The rise of the Middle East petrochemicals industry has been meteoric. After years of focusing on oil production, the sector is now of increasing strategic importance to the region as it prioritises the diversification of its economies and seeks to create job opportunities.
Today, the region has become the main driver for global petrochemicals growth. Over the eight years to 2012, the Middle East’s total installed ethylene capacity will have jumped from 10 million tonnes a year (t/y) to almost 35 million t/y, according to US consultant Nexant ChemSystems.
This is equivalent to more than two-thirds of global capacity additions over the same period.
Indeed, so much capacity is due to come on stream from the Middle East over the next two years that the world market is set to enter a cyclical trough as it struggles to absorb all the new output.
The region’s producers are not too concerned. Due to their unbeatable cash-cost advantage in ethane feedstock, which accounts for more than 70 per cent of regional production, they have a considerable advantage over their non-regional competition.
This is especially prevalent in the current high oil price environment.
Due to the Gulf’s huge gas reserves, ethane feedstock is supplied at a subsidised rate to regional producers at anything between $0.75 and $2 a million BTUs, compared with $7-9 a million BTUs elsewhere.
This allows Gulf producers to produce ethylene at less than $100 a tonne compared with almost $1,000 a tonne for non-regional production. This differential increases with any rise in oil prices.
Recently, the US’ Dow Chemical Company, one of the three largest chemical companies in the world, hit the headlines when it announced a 20 per cent increase in some product prices as it struggled to cope with rising feedstock costs. It spent $8bn on feedstock in 2002. At the current rate, those costs will climb to $32bn this year.
“We are caught in the middle between the oil and gas side, and the consumers,” says Mike Gambrell, executive vice-president, basic plastics and chemicals, manufacturing and engineering, at Dow. “In the first quarter alone, our hydrocarbon industry cost was up $2.5bn versus the first quarter of 2007. We have to pass that on down through to the customer base, and at some point that is going to result in a slowdown in demand.”
Dow, which last year posted revenues of more than $53bn, suffered an $800m fall in profits to $2.9bn as its cost base surged. But Saudi Basic Industries Corporation (Sabic), which has the majority of its output based in Saudi Arabia, was able to increase net income to SR27bn ($7.2bn) last year from sales of SR126bn ($33.6bn).
For existing producers and those with planned production projects fortunate to have an ethane allocation, their economic advantage will last for some time. But others looking to enter the market will not be so lucky. Due to the regional boom and a glut of feedstock allocations awarded in the past four years, non-allocated ethane is much harder to obtain.
Saudi Arabia, the region’s petrochemicals pioneer, has not been able to offer an ethane feedstock allocation since one was given to Saudi International Petrochemical Company (Sipchem) in spring 2006. Saudi Aramco, the firm responsible for the majority of the kingdom’s gas production, says future field developments have reduced ethane content and that it will not be able to guarantee a supply greater than already announced.
Sabic, the world’s largest chemical company by market value, has not received an ethane allocation from Riyadh since 2005 for its Yansab and Sharq complexes. Since then, it has bought into the massive Saudi Kayan project, originally planned by local private sector firm PMD, which received a feedstock allocation in 2004. Unsurprisingly, Sabic is also seeking to take a major shareholding in the Sipchem scheme.
Among the Gulf states only Qatar and Iran, due to their massive gas reserves, have any substantial amounts of gas available. The rest, including Saudi Arabia, must consider other options. Simply put, producers are going to have to look at alternatives to cheap feedstock to make their schemes profitable.
The shortage of available ethane has brought the regional expansion boom to a halt. In Saudi Arabia, only two cracker projects are under development: the first for Sipchem, the second for the Aramco/Dow Chemical Company joint venture at Ras Tanura. Neither has yet reached a final investment decision.
In Qatar, the only live project is the Honam Petrochemical Corporation/Qatar Intermediate Holdings Company complex at Mesaieed, but even that uses mainly naphtha feedstock. Kuwait, Bahrain and Oman have no definite future projects to speak of. The UAE, in the form of Abu Dhabi Polymers Company (Borouge), is the only GCC state to have enough available ethane to have allocated it as feedstock over the past 12 months.
Bahrain, the state with the fewest natural resources, has suggested that the GCC establishes a gas network to pool regional resources. “One day we hope there will be a gas network,” says Abdul Hussain Ali Mirza, Oil & Gas Minister of Bahrain. “On a strategic level, a GCC gas network similar to the GCC electricity network makes economic and political sense.”
While there have been several notable GCC initiatives such as the electricity grid, a gas network seems unlikely. Qatar has a moratorium on further development of its giant North field and the US is putting pressure on companies not to strike gas import deals with Tehran.
As the ethane age comes to an end, producers have started looking at heavier feedstocks such as naphtha and liquefied petroleum gases (LPGs) such as propane and butane. Because these feedstocks are derived from oil refining, there is no shortage of them.
Due to their more complex molecular structure, they have the added attraction of being able to create more advanced chemicals and plastics such as aromatics, phenols, amines and polycarbonates, which cannot be produced from ethylene and propylene alone.
Yet there is a reason the region has stayed wedded to ethane for so long. Because heavier feedstocks are derived from crude, they are also linked to the oil price. As the oil price goes up so does the feedstock cost, making them less competitive on price. Complexes based on heavy feedstocks also cost more, are more expensive to maintain and produce goods that may be difficult to market.
Subsidies can help. Saudi Arabia, for example, employs a complex discount formula on LPG feedstocks based on the Japanese naphtha export price. But the legality of subsidising a product that is traded globally is in question. Riyadh has promised to end its current formula in 2012, following its accession to the World Trade Organisation (WTO) in 2006. Ethane on the other hand, because it is not exported, is counted as a nation’s natural resource and a natural advantage.
If there is no subsidy, then there is essentially no difference between building a cracker in Jubail or Europe or China, except that with the latter two there are considerably lower transportation costs because output is closer to the market.
“Broadly speaking, a naphtha cracker in the Middle East would look like a naphtha cracker in Europe or the US,” says Roger Green, manager, petrochemicals, at Nexant ChemSystems. “And we are not seeing a lot of growth there, so the Middle East would be the same.”
This has not stopped the drive towards naphtha. The two largest single-phase petrochemical schemes in history – the Dow/
Aramco Ras Tanura scheme and the new Chemaweyaat venture at Taweelah in Abu Dhabi – will use mainly naphtha feedstocks from state-owned refineries, most likely at a subsidised rate. Economic diversification and job creation is considered as important as feedstock pricing.
There is a growing consensus that the key to the feedstock issue is the integration of existing refineries with naphtha and LPG-fed petrochemical complexes. The vast majority of the world’s 50 largest refineries are integrated with chemical facilities. But so far in the Middle East, only the Petro-Rabigh development on the Red Sea coast has been integrated.
Integration has many advantages. “We believe there are huge synergies with integration,” says Mohammed Husain, deputy chairman and deputy managing director of Kuwait Oil Company. “Off-gas streams can be reprocessed, there is a saving on capital expenditure – which is what everybody is talking about today – there is a greater feedstock flexibility, and improved risk management. We can also increase the breadth and depth of technology applications and establish a platform for further derivative production.”
After a slow start, the region is slowly taking up the integration model. In addition to Petro-Rabigh and the Ras Tanura venture, Aramco has earmarked its Yanbu refinery for integration, and is planning to integrate an aromatics facility at its grassroots Jubail refinery to be carried out in a joint venture with France’s Total. Abu Dhabi is planning to tag on an aromatics plant at its existing Ruwais refinery, and Kuwait recently said it was considering integrating its massive Al-Zour refinery with a petrochemicals complex if the facility was reconfigured for exports.
“It is observed that generally project returns could be increased by an attractive 3-4 per cent by incorporating integration principles at the design stage,” says Saad al-Shuwaib, deputy chairman and chief executive officer of Kuwait Petroleum Corporation.
The problem with integration is that it does not come cheap, often costing more than $10bn. More notably, it appears to exclude the regional private sector, as the region’s refineries are under state control. It may become increasingly difficult for the private sector to grow within the industry as a result.
The substantial scale and diverse product mix of integrated chemical complexes, however, can potentially be used to kickstart a downstream manufacturing base. Taweelah, Petro-Rabigh and Ras Tanura will all have an associated conversion park for moulders, extruders and converters to create the end product. Such industries are far more labour-intensive than their upstream counterparts and meet the governments’ goals of diversifying the economy and creating jobs for their fast-growing, young populations.
Feedstock issues are by no means the only problems facing the petrochemicals industry. The world in general faces a shortage of engineering talent, with much experience due to be lost to retirement over the next 10 years.
“If you look at the technical resources it takes to provide the growth required in the oil and gas and petrochemical industries, there is a severe talent shortage,” says Gambrell.
“It has not developed into warfare but it is heating up in the emerging geographies. Right now we are starting to see a 40-50 per cent increase in salaries each year and the gap is closing on cost.
“Everyone looks at the Middle East as having oil as its natural resource. I think they need to look at it as talent.
“They have a young population that they need to grasp and capture. Right now, we do not have enough people interested in science and technology.”
Engineering, procurement and construction costs are another long-running issue. Material and equipment prices have surged over the past three years as the contractor market tightens. Today, it can cost twice as much to build a facility as it did five years ago, and several projects have already fallen by the wayside as a result (see box, page 39).
The global credit crunch has also caused problems, making project financing more expensive and more difficult to obtain. After years of cheap credit, when project sponsors could practically demand whatever terms they wanted, they now have to be much more rigorous in the structure of their schemes.
“Project financing will largely depend on the sponsor,” says Sanjay Sharma, project manager at US petrochemicals consultant CMAI. “It is getting tough. Banks are asking many more questions. But for the big guys it will be OK and for the right kind of project there will still be the right liquidity.”
With opportunities at home more limited, the region’s producers are looking for opportunities overseas. Sabic announced its arrival on the world stage last year with the $11bn acquisition of US-based GE Plastics, now called Sabic Innovative Plastics. And in December, state-owned Petrochemical Industries Company (PIC) of Kuwait signed an initial agreement with Dow to acquire a 50 per cent interest in five of its global business units.
“We are looking at the end of the year [to complete the deal],” says Maha Hussain, chairman and managing director of PIC.
“We have a vision to become an international player in the petrochemicals sector and also in the sense of production, owning technology and increasing market share. Our strategy is based on partnership.”
As the GCC petrochemicals sector slows, so the opportunity has arisen for other countries to prosper.
Iran, with far fewer gas restrictions, says it wants to overtake Saudi Arabia as the region’s largest petrochemicals producer. Libya and Algeria, with more plentiful gas reserves, also have ambitions to become major players, although bureaucracy and politics may mean they develop at a slower pace.
The dynamics of the regional petrochemicals industry are clearly changing.
How the Middle East adapts to these changes will decide if it can maintain its leading position.
Project market continues to grow
According to data from Gulf projects tracker MEED Projects, more than $160bn worth of petrochemicals projects have been announced or are under way in the region. Add to that the $20bn-plus value of projects in North Africa and it is clear why the Middle East is fast becoming the dominant region in the petrochemicals industry, not just on pricing but also on size.
As ever, Saudi Arabia remains at the forefront of development with in excess of $75bn worth of chemical schemes under way. The majority are under construction, including the world-scale Yansab and Sharq olefins complexes developed by Saudi Aramco, and the Saudi Kayan complex at Jubail, which is understood to be the largest single-phase petrochemicals complex ever built.
The private sector has not been left behind. Local conglomerates Tasnee, Saudi International Petrochemical Company (Sipchem), Sahara Petrochemical Company, House of Invention and Osos Petrochemical Company all have schemes planned or under construction.
While the number of new projects has fallen, planned new projects have grown in size. An aromatics plant is set to be added to the estimated $13-15bn export refinery at Jubail, planned by Saudi Aramco and Total. Sipchem and Saudi Basic Industries Corporation (Sabic) are likely to team up to develop a massive olefins and derivatives complex at Jubail. Building on the success of the Petro-Rabigh integrated refinery and petrochemicals complex, Aramco in joint venture with the US’ Dow Chemical Company is set to sponsor one of the largest industrial projects ever undertaken at Ras Tanura, upgrading and integrating the existing refinery with a massive new chemicals complex.
Iran is not far behind. It wants to increase total output to 35 million tonnes a year (t/y) over the next two years from 23 million t/y currently. However, because of US sanctions, many of the planned projects have immense difficulties finding both contractors and bank finance to proceed. Although the republic has set itself some lofty targets, it is difficult to see how they will be achieved in the short term.
After a slow start, the UAE, through Abu Dhabi, is also building capacity. The second phase of the landmark Abu Dhabi Polymers Company (Borouge) complex at Ruwais is well under way and the firm already has plans for a third ethane cracker.
In April, the government announced it was intending the build the largest petrochemicals complex in history – although the Dow/Aramco Ras Tanura scheme may ultimately be larger – at Taweelah. Using 6 million t/y of naphtha as feedstock, the complex will feature world-scale aromatics, ethylene and urea plants (see feature, page 42).
Gas-rich Qatar has four major projects planned, although only one – the Honam Petrochemical Corporation/Qatar Intermediate Holdings joint venture – is under way. Rising engineering, procurement and construction costs may end up impacting on the feasibility of other schemes planned by Qatar Petroleum in joint venture with the US’ ExxonMobil Corporation, the UK/Dutch Shell Group and France’s Total.
Future projects in Bahrain, Kuwait and Oman will all depend on the availability of gas. Beyond the schemes currently under construction, no other projects have been given the go-ahead.
North Africa is coming into its own. Last year, Algeria signed two deals to develop olefins and methanol complexes with international groups. Libya too is planning a large-scale revamp of its existing facilities and is seeking international investment for grassroots opportunities. In both countries a lack of strong financing frameworks, legal issues and bureaucracy means initiatives will be slow to get off the ground.