INSIGHT: Mid East still has cracker site advantage

15 August 2006 15:31  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Petrochemical project proponents who have yet to secure gas supply from Saudi Arabia’s Ministry of Petroleum (MoP) must be on tenterhooks, as industry sources indicate that there are five or six applicants for only two parcels of feedstock available in the current round of allocations.

The nail biting is expected to be over in September, when ministry officials return from their extended summer holidays.

The number of applications is further evidence of the strong interest in yet more investments in the Saudi petrochemical sector, with no signs of a let-up in project activity in Qatar, Oman, Abu Dhabi and Kuwait. It is only in Iran where the pace of investment appears to have slowed purely for political reasons.

 

But is all this investment wise? In the long term, the answer surely has to be yes, as the Middle East feedstock advantage is hardly going to evaporate.

 

Gas is in short supply in Saudi, hence the availability of only two further parcels of gas in this application round. There are also plans to increase the cost of ethane in 2012 because of the short supply.

 

It could well be argued that crude oil pricing cannot stay at current levels forever without the world economy kicking back through a sharp decline in demand. Inflationary pressure and rising interest rates already indicate the potential for slower global consumption growth.

 

But even when the price of ethane rises to $1.25/mmBTU in Saudi Arabia in 2012 from its current 0.75cents/mmBTU, the cost of gas is still likely to be cheaper than anywhere else.

 

And it seems almost impossible for crude to again fall below $20/bbl, as a result of long-term supply constraints.

 

This means a huge long-term advantage for Saudi producers and those elsewhere in the Middle East, where gas prices are also exceptionally competitive.

 

But what about in the short term? Margins will inevitably plummet when oversupply bites in 2008-10.

 

Any Middle East project will very probably make money even in the worst market conditions.

 

Plus, many project proponents have deep pockets from operating existing plants during the most sustained petrochemical upswing of all time.

 

“We’ve had it good for the last three to five years, so most big companies will have a sizeable buffer to see them through the down cycle. Even with the huge amounts of investment, companies may well be able to ride out the forthcoming storm because they have been using a lot of cash and not debt,” said a senior executive with an oil-to-petrochemicals major.

 

It is hardly a surprise, therefore, that there is so much interest in new capacity, with six firm cracker projects in Saudi, three or four in Qatar and many more elsewhere in the Middle East.

 

But if you want to join this club of high earners, membership qualifications in Saudi Arabia are becoming increasingly stringent.

 

“Don’t bother going to the MoP with a project that only contains plans for downstream monoethylene glycol (MEG), polyethylene (PE) and polypropylene (PP) plants,” said one senior executive with a private Saudi company.

 

He added that proponents such as Kayan Petrochemical and Sipchem have respective plans to produce polycarbonate (PC) and acrylonitrile (ACN).

 

In addition, as long as the contractors remain busy and labour and raw-material markets stay tight, a project is going to cost around double what it would have cost two to three years ago. However, there remains no shortage of banks willing to lend money to the sector.

 

It might be a tougher club to join, but it probably makes more sense to sign up for membership than build a naphtha cracker anywhere in Asia, even in China.

By: John Richardson
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