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Will the petrochemical industry in the Gulf rise to face the challenge of competition from US shale gas

Will the petrochemical industry in the Gulf rise to face the challenge of competition from US shale gas

In 2000, the Middle East and Africa accounted for 8% of the global installed petrochemical capacity. The Mideast, notably the Gulf Cooperation Council (GCC) states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, have for decades enjoyed a massive competitive advantage in petrochemicals. The capacity share of Middle East and Africa is expected to increase to 21% in 2015, and it is set to become the second highest region in terms of capacity after Asia-Pacific. The Middle East produces almost 13% of the world’s primary petrochemicals production and grew capacity by 5.5% in 2012 to reach 127.8 mln tons. In contrast, the global petrochemicals industry grew by a mere 2.6%. Saudi Arabia led the industry in the region, accounting for 86.4 mln tpa, while Qatar produced 16.8 mln tpa and Oman 9.5 mln tpa, making up 88% production of the Gulf petrochemicals industry. The UAE makes up roughly 5% of the regional capacity with 6.1 mln tpa. Though the region’s petrochemical industry is growing, and has seen robust growth over the past two decades, it is facing fresh new challenges with rising feedstock costs and increased competition.

At the onset of the development of the region’s petrochemical industry, access to cheap feedstock fuelled growth. Cheap raw materials, especially associated gas from oil production, and a favorable geographical location with accessibility and geographic proximity to both Asia and Europe, propelled the region to the leading producer and exporter of basic petrochemicals and polymers. The cheap feedstock advantage is slowly eroding, and will continue to erode in the medium term as the opportunity cost of natural gas as the major domestic feedstock rises and ethane reserves decrease. Recent constraints on feedstock supplies in the Mideast coupled with the shale gas revolution in the United States and an upsurge in coal-to-chemicals investments in China are presenting challenges. Growing industrialization in the region has lead to increased urbanization, resulting in rising demand for power. Demand continues to rise, driven by power generation, water desalination and petrochemical projects, as well as captive consumption in LNG and gas-to-liquids production, as per the International Energy Agency (Paris). Rising power consumption in the region means that natural gas is fast becoming a scarce commodity despite huge reserves. Natural gas consumption in the Middle East region has grown from 86 bln cubic metres by 1990 to 376 bcm by 2010, and is set to reach 485 bcm by the end of the decade. Though production is set to reach 600 bcm by that time, much of the natural gas is set for exports, as per gulfbusiness.com. In some cases, low regulated gas prices have resulted in physical shortages of gas, as demand has outstripped local supply capacity. The sizeable shortfall in natural gas in the coming years will result in low growth for ethane. The supply of ethane is not expected to grow significantly and most of the anticipated supply is already committed to existing and new projects. The last allocation of ethane gas for a grassroots petrochemicals project in Saudi Arabia was in the middle of the last decade. The US$20 bln Sadara joint venture between Saudi Aramco and Dow Chemical will use liquid feedstocks as well as gas to feed its cracker at Al Jubail. Liquid feedstocks do not offer the same cost advantages. The situation is similar in other GCC states. The Borouge 3 project took up the last of the gas availability in the United Arab Emirates, as did Equate II in Kuwait. Another major threat is shale gas production in North America, which has revived the US petrochemicals sector. GCC players will need to work on multiple fronts to ensure they maintain their lead in the sector. Consulting firm Booz & Co. (Dubai) says that GCC petrochemical players have three main options to secure future growth: remain upstream and participate in shale gas ventures in North America, move downstream into performance or specialty chemicals, or become consolidators of the industry within the GCC to build greater scale. Mideast producers are beginning to consolidate. The US produced nearly 30% of the world’s petrochemicals in the 1980s, but that market share shrunk to 10% by 2010. With access to new cheap natural gas, it is predicted that the United States will be 99% self-sufficient in energy by 2030. USA has already overtaken Russia as the world’s biggest gas producer. According to the World Energy Outlook from the International Energy Agency in 2012, within two or three years the United States will also have surpassed Saudi Arabia in oil production.

With shale gas development, USA moves towards potential self-sufficiency and towards a gas-exporting nation, resulting in loss of market for the Middle Eastern. As a result, diversification - already well under way in some GCC states - investments in new resource-rich countries, and regional and overseas acquisitions are the way forward, as per analysts in IHS Chemicals. Most analysts believe that Mideast producers will retain a cost advantage in certain niches despite the growth in US competitiveness. The pure ethane facilities in MENA are likely to be cost-advantaged relative to US facilities, but the mixed-feed facilities will not.
Developments are also underway to integrate Saudi Arabia’s refineries with petrochemicals production at Jazan, in the southwest of the country, Yanbu, on the Red Sea coast; and Ras Tanura, in the country’s Eastern Province. The initiatives are led by Aramco but also include Sabic and Farabi Petrochemicals (Al Jubail). Aramco and Total, partners in the Satorp refinery and aromatics complex at Al Jubail, also have tentative plans to expand the JV after the first phase comes onstream at the end of this year. There are plans to integrate the Aramco Sinopec Refining venture further into chemicals production. Aramco, under its Accelerated Transformation Program (ATP), aims to transform itself into the world’s leading integrated energy and chemicals company by 2020. ATP foresees Aramco’s refining capacity, including its share of JV’s, doubling, to 8 mln bpd. The company’s current chemical operations include Petro Rabigh, where the planned doubling of capacity and an expansion into specialty chemicals will involve a US$7 bln investment in the next three years; the Satorp JV; and Sadara. Aramco plans to invest heavily to expand its aromatics capacity. The company aims, by 2017–18, to be among the top-three aromatics players worldwide. The company and its partnerships, including Petro Rabigh, S-Oil, and the Fujian JV, will-over the next five years-supply 4 mln tpa of paraxylene to world markets, which will make Aramco one of the largest paraxylene producers in the world by 2018. Sadara will operate the world’s largest single-phase integrated petrochemical facility when it comes onstream, in 2016. Sadara’s Al Jubail complex will include 26 process units making amines, glycol ethers, isocyanates, polyether polyols, polyethylene (PE), polyolefin elastomers and propylene glycol.

Sabic aims to become more integrated, more differentiated, and more global under its new Sabic 2025 strategy. Sabic’s US$3.4 bln investment with ExxonMobil Chemical to build a rubber and elastomers complex is Sabic’s largest investment to date. Sabic’s performance chemicals unit is also planning to build a fully integrated polyurethanes (PUs) complex, which would mark the company’s entry into that market. Sabic signed an agreement with Shell Chemicals to expand their Sadaf JV at Al Jubail through the addition of propylene oxide–styrene monomer and polyol plants. Saudi Japanese Acrylonitrile Co. (Shrouq), a Sabic JV with Asahi Kasei and Mitsubishi Corp. is building a 220,000 tpa acrylonitrile plant at the Ibn Zahr facility at Al Jubail. The plant, scheduled to be onstream in 2016, will supply a planned 3,000 tpa carbon fiber plant at Sabic’s Ibn Rushd facility at Yanbu. Sabic Innovative Plastics will use some of the acrylonitrile in a 140,000 tpa acrylonitrile butadiene styrene resin plant at the Petrokemya facility at Al Jubail.  Sabic and Mitsubishi Rayon are building 250,000 tpa methyl methacrylate (MMA) and 40,000 tpa polymethyl methacrylate plants at the Ibn Sina complex at Al Jubail. Ibn Sina, owned 50% by Sabic and 25% each by Celanese and an affiliate of Duke Energy, is building a 50,000 tpa polyacetal plant at Al Jubail, scheduled to be completed at the end of 2016. Sabic has significant operations in Europe following the company’s acquisition of the petrochemical operations of DSM in the Netherlands and of Huntsman in the United Kingdom. Sabic, after restructuring some of these operations to make them more competitive, says it is studying plans to “review the potential of the UK Wilton cracker to crack ethane.”

Qatar is planning to spend about US$25 bln by 2020 to expand capacity in its chemical and petrochemical industries. Qatar plans two mega petrochemical projects at Ras Laffan. The first, Al Karaana, a JV with Qatar Petroleum and Shell, is slated to be onstream in 2017. The second, Al Sejeel, a JV between QP and Qatar Petrochemical Co., is expected online in 2018. The JVs form part of Qatar’s plans to raise petrochemicals output to 23 mln tpa by 2020, more than doubling current production. Al Karaana will comprise a world-scale steam cracker; a 1.5 mln tpa ethylene glycol plant; a 300,000 tpa linear alpha-olefin unit; and a 250,000 tpa oxo alcohols unit. Al Sejeel will produce 2.2 mln tpa of polymers, including PE and polypropylene (PP). Upstream units will include a world-scale ethylene plant and a butadiene facility. One will be designed to produce 550,000 tpa of linear low-density PE (LLDPE), and the others will each produce 520,000 tpa of high-density PE (HDPE). Dow has licensed the PP technology. QP is also carrying out feasibility studies for propylene-based and benzene-derivative complexes at Ras Laffan, adjacent to existing liquefied petroleum gas facilities. Plans include a propane dehydrogenation plant producing 650,000–750,000 tpa of propylene; and an aromatics complex, which would produce 1 million tpa of paraxylene; and 500,000–700,000 tpa of benzene.
At Ruwais, Abu Dhabi, the Borouge 3 complex is nearing completion, consisting of a third cracker and 2.5 mln tpa of additional polyolefins capacity by 2014. Equate (Safat, Kuwait) is also planning to grow its operations. The company has completed a feasibility study to debottleneck its complex at Al Shuayba, which may lead to the addition of an ethylene furnace.  Oman Refineries and Petroleum Industries Co. is planning a polyolefins project integrated with the Sohar, Oman, refinery, which is currently being expanded. Completion of the project is scheduled for 2018. The project has six components: a gas extraction plant at Fahud; a 300-kilometer gas pipeline between Fahud and Sohar Port; a cracker based on ethane, propane, butane, and condensate feedstocks; and two PE plants, one producing 420,000 tpa of HDPE and the other making 420,000 tpa of LLDPE. An existing 200,000 tpa PP plant, also a part of Orpic, will be expanded by 215,000 tpa. About 60% of the feedstock for the polyolefins project would come from the Sohar refinery, and the remaining 40% would be natural gas liquids extracted from gas at Fahud. The project would increase Oman’s polyolefins capacity from 200,000 tpa to 1.4 mln tpa. Oman is also planning to build purified terephthalic acid (PTA) and Polyethylene terephthalate (PET) resin plants at Sohar. OOC and IPIC announced last year the formation of a 50-50 JV to develop a refinery and petrochemical complex at Duqm, on the east coast of Oman. Duqm Refinery and Petrochemical Industries expects to begin production in 2017. The refinery, the first phase of the project, will have a capacity of 230,000 bpd, with petrochemicals being produced in the second phase.

The global petrochemicals industry is at cross roads, and players from the Gulf are moving quickly and smartly to ensure they do not lose their edge in the industry.

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