Kuwait ripe for expansion

19 March 2015

Progress on refinery megaprojects means the country can go ahead with plans to integrate petrochemicals facilities

After years of stagnation, a boom in refinery projects activity in Kuwait is creating new options for downstream schemes that could lead to the country becoming a more important player in the Middle East’s petrochemicals sector.

In September, Kuwait announced it had revived plans for the multibillion-dollar petrochemicals project called Olefins 3, and would be integrating the facility with the 615,000 barrel-a-day (b/d) New Refinery Project (NRP), which is to be built in the Divided Zone that the country shares with Saudi Arabia.

If the project comes to fruition, it will significantly increase the country’s chemicals output and broaden its production slate. It could also mark the start of a new trend in Kuwait, becoming the first of several new petrochemicals facilities integrated with refineries - taking advantage of the increased amounts of liquid feedstock that will be produced domestically thanks to ongoing refinery megaprojects.

Refinery boom

The revival of Olefins 3 comes on the back of a surge in activity in Kuwait’s refining sector. In 2014, a total of $13.2bn in downstream contracts was awarded in the country, more than 10 times the sum of the deals signed in the preceding nine years.

The leap in awards was driven by the $16bn Clean Fuels Project (CFP), which saw $12bn-worth of deals inked over the year. The scheme will upgrade and expand Kuwait’s Mina al-Ahmadi and Mina Abdullah refineries, increasing capacity and lowering the sulphur content of output. It will also see a third refinery, Shuaiba, decommissioned.

The flurry of awards is expected to continue into 2015, with $7.6bn in downstream contracts due to be signed and the bulk of that figure being made up of deals for the NRP.

As things stand, Kuwait’s petrochemicals sector is underdeveloped by regional standards. Its petrochemicals capacity has not grown since April 2009, when the Equate Olefins 2 project reached completion, and expansion in the short term is unlikely as there are no facilities currently under construction.

In numbers

75 million tonnes
Saudi Arabia’s annual petrochemicals capacity in 2013

5 million tonnes
Kuwait’s current capacity of finished
petrochemicals products

Source: MEED

Capacity currently stands at about 5 million tonnes a year (t/y) of finished product, with ethylene capacity amounting to just 1.6 million t/y. This is far less than the volumes produced by Saudi Arabia, which has a capacity of more than 75 million t/y.

Over the past decade, petrochemicals project activity in Kuwait has been minimal compared with other GCC states, with only Bahrain spending less. Kuwait signed just $3.3bn in engineering, procurement, and construction (EPC) contracts for petrochemicals facilities over the period, compared with $145.1bn in Saudi Arabia and $25.7bn in Qatar.

Part of the reason for the slow growth in Kuwait’s petrochemicals market is lack of access to natural gas as a feedstock. The government has struggled to meet domestic demand since the 1980s, and has become increasingly reliant on imported liquefied natural gas (LNG) over recent years.

The planned expansion in refinery output provides an opportunity to boost petrochemicals production by using liquid feedstocks from the refineries, rather than relying solely on gas feedstocks, which are in short supply.

Olefins 3

“Olefins 3 is an important project for Kuwait,” says Andrew Spiers, senior vice-president at US consultancy Nexant. “It will change the industry, substantially increasing the production base, diversifying its product portfolio and making Kuwait Petroleum Corporation [KPC] and Petrochemical Industries Company [PIC] much more prominent regionally.”

Previously, PIC has talked about building a 1.4 million-t/y cracker, expanding the country’s total petrochemicals capacity by 28 per cent, but the exact capacity of the proposed facility and its configuration has yet to be finalised.

While Olefins 3 is the only integrated refinery and chemicals plant being discussed publicly at the moment, insiders say the plant could potentially be one of several similar facilities.

“The current trend in Kuwait is an increasing focus on refinery and petrochemicals integration,” says Spiers. “It is natural that, with such large refinery projects in the pipeline, officials are looking at how to build on these assets and create extra value.”

Although analysts see clear benefits for Kuwait if it follows through with its plans for Olefins 3, it is by no means certain to see progress. Over the past decade, several megaprojects that appeared to have solid fundamentals were derailed by infighting between the country’s government and parliament including a $17.4bn petrochemicals joint venture with the US’ Dow Chemical. Although this kind of hostile political environment has largely disappeared over the past two years, some analysts fear Kuwait’s lively politics could still disrupt projects and opposition to costly schemes could increase in the current low oil price environment.

Lower revenues

Crude prices dropped by 60 per cent between June 2014 and January 2015, and have remained low over subsequent months.

This has significantly reduced Kuwait’s revenues, and in September, Mohammad Ghazi al-Mutairi, CEO of KNPC, told MEED non-essential projects would be reviewed for possible cuts in spending.

Even though Olefins 3 is a long-term project, and the low oil prices may prove to be a temporary depression, there is a possibility it could be affected by government efforts to reduce spending.

Other large-scale chemicals projects planned elsewhere in the GCC have already been derailed in recent months, including Qatar’s $7.4bn Al-Sejeel petrochemicals complex and its $6.4bn Al-Karaana scheme. Al-Sejeel was put on hold in September 2014 and Al-Karaana was cancelled in January this year.

Kuwait’s petrochemicals ambitions could also be tempered due to competition from Saudi Arabia and Qatar, both of which have much more developed petrochemicals sectors. Driven partly by a need to create jobs and reduce unemployment, Saudi Arabia, already the Gulf’s biggest petrochemicals producer, has set in motion a masterplan in an effort to further ramp up production. The kingdom is planning to significantly increase its exports to the Middle East and North Africa region in coming years, targeting 100 million t/y in 2016.

Domestic competition

Kuwait also has domestic petrochemicals producers to compete with in its target export markets such as China. “The fundamentals for liquid-fed crackers in the Middle East are not good when compared with Asia,” says Florian Budde, global chairman of the chemicals practice at US consultancy McKinsey’s. “They won’t be able to compete on price with naphtha-based crackers in China.”

Any delays to Kuwait’s refinery megaprojects would also have a knock-on effect on petrochemicals plans. While the CFP’s EPC contracts have been signed, there are increasing concerns about the NRP, which is due to award the majority of its EPC deals this year and has seen significant delays since it was first announced in 2005.

In March, the Central Tenders Committee revealed that the prices submitted by contractors for the EPC packages that make up the NRP had come in $4.2bn over budget, stoking concerns the scheme may be retendered. If this happens, it would create delays of at least six months for the project - something that would, in turn, delay progress on the Olefins 3 facility.

Much to gain

Although there are a large number of moving parts and possible factors that could derail Olefins 3, analysts say Kuwait has much to gain should it push on with the integrated refinery facility and other similar petrochemicals schemes.

The country’s current chemicals output is dominated by gas-fed facilities that produce mainly ethylene, polyethylene and glycols. The construction of a large cracker that uses either just liquid feedstocks or a mixture of liquid and gas would significantly diversify Kuwait’s petrochemicals portfolio, allowing the production of more aromatics, polypropylene and other propylene derivatives, as well as speciality chemicals.

This would allow Kuwait to tap into new markets and bolster the country’s resilience to increased competition from other exporting nations.

Good timing

“Now is a good time to invest in downstream projects like Olefins 3,” says Aman Amanpour, president of UAE-based petrochemicals and energy consultancy Amanpourconsult.

Amanpour says that, due to the collapse in oil prices and its impact on government revenues, the GCC is likely to see a slowdown in project activity, which will bring down the price of contractors and materials.

“Those who have money and who have been delaying their schemes have a window of opportunity to execute the projects with less capital expenditure,” he says.

With its large financial reserves from the recent years of high oil prices, Kuwait is well positioned to carry out this kind of counter-cyclical spending, but it may well face significant political opposition at a time when revenues are lower.

“They have the chance to do it,” says Amanpour. “Whether they have the political will to do it is another question.”

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