Kuwait’s Petrochemical Industries Company (PIC) faces some tough strategic decisions as it considers its options for long-term growth. Constrained by a shortage of gas to feed any petrochemicals plant expansions, the group will have to consider how to extract the best possible return from the gas feedstock that is available.
Kuwait’s natural gas production totalled 12.8 million cubic metres in 2008, a fraction of the 78.1 million cubic metres produced by Saudi Arabia and the 50.2 million cubic metres produced by the UAE the same year.
Given that domestic demand for electricity, which in Kuwait is primarily generated from gas-fired power plants, is currently growing by 10 per cent a year, the competition for gas resources is strong.
“Cheap feedstock is key for petrochemicals production, and gas is cheap because it is difficult to move around”
Roger Green, vice-president, Nexant
With such limits on the growth of petrochemicals production at home, PIC is looking for opportunities abroad, despite the collapse of a US venture just 12 months ago. In December 2008, Kuwait’s Supreme Petroleum Council blocked the formation of K-Dow Petrochemicals, a proposed international joint venture of PIC and the US’ Dow Chemical Company, which was to be based in Michigan.
Under the terms of the proposed deal, PIC would have taken a 50 per cent stake in five of Dow’s basic chemical businesses, producing and marketing polyethylene, ethylene-amines, ethanolamines, poly-propylene and polycarbonate.
Nevertheless, in October, Yousef al-Ateeqi, PIC’s deputy managing director for olefins, said at a press conference in Abu Dhabi that the group hoped that the first contracts for the development of a $10bn integrated refining and petrochemicals project at Zhanjiang in southern China would be signed in 2010.
The project, a joint venture of PIC and China Petroleum & Chemicals Company (Sinopec), will, Al-Ateeqi hopes, be the first of many more international joint ventures. “In petrochemicals, we plan to pursue growth inside and outside Kuwait by building or acquiring leading petrochemicals assets in mature markets, with a foreign partner,” he said at the press conference.
Industry analysts say that partner could be Dow, despite the bruises left by the unexpected Kuwaiti withdrawal from the K-Dow deal last year. “PIC and Dow have a long history of collaboration,” says Roger Green, vice-president at industry analyst Nexant.
The two groups are partners in the first and second phases of Equate, the business that is the cornerstone of Kuwait’s petrochemicals sector.
The government’s sudden decision to scrap K-Dow was widely seen as a response to domestic political pressures of the time. MPs questioned the pricing of the deal and Kuwaiti investment had already been cut from $9.5bn to $7.5bn during a period of uncertainty over the value of petrochemical assets.
There followed in late 2008 suggestions from MPs that PIC could have driven a harder bargain with Dow at a time when, on average, US petrochemical groups had lost 40 per cent of their market capitalisation as a result of the global financial crisis.
Kuwait’s withdrawal deprived Dow of funds it had hoped to use to finance the takeover of fellow US company Rohm & Haas. But in a sign of its desire to maintain good relations with the Kuwaitis, the US group opted not to pursue the $2.5bn compensation to which it was entitled under the terms of its contract for K-Dow.
A new version of the K-Dow project could therefore yet go ahead, with PIC becoming a major investor in international production assets originally built up by Dow around the world.
“The business logic was there previously for Dow. So the logic must still be there,” argues Green. “There was sense to the K-Dow deal. It fell apart because of the financial and political reassessment.”
In the meantime, PIC’s pursuit of the partnership with Sinopec is a sign of Asia’s importance in the global petrochemicals industry. But, Green points out, North America and Europe still represent important markets.
It seems plausible, therefore, that PIC could pursue a triple-track strategy, collaborating with Asian players in the growing Far East market – which is already a major customer for Kuwaiti crude oil – while continuing the partnership with Dow at home and seeking further alliances, with Dow or others, to build a position in the West.
In the Far East, outside China, Al-Ateeqi reported that PIC is planning a $5bn refining and petrochemicals project at Nghi Son in Vietnam. “We are in the process of designing an integrated complex in a joint venture with Vietnamese and Chinese partners,” he told the press conference in Abu Dhabi.
In Kuwait itself, a third phase of PIC’s olefins project, with capacity to produce 1.4 million tonnes a year of ethylene, is now planned. Work on the project is set to start by 2015.
PIC, Dow Chemicals Company and local firms Boubyan Petrochemicals Company and Qurain Petrochemicals Industries are all shareholders in the project, for which the US’ Jacobs Engineering has carried out a feasibility study.
The strategy that PIC and its subsidiaries pursue will be shaped heavily by the shortage of domestic gas feedstock. But among Kuwait’s politicians, the wisdom of boosting oil output to raise gas production is disputed.
The government has said it wants to reach output of 4 million barrels a day (b/d) by 2020 from current output of about 2.6 million b/d, but some senior politicians outside government openly question the case for doing so.
They say that over-reliance on Kuwait’s natural resources wealth for revenues is socially damaging, perpetuating a culture of dependency in which people expect oil money to sustain living standards and services, rather than seeking to create wealth and employment through diversified economic activities.
“Kuwait probably needs to increase its oil production and revenue a bit, but not urgently, and not by a lot,” says Abdullah al-Naibari, a former liberal MP in the Kuwaiti parliament. “If you boost it too much, you just get public pressure for pay rises and loan write-offs.”
If Kuwait does opt to keep more of its oil and associated gas in the ground for future generations, it would constrain the growth of domestic petrochemicals production, explains Green. “Cheap feedstock is the key thing for petrochemicals production, and the reason gas is cheap is because it is difficult to move around,” he says.
For raw gas to be transformed into petrochemical products at an overseas destination, it will have to be converted into liquefied natural gas (LNG) before it can be shipped. It is a process that requires massive investment in plant and purpose-built LNG tankers.
Once the LNG is regasified overseas, the ethane then has to be stripped out to use in crackers. This builds an extra layer of costs into the process of overseas petrochemicals production.
Petrochemical plants in gas-importing countries, supplied with imported LNG, suffer this major input cost disadvantage. While feedstock costs in the Gulf petrochemical industry have remained roughly fixed despite the energy price volatility of recent years – at about 25 per cent of global gas prices, or $1 a million BTUs – prices at plants in gas-importing countries have fluctuated in line with changes in the price of oil.
Given the added cost to Kuwait of supplying its overseas petrochemicals plants with gas, it makes more sense for PIC to invest in overseas petrochemicals production at plants that can be supplied with local refinery feedstock, as it is doing in Vietnam.
With limits to the availability of gas, PIC is also setting priorities within the domestic industry, with plans to gradually shift out of the production of more basic petrochemicals such as urea and ammonia – which are made from lighter gas such as methane and used in the production of fertilisers – to focus on the production of polyethylene and mono-ethylene glycol, which are made from the heavier ethane gas and are used to make plastics, polyester and anti-freeze.
Diversifying into this kind of product also offers wider prospects for the development of further downstream activity, such as the manufacture of plastic products.
This realignment of priorities at PIC is paralleled by a structural reorganisation of the PIC group into global product strands, such as aromatics or olefins. PIC carried out a reorganisation study in 2006 to rationalise the company’s structure along product lines.
“Instead of managing the company around the physical assets, they will manage it around product groups, which is following the model set by Saudi Basic Industries Corporation,” says Green. “It is absolutely the sort of thing PIC should be doing.”
PIC’s refocusing of its domestic petrochemicals production, along with its investment in overseas assets and a corporate restructuring, are all signs that the company is looking to the future with ambition.
2010 – Year when PIC hopes to sign first -contracts for Zhanjiang project
$5bn – Cost of PIC’s planned refinery and -petrochemicals plant in Vietnam