INSIGHT: Mid East petchems look beyond cheap gas

15 December 2006 16:09  [Source: ICIS news]

By John Richardson

DUBAI (ICIS news)--Just imagine gas prices at more than $4/m Btu in the Middle East against an equivalent cost for coal-to-olefins production in China at below $1/m Btu.

And imagine if the Middle East is producing only low value-added commodity grade petrochemicals, mainly for export to a China market that has become virtually self-sufficient.

Now add to this mix chronically high logistics, labour, raw material and contractor costs that make it prohibitively expensive to build and operate plants in the Middle East.

Far fetched? Maybe, but the formation of the Gulf Petrochemicals and Chemicals Association (GPCA) early this year was partly the result of a recognition that the Middle East’s existing competitive advantage may not last forever.

The region might be sitting on the largest pool of proven natural gas reserves in the world. But, the rate of growth in petrochemical capacity is such that ethane supply is likely to remain tight for the foreseeable future, leading to a marginal increase in the cost of the gas after 2012.

Elsewhere in the region there is a keener awareness of the value of natural gas reserves for uses other than petrochemicals.

Another long term problem is logistics. There is the perennial issue of the lack of backhaul cargoes to fill container ships travelling to the Middle East because of the mismatch between export and import markets.

Concerns are also being expressed over the ability of the region’s ports to handle ever-larger volumes of liquid chemicals and the age of the tanker fleet: some of the chemical vessels that work the Middle East trade routes are nearing retirement.

A much bigger issue is labour supply. Finding enough chemical engineers and labourers to build and operate petrochemical plants is a global issue, but the Middle East is finding it more difficult to attract workers than any other region.

Innovative solutions at government levels are needed to free up immigration procedures and to address often unfounded concerns over lifestyle issues, say industry observers.

The cost of building projects has also gone through the roof of late, the result of rising labour, raw material and contractor costs. But whether this is just a cyclical upturn or a long term trend remains to be seen.

Companies also have to play a dual role – maintaining returns to shareholders and satisfying governments that want an increasingly diversified petrochemical production slate.

The cost advantages of olefin derivative production are likely to remain strong for at least the next ten years.

But will producers be persuaded into less-advantaged highly commoditised aromatics production by governments that control feedstock allocations?

Hence the formation of the GPCA to address logistics issues, to promote research and development (R&D), and to encourage the right environmental and regulatory practices.

Sharing R&D resources will help companies diversify, thereby satisfying governments, and develop home-grown technologies and processes that add value.

“It’s very easy to be complacent, to think that the gas advantage will last forever but it won’t,” says a chief executive officer from the region.

“We need to be more innovative, more customer-focused, and move into areas such as plastics compounding.”

If this innovation doesn’t take place, then China might end up being more competitive in 10-20 years.

Granted, the coal to synthesis gas to methanol to olefins and then polymers process is not commercially proven. The process also requires large amounts of water, a scarce resource in western China where most of the projects are located.

There could also be high logistics costs in moving the finished product east, to where the big consumption markets are located.

But even if China doesn’t emerge as the biggest competitive threat, it could be another country or region as the search for alternatives to building in the Middle East is stepped up.

Could Kazakhstan emerge is the next big petrochemical story, or perhaps Algeria? Both countries have substantial gas and oil reserves and have seen several major project announcements of late.

And so, as the delegates gather for the First International GPCA Forum, which takes place in Dubai this weekend, it will be interesting to watch the debate on these longer term challenges.

Or will that debate be stifled by the complacency that the chief executive warned about?

By: John Richardson
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