PETROCHEMICALS: Time to join the major league

07 November 2003
The Middle East is the rising star of the global petrochemicals industry. Today, it accounts for less than 9 per cent of global ethylene capacity, but by 2010, its share will jump to about 16.5 per cent, based on projects planned and under way. A decade later, and the Gulf will overtake the US - the biggest petrochemical producer at present, with 25 per cent of global ethylene capacity - as having the world's largest concentration of petrochemical capacity. The Asian industry will still be larger - but the Middle East will be a heavyweight in capacity terms.

The region already punches well above its weight in global petrochemical trading. Small populations and a relatively low level of industrialisation have meant the bulk of petrochemical production is exported. In 2001, almost 15 per cent of all polyethylene exports originated from the Middle East. This is a staggering statistic, given the high level of regional trade flows within Europe, Asia and the Americas. If the inter-regional trade is taken out, the Middle East accounted for 36 per cent of deep-sea exports in 2001, with North America still the largest exporter. But by 2010, the Middle East is forecast to account for more than 80 per cent of deep-sea exports.

Investment in the region is being fuelled not only by traditional factors such as cheap and abundant feedstock, but also by the poor returns generated by the industry elsewhere, especially in North America.

Between 1985 and 2000, Middle East ethylene capacity increased by 7.9 million tonnes a year (t/y). This is a significant increase, but dwarfed by the North American increase of 13.7 million t/y, and 18.4 million t/y in Asia. Even Western Europe added an equivalent amount of capacity to the Middle East over the same 15-year period.

In hindsight it seems extraordinary that, given the attractions of the Middle East, the level of investment was so low compared with other regions. The relative under-investment can be attributed to international companies being mesmerised by the Asian growth story - at least until the 1997 crisis - and to the apparent safety of investing in OECD markets, where political risks were seen to be less of an issue.

The Asian crisis, followed by the upsurge in gas prices in the US, resulted in a dramatic shift in investment perceptions. Since January 2000, natural gas prices in the US have averaged $4.24 a million British thermal units (BTUs), with prices in 2003 averaging $5.70 a million BTUs. At these levels, the North American petrochemicals industry has the highest ethylene production costs in the world. The result is that US operating rates are running at below 80 per cent, forcing the industry to seriously consider scrapping its high-cost capacity. However, with the exception of Dow Chemical Company, US producers have so far shied away from shutting down capacity, holding out in hope of a cyclical recovery.

Somewhat belatedly, industry executives have realised there are only two places where investment in new capacity can hope to cover the capital costs: the Middle East, with its low costs and abundant feedstock; and China, with its rapid industrialisation.

The irony is that just when international petrochemical companies have decided they need the Middle East to sustain their growth, the region's two heavyweights - Saudi Basic Industries Corporation (Sabic) and Iran's National Petrochemical Company (NPC) - are pursuing more independent paths.

Back in the 1980s, Sabic had little alternative but to set up joint ventures with foreign companies. The departure came in 1999 when it set up Jubail United Petrochemicals Company (United), its first fully-integrated complex undertaken without any external support. With this project, Sabic clearly demonstrated that it no longer needed foreign participation. Moreover, following its acquisition of Netherlands-based DSM's petrochemical business, Sabic has become the world's fourth largest polyolefin producer. As such, it now finds its existing joint venture partners are also its principal global competitors. Indeed, Sabic's joint ventures have arguably become more of a hindrance than a help - as illustrated by the recent US court case between Sabic and the US' ExxonMobil Corporation over royalties.

NPC has also adopted a more independent role due to force of circumstance. The four 1 million-t/y-plus cracker complexes - olefins 7, 8, 9 and 10 - were originally conceived as two wholly NPC-owned companies - 7 and 10 - leaving olefins 8 and 9 to be undertaken with the Royal Dutch/Shell Group and the UK's BP, respectively.

BP subsequently withdrew from olefins 9 to concentrate on China, and was replaced by South Africa's Sasol, while negotiations with Shell dragged on. Recently, NPC announced that the olefins 8 project would also be a wholly NPC-owned project. As NPC develops these and other projects using its own resources and in-house skills, it is debatable whether it will ever feel the need to enter into another joint-venture partnership.

With Sabic and NPC seen as increasingly independent, the international petrochemical companies had viewed the Saudi gas initiative as the best opportunity to access the kingdom's low-cost feedstock. However, following the collapse of the integrated programme, Saudi Arabia is now looking to engage international oil companies (IOCs) in upstream exploration and production activities only.

Investment opportunities certainly remain for IOCs in the Gulf. In Kuwait, Petrochemical Industries Company (PIC) is planning Equate II with Dow as its foreign partner. The project is planned to utilise gas liquids obtained by the shrinking of wet gas currently used for power generation. A new gas processing facility is planned to provide the feedstock. Gas imports from Qatar and Iran would provide dry gas to replace this shrinkage, as well as to reduce the sizeable fuel oil burn in the country. However, pipeline construction from Qatar to Kuwait is now in doubt, as Saudi Arabia will not allow its passage through its territorial waters. Kuwait is therefore considering a new refinery, the fourth refinery project, to provide fuel oil to meet power demand. Whether in such circumstances it is still economic to shrink wet gas for petrochemical use is questionable.

Qatar is also planning the 1.3 million-t/y ethylene Q-Chem II/Qatofin project with its existing partners ChevronPhillips Chemical Company and France's Atofina. Ethane feedstock will be supplied by the Al-Khaleej gas (AKG) development and the Dolphin project. AKG is due to start up in 2005 with Dolphin following in 2006, allowing commissioning of the new capacity to take place around 2008. The ethylene will support new polyethylene and alpha olefins projects in Mesaieed, and Qatar Vinyl Company's plans to increase ethylene dichloride (EDC) capacity

In the UAE, Abu Dhabi National Oil Company (ADNOC) is looking at a 1.25 million-t/y ethylene project at the Abu Dhabi Polymers Company (Borouge) complex, where Copenhagen-based Borealis is the foreign partner. Additional ethane feedstock supplies will come from the third onshore gas development and second Asab gas development (OGD-3/AGD-2) projects, starting in 2006/07.

None of these projects provides any openings for foreign companies without an existing presence to gain access to the region. Such opportunities tend to be rare, as they arise only when new players appear on the scene. One such company is Saudi Aramco, which has decided to enter the petrochemical sector. It is in discussions with Sabic, Dow and Japan's Sumitomo Corporation about being a partner for a 1 million-t/y ethylene and 450,000-t/y propylene complex at Rabigh.

The Saudi private sector is also seeking to expand its activities. Two private groups are considering new 1 million-t/y ethylene complexes, for which foreign partners may be sought. At the same time, propane dehydrogenation and polypropylene projects are attracting considerable interest, following the 450,000-t/y Saudi Polyolefins Company project, which is now mechanically complete.

Petrochemical developments in the Saudi private sector rely heavily on Aramco feedstock allocations of liquefied petroleum gas (LPG) and condensate, as there is limited ethane availability to the private sector. The price discount on LPG and condensate, which was widened by a new price formula in 2002, has made projects based on these feedstocks more attractive.

Recently, in discussions with the EU regarding WTO accession, Saudi Arabia offered to end the dual pricing of 'natural gas products'. This appears to signal the end of the LPG and condensate price discounts. When - or indeed whether - this will occur is unclear. The present pricing arrangements end in 2011, which may be a suitable phase-out point. The end of price discounting will slow investment in this now-booming sector, and may threaten the economic basis of existing LPG and condensate projects. Such issues provide further confirmation of the continued attractiveness of ethane as a genuinely competitive feedstock base for the region's petrochemical industry.

Dr Philip Leighton of Jacobs Consultancy

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