing down one of the petrochemicals sector’s biggest deals and putting a serious dent in Kuwait’s ambitions.

The K-Dow deal would have involved Kuwait taking a 50 per cent stake and investing more than $7.5bn in one of the largest polymer producers in the world, with projected annual sales of about $15bn. The total value of the joint venture was expected to be $17.4bn.

It looked like a formidable alliance, building on a ready supply of low-cost feedstock, combined with industry expertise and market reach, to create a globally competitive and fully integrated producer. After almost a year of planning, the K-Dow deal was announced and then swiftly cancelled.

In December 2008, Kuwait’s Supreme Petroleum Council (SPC), the country’s highest oil decision-making body, withdrew its support and approval for the deal. Opposition MPs argued that Kuwait was over-paying on its $7.5bn investment, as the value of Dow’s assets had plummeted because of the global financial crisis, and the US giant was unloading some of its ageing assets, with some plants more than 40 years old. Following the collapse of the deal, Dow entered arbitration proceedings, seeking more than $2.5bn in damages. A decision is expected later this year.

Power struggles are nothing new in Kuwait, but the collapse of the K-Dow deal dealt a serious blow to its hopes of becoming a leader in the global petrochemicals industry.

Feedstock requirements for Kuwait

The failed investment is not the only problem facing the sector. The limited range of petrochemicals produced in the country and a shortage of gas represent more serious challenges to Kuwait’s future growth plans. Its petrochemicals strategy depends on progress being made with its refinery expansion programme, which aims to create the extra capacity and naphtha feedstock needed to boost petrochemicals output.

The lack of integration between its ageing refineries and downstream plants has resulted in the current low-value production slate.

Refinery and petrochemical integration is not just an option, but a necessity, says Bakhit al-Rashidi, deputy managing director of planning and local marketing at Kuwait National Petroleum Company (KNPC). “Cyclical trends in refining margins and a thin band of margin operation for overall profitability make integration essential to even out the margin vagaries,” he says. “All new refinery projects incorporate integration with petrochemicals as much greater savings in investment cost and operating costs result.”

Political wrangling over the control of the oil sector has led to increasing delays on upstream refinery projects, which have hampered the development of Kuwait’s petrochemical industry. KNPC’s 615,000-barrel-a-day (b/d) Al-Zour refinery is a case in point. Designed as the world’s largest refinery, it was originally meant to be completed by the end of 2010, but the project is now on hold, pending the resolution of a political dispute over the scheme.

The refinery, intended to play a crucial role in providing naphtha feedstock for the petrochemicals sector, has been under intense scrutiny since a parliamentary group last year called for a review of how contracts for the project had been awarded. The SPC is due to make a final decision on retendering the project within months.

New petrochemical technologies

Dubai-based MEGlobal, another US-Kuwait joint venture, is also exploring options to expand its monoethylene glycol (MEG) production capacity, although questions over feedstock supplies remain. The company is looking to new technologies to resolve this issue, considering methanol, bio fuel and even coal-based olefins production. Gas supplies, particularly in Kuwait, will be difficult to source, but MEG says it is hopeful it will be able to expand MEG production in the country.

Kuwait’s petrochemicals sector is hampered by a lack of gas, despite discoveries in the past five years. KPC supplies gas to Equate plants, but faces competition for gas from the power sector. Given this constraint, the proposed third cracker, which would produce ethylene, is expected to use a mixed ethane-naphtha feed.

Until recently, gas availability was not a problem, but with power generation taking up an ever-greater slice of the allocations, competition for resources will only increase. Feedstock may have to be imported, with some sources estimating annual net imports of 10 billion cubic metres by 2015.

Feedstock could also possibly come from Kuwait’s Jurassic gas fields, suggests a source close to the scheme. Kuwait’s natural gas reserves stand at nearly 63 trillion cubic feet, the majority of which is associated with crude oil.

In April last year, UK/Dutch oil major Shell signed an $800m enhanced technical services agreement with state upstream operator Kuwait Oil Company (KOC). Under the five-year deal, Shell will help KOC develop and manage its northern Jurassic gas fields, producing an undisclosed volume of non-associated gas.

Production at the fields began in 2008 and stands at about 4.9 million cubic metres a day. KOC plans to increase gas production to nearly 28.3 million cubic metres a day by 2015. However, developing the fields has been problematic. Much of the gas lies at depths of up to 14,000 feet, making extraction complex.

Technical services agreements between KOC’s parent company, KPC, and international energy majors all expired between August 2008 and July 2009. The new deals face political opposition in the country, and senior international oil company (IOC) sources have previously told MEED they hold little hope of seeing them concluded. The Oil Ministry, KOC and KPC hold conflicting views on the role of IOCs, which could stall progress on the Shell deal.

Optimism reigns in Kuwait’s petrochemical sector

Nonetheless, there are still grounds for optimism in the Kuwaiti petrochemicals sector, provided that the issue of gas supply can be resolved. The sector is well established, has plentiful access to hydrocarbons, although ethane feedstock availability will be influenced by oil production and Opec quotas, as well as demand from the power sector. But frequent political crises and episodes, such as the K-Dow deal collapse, mean ambitious expansions look unlikely in the near future.