As ethane allocations grow scarce, petrochemicals producers are turning to naphtha and other liquid feeds, a move that will benefit governments’ job creation drive
The days when Gulf petrochemicals producers could simply secure an ethane allocation letter, build a cracking unit, and then watch the revenues flood in are over.
With ethane demand now outweighing supply, new petrochemical projects are increasingly being forced to use naphtha or natural gas liquids (NGLs), such as propane and butane, as feedstock. These projects tend to offer reduced returns, as the feedstocks are more expensive than ethane, particularly naphtha, which is linked to the price of oil.
But regional governments – which have long seen the petrochemicals sector as a priority area for investment as they seek to further industrial development and create jobs for a growing population – stand to gain from this enforced feedstock change. Naphtha and NGL-based petrochemicals projects have the potential to create significantly more jobs than their ethane-fuelled counterparts.
- 90,000: Number of Saudi nationals employed in the kingdom’s petrochemicals sector
- 1,200: Number of direct job opportunities the Aramco-Total refinery at Jubail will create
- 10,000: Number of staff employed at Adbic’s Polyers Park when fully operational
The reason is that the composition of the heavier feedstocks delivers a wider production slate than ethane, which only produces basic olefins, used to make a limited number of other chemicals. Naphtha and NGLs, as the more versatile feedstocks, offer a much broader product range, including aromatics and intermediate petrochemicals.
This widening of the product slate into speciality chemicals carries a significant socio-economic payback. Though basic petrochemicals manufacturing creates more jobs than the oil industry, by moving further down the product chain into intermediates many more employment opportunities are created.
“Naphtha-based petrochemicals [projects] open up a whole host of products and hence job opportunities that plain oil extraction does not,” says James Reeve, analyst at Riyadh-based Samba Group.
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.
|Saudi ethylene feedstock|
|Percentage share in production||2007||2013f|
|f=Forecast. Source: Alpen/CMAI|
“The downstream plants are where you create additional appointments,” says Richard Sleep, senior vice-president of energy & chemicals at US consultant Nexant. “The number of people on the actual cracker is not that different, whether it’s a gas or liquids cracker, it’s really about the downstream. If the aim is wealth and job creation, then derivatives and liquids crackers do a much better job of that than gas.”
The shift away from ethane – whose proportion of the Saudi feedstock mix is forecast to shrink by 8-10 percentage points over the next six years, according to Dubai-based investment bank Alpen Capital – by chance fits the regional drive to diversify and ensure broader economic, industrial and social growth. For governments facing a pronounced youth bulge, there is now an opportunity to leverage the Gulf’s hydrocarbon resources for socio-economic development.
Governments are actively encouraging the shift from export-oriented, ethane-based petrochemicals production to manufacturing value-added speciality chemicals to feed domestic industries, whether through direct discounts or indirect incentives. And ethane allocations are becoming increasingly difficult to secure.
In Saudi Arabia, prices of naphtha and NGLs are subsidised through a complex discount system for domestic users. NGLs receive a 30 per cent discount on the export price of naphtha, and naphtha itself receives an 11 per cent discount on its export price.
Saudi petrochemicals producers are taking up the challenge, backing new downstream ventures that are more complex – and labour intensive – than the previous wave of ethane-based projects.
Saudi labour market
Local banking firm Samba Group estimates the number of Saudi nationals employed in the domestic petrochemicals industry is about 90,000, representing 3.8 per cent of the workforce. However, annual entrants to the Saudi labour market averaged 220,000 between 2004 and 2009. If the petrochemicals sector is to absorb a higher proportion the young population, the kingdom needs to invest in a large number of liquids-based schemes.
Saudi Aramco and the Gulf’s largest petrochemicals player, Saudi Basic Industries Corporation (Sabic), as state-controlled companies, have a mandate to employ as many Saudi nationals as possible. They are always eager to emphasise the job creation aspect of new initiatives, highlighting their multiplier effect on downstream industries.
The proposed 400,000 barrel a day Saudi Aramco-Total refinery at Jubail is forecast to create 1,200 direct employment opportunities in the kingdom, each of which typically creates five to six indirect job opportunities.
Though Sabic has been prepared to sacrifice overseas jobs – cutting 1,000 of its 9,500 US and Europe-based staff at its Innovative Plastics division since 2008 – such a move would be politically unpalatable back home.
Changes to its feedstock mix will ensure a higher domestic headcount. The new wave of projects from Sabic and its affiliates will be using heavy liquids alongside ethane, to introduce new products into their portfolios. The Sabic-backed Saudi Kayan petrochemical complex at Jubail, due for completion in 2011, will create products using 70-80 per cent butane. The project is central to Sabic’s plans to raise the proportion of speciality chemicals to 30 per cent of its total sales by 2020.
Aramco’s Rabigh refinery will feed 15 specialist downstream chemical production plants planned by PetroRabigh. PetroRabigh, a joint venture with Japan’s Sumitomo, will also utilise mixed feedstock.
Saudi Arabia with its larger population faces the more urgent employment challenge, but other Gulf states are also pushing the employment angle in new petrochemicals projects.
In Abu Dhabi, Abu Dhabi National Chemicals Company (Chemaweyaat) is planning a new 10 million tonne-a-year (t/y) petrochemicals complex at Taweelah, known as Tacaamol, which will come on stream 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.
Chemaweyaat has been established to further the development of a chemicals industry in Abu Dhabi, says chief executive officer Mohamed Abdulla al-Azdi. “Accordingly, job creation is an important by-product of this economic development strategy, with a focus on creating engineering and advanced technical positions.”
Hiring priority will be given to UAE nationals through direct development of manpower, along with tapping into existing national programmes for vocational and post-high school education.
“Due to continuous growth in the chemicals sector, there is a shortage of qualified expatriate staff with relevant experience, which leads to the attrition rate being higher than normal. As a result, developing qualified local staff is the most rewarding long-term, for both the company and employees, as is the case in Saudi Arabia,” says Al-Azdi.
Abu Dhabi Basic Industries Corporation (Adbic) is also planning a liquids-based plant to produce speciality chemicals.
The employment spinoffs from plastics conversion plants form a large part of the investment case for the latest wave of Gulf petrochemicals projects. Adbic set up the $4bn polymers park in 2008 with the aim of producing more than 1 million t/y of plastics by 2012. It will include Chemaweyaat’s naphtha cracker with downstream propylene and ethylene derivatives plants, as well as xylene, benzene, cumene, phenol facilities and derivatives units. When fully operational, the project will employ 10,000 staff.
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. .
But liquid-based petrochemicals schemes do not enjoy the same economic advantages of those that use ethane. Plants based on naphtha and NGLs are costlier to build and maintain, and the feedstock itself is more expensive.
Moreover, petrochemicals further down the supply chain tend to be less profitable, with investment becoming progressively less attractive for producers when measured by internal rates of return (IRR).
However, they are attractive for governments when measured by the number of jobs created per tonne of feedstock allocated, according to an analysis by management consultants McKinsey. Production of polyether polyols and epoxy resin, for example, offer returns on investment of less than 15 per cent, but create significantly more jobs than ethylene vinyl alcohol or ethylene oxide production, which offer returns in excess of 25 per cent.
This presents a challenge for foreign partners considering investments in liquids-based schemes. Investments require portfolios that satisfy government needs as well as delivering attractive IRRs.
Such considerations have led several projects to adopt a mixed feedstock strategy – using either ethane and naphtha, or ethane and NGLs – and also contributed to the growing trend for integrating petrochemicals facilities with refineries to maximise profitability.
Concerns over profitability are also understood to have prompted the recent change in feedstock choice for Saudi Aramco’s proposed joint venture integrated petrochemicals project with Dow Chemical of the US, which will now be fed using a mix of propane and ethane, rather than being purely naphtha-based. The location for the scheme has also been switched from Ras Tanura to be sited alongside a refinery in Jubail instead. The planned expansion of the Ras Tanura refinery has now been cancelled.
Yet the choice is not a simple one between profitable ethane projects that deliver few jobs, and naphtha-based schemes offering large employment opportunities.
Striking a balance
“From experience, it is proven that specialty products provide stable returns on average compared to the erratic returns of products sold as commodities. The challenge has always been how to strike the right balance between specialities with limited volumes versus commodities with wider market applications,” says Al-Azdi.
Furthermore, Saudi producers using liquids still retain a competitive advantage over international rivals who have to pay market rates for their feedstocks. “Liquids still offer a decent discount, albeit not as generous as that for ethane,” says Reeve. “But the plain fact is that ethane is scarce. Most potential joint venture partners understand this and they also understand that if they want to form long-term strategic alliances with companies such as Aramco or Sabic, then issues such as employment generation will come into play.”
In the wake of the global recession and slump in demand for petrochemicals, Aramco has compromised, backing away from a naphtha-based scheme in favour of improved project economics for its partner Dow. But petrochemicals is a cyclical business and once demand recovers, the urgent need for job creation is certain to take precedence once again, furthermore, on this occasion ethane was available, but this will not always be the case.
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