But amid the excitement, concerns are being raised over how to manage this unprecedented growth. At MEED’s Gulf Petrochemicals conference in Bahrain on
5-6 June, top of the agenda were the challenges faced by unpredictable oil prices, spiralling engineering, procurement and construction (EPC) costs, uncertain global demand, and logistics issues. Building up new capacity in a region with so many natural cost advantages is the easy part. Maintaining that lead will be far more difficult.
Many of the challenges faced by the industry today are the result of its own success. More than $25,000 million worth of EPC contracts have been placed in the sector since the start of 2005, including six ethylene crackers, the majority of them in Saudi Arabia. Six more crackers, not including those planned in Iran, are expected to be awarded over the coming 12 months. The Gulf’s ethylene production capacity is forecast to more than double to 30 million tonnes a year (t/y) by 2010 from 12.5 million t/y today.
The deluge of awards has placed
considerable strain on capacity across the board. Contractors have been stretched
to the limit as they struggle to cope with the unprecedented demand on their services. Ports face backlogs of petrochemical products sitting on their quays. Shipping lines are racing to ensure enough container capacity to ship these
products to the customer (see box).
It is not hard to see the reason for the onrush of investment. The region’s chief selling point is its cheap and plentiful natural gas resources. Ethane, the feedstock of choice, is priced as low as $0.75 a million British thermal unit (BTU) and rarely goes above $1.50, compared to $6-8 a million BTU elsewhere. Add in rising oil prices, a robust infrastructure and the Gulf’s strategic location between Europe and Asia and it is easy to see why most of the world’s major petrochemicals companies are scrambling for local partnerships to set up projects locally.
‘What we are seeing is production leadership shifting from mature markets to areas of the world with low-cost feedstock,’ says Just Jansz, president of technology at Europe’s Basell. ‘Cash cost leadership will be in these feedstock-owning nations.’
Mass end-users of plastic products, such as Procter & Gamble and Unilever, are for the first time eyeing equity positions in Gulf petrochemicals production as they seek to gain some control over their cost base. ‘We’ve never needed to invest in the region before,’ says one Procter & Gamble executive. ‘Petrochemicals have always been so cheap. But with prices rising so rapidly now, we have to goin.’
However, the industry may be about to hit a stumbling block. In Saudi Arabia, by far the biggest player in the region, the glut of cracker projects has resulted in a shortage of ethane feedstock. The Petroleum & Mineral Resources Ministry is reckoned to have allocations for just two or three more worldscale crackers, at least until Saudi Aramco’s next round of oil field developments come on stream towards the end of the decade.
With feedstock allocations increasingly hard to come by, prospective producers are having to settle for mixed-feedstock crackers. Natural gas liquids (NGLs), such as propane and butane, are still cheaper in Saudi Arabia than the global norm, thanks largely to a
complex discount formula based on the Japanese naphtha export price. As of May, they were priced at $0.65 a million BTU in the kingdom against a price of $0.91 in the US an attra