Following two decades of expansion driven by an abundance of natural gas at advantaged prices, GCC petrochemical companies established a leading position in their industry. However, recent shifts in both supply and demand have led to growing gas shortages of natural gas in the region. At the same time, feedstock developments in other parts of the world pose threats as well as provide opportunities to GCC players. Booz & Company's latest report on these feedstock developments analyses these threats and opportunities and provides the implications for Middle East petrochemicals players.
"The region's diversification effort to increase non oil-related GDP has seen boosts in local employment, including in industrial sectors that are energy-intensive, and driven by low gas prices. As a result, the GCC is projected to experience a sizable-and growing- shortfall in natural gas for the coming years. Consequently, ethane supply is not expected to grow significantly and most of the anticipated supply is already committed to existing and new projects", said Andrew Horncastle, partner with Booz & Company.
Adapting to this, petrochemical companies have shifted to more liquid feedstocks. Most new major projects across the region (such as the Saudi Aramco-Dow Chemical venture, Sadara) are expected to use mostly liquid feedstocks. This move to liquid feedstocks will reduce profit margins and overall competitiveness for GCC players, as they do not offer the same cost advantages as gas feedstocks. Elsewhere in the world, feedstock developments are making petrochemical players more competitive. New sources of shale gas in North America, promising production technologies such as coal-to-olefin initiatives in China and conventional gas from the redeveloped sector in Iraq are all impacting the industry. Each development presents a significant potential discontinuity, but they all include uncertainties regarding precise production levels, the degree of competitive advantage for local petrochemical companies, and other factors. Still, in the aggregate they can lead to major changes in the industry and require close scrutiny. Shale gas is currently projected to become the dominant source of natural gas in the US by 2035. The growth in shale gas production has effectively decoupled natural gas prices and oil prices. From their peak in mid-2008, oil prices have fallen roughly 35 percent through late 2011, while natural gas prices have fallen some 68 percent. Unconventional natural gas sources such as shale gas will cap gas prices over the long term at US$6-7 per million metric BTUs (mmBTUs).
"A significant uncertainty regarding shale gas is the 'richness' of the US basins, or the relative levels of ethane and propane in the gas they generate. Gas from western wells is rich in ethane, making it more attractive as a feedstock. If this propensity continues, it could lead to new feedstock sources for US petrochemical players, increasing their competitive advantage," said Asheesh Sastry, principal with Booz & Company. "Reliable development of North America's shale basins though will have to overcome environmental challenges, such as those posed by hydraulic fracturing or 'fracking' techniques and the production of high amounts of methane gas, as well as infrastructure obstacles." The European petrochemical industry is driven by naphtha feedstocks, with a smaller percentage of natural gas. China's technically recoverable shale gas reserves are estimated at 1,275 Tcf, primarily in the Sichuan and Tarim basins, which feature the right geologic conditions. The magnitude and timing of gas production growth in Iraq is highly dependent on oil production growth. Field development rights have been awarded to international oil companies in three licensing rounds, in which the treatment of gas varies. In some cases, gas will be gathered, processed, and marketed by the Basrah Gas Company. In other cases, individual license holders are required to gather and process gas and deliver it to the Ministry of Oil. For non-associated gas fields, the licensee will develop the fields in return for a fee. In all cases, current gas reserves of 112 Tcf will likely be expanded.
Iraqi oil production is subject to a wide range of uncertainty. Consequently gas production, ethane production and ethylene capacity in Iraq are subject to similar disparities regarding growth potential. Despite this uncertainty, we believe that the country could potentially add significant ethylene capacity by 2025. While dramatic changes aren't immediate for the current capacity of the region's petrochemical producers, Middle East companies must now work harder to identify new sources of growth. Below are three strategic responses that they can take: To succeed, petrochemical players will need to diversify their business models in order to reflect different market positions and value propositions for each customer segment. Any company seeking to expand into performance or specialty chemicals will need to build up an innovation capability to protect margins on its more specialized products, along with a better understanding of the business models to serve end-use customers.
Consolidate the industry within the GCC and build scale. This is the most complex strategic option and will involve the full complement of institutional capabilities: Financial strength, partnering and integration, efficient bulk processing of basic chemicals, a strong supply chain and distribution network, and the ability to establish capital-intensive projects efficiently and in a timely manner, as well as strong innovation and a solid understanding of suppliers' and customers' business models and needs. Most important, these companies will need to be able to efficiently run Verbund sites in customers' markets in order to effectively capture synergies.
"GCC petrochemical players have some clear choices in how to respond to this competitive threat, through a number of strategic options both upstream and downstream in the value chain. However, each option requires a specific set of underlying capabilities," concluded Horncastle.