Oil price drop will lower GCC petrochemicals margins

15 February 2015

Regional producers will face stronger competition from naphtha-based crackers in Asia and Europe

Middle East petrochemicals producers will be faced with stronger competition from other regions as the fall in global oil prices makes liquid feedstocks more competitive.

Petrochemicals complexes in the GCC largely use ethane gas feedstock that is fixed at low prices by the government, while most crackers in Europe and Asia utilise naphtha and other liquid products.

According to US-based consultancy IHS, the average price of naphtha in Asia has dropped from an average of $1,200 a tonne in 2013 to a forecast average of less than $500 a tonne in 2015.

This trend makes products such as ethylene and its derivatives much cheaper to producer using naphtha, lowering global prices and weakening the margins for ethane-based crackers.

“Since oil serves as the marginal production cost and price-setter for many chemicals, plastics and fibres, a decline in the oil price typically leads to lower product prices,” says Dave White, senior vice president at IHS.

“At the same time, we see assets that derive margin from a wide gas-to-oil deficit – such as those in North America and the Middle East – experiencing margin decline,” he adds.

White expects large, capital-intensive projects already under way in the Middle East to continue, but expects a “lull in future investment plans as chemical producers wait for forward clarity and for some of the market volatility to ease”.

One of the region’s largest planned petrochemicals projects – Qatar’s $64.bn Al-Karaana complex – was cancelled in January. The country’s proposed $7.4bn Al-Sejeel petrochemicals project had been shelved in 2014.

The six-country GCC does not have a significant amount of large petrochemicals projects in the pipeline, with the region’s largest producer Saudi Arabia focusing more on downstream facilities with the aim of creating more jobs.

The most notable projects are Oman’s $3.6bn Liwa Plastics cracker and plastics complex and Abu Dhabi’s Tacaamol aromatics complex.

Liwa Plastics is expected to be tendered in the coming weeks with Oman Oil Refineries & Petroleum Industries Company (Orpic) having pre-qualified 19 companies to bid for packages.

The falling price of oil will have one positive effect for GCC petrochemicals producers. IHS forecasts that depleted inventories and faster consumption growth will generate additional ethylene demand.

This is expected to be 1 million tonnes above the previous high-crude-based forecasts and is projected to add up to 3.5 million tonnes by 2020.

The supply pressure on global ethylene producers will intensify if higher demand volumes materialise, which will cause operating rates to rise above 90 per cent,” forecasts White, saying it could reach 95 per cent by 2023.  

“During the years 2017 to 2020, IHS expects it would signal tight market conditions that the industry has not witnessed in many years, and would drive margin expansion opportunities for producers,” said White.   

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