Middle East expansions continue at breakneck pace, but a gas shortage could derail investment beyond 2012

Running out of steam

03 December 2007 00:00  [Source: ICB]


Middle East project activity continues at breakneck pace, but could a shortage of natural gas stop expansion in its tracks?

John Richardson/Singapore

THE STAGGERING pace of project activity in the Middle East shows no sign of abating, at least until 2012 when all the current wave of cracker projects are due to be onstream.

But what will be interesting to observe is exactly how many crackers are built after 2012 because of tight feedstock supply and issues surrounding how gas will be valued in the future.

More immediately, the big worry is what impact this current wave of crackers will have on supply and demand, particularly as many of the start-ups will coincide with a big ramp-up in capacity in China and elsewhere.

The ICIS insight Asia/International eChem Middle East Report estimates that 9.55m tonnes/year of ethylene capacity is due onstream globally in 2008 alone, a large slice of which is in the Middle East.

Further delays to the projects already under construction might occur as a result of tight contractor and labor markets and the usual problems in starting up any new plant.

But there will still be sufficient start-ups to raise global ethylene capacity to 150m tonnes/year in 2010 - up from 109.5m tonnes in 2006, according to UK consultancy Nexant ChemSystems. This could reduce global operating rates to as low as 85%.


Saudi Arabia is dominating this current wave of investment as a result of huge oil revenues and a strong corporate and political commitment to expanding capacity.

In ethylene alone, 7.71m tonnes/year of capacity is confirmed for start-up by 2012, with a further 2.7m tonnes/year possible.

Confirmed projects include those by YanSab, Sharq, PetroRabigh and Saudi Ethylene and Polyethylene Co.

The 1.5m tonne/year Dow Chemical/Saudi Aramco project could also be on stream by that year - although final investment decisions have not been made. As a result, commissioning might be a year later.

SABIC is diversifying its product slate. For example, the 1.35m tonne/year Saudi Kayan Petrochemical project, due onstream in 2010, includes downstream specialty chemical production and the phenol through to polycarbonate (PC).

And what's also worth noting about the building work taking place in Saudi Arabia at the moment is the amount of new polypropylene (PP) capacity.

This is the result of a strategic drive to diversify away from the production of just ethylene derivatives, and a shortage of ethane.

Out of the current wave of crackers, only PetroRabigh is receiving 100% ethane feedstock. The remainder are mixed feed - meaning ethane, propane and butane - resulting in PP plants connected to these crackers.

There are also two propane dehydrogenation-to-PP plants due to start up over the next two years: Advanced Polypropylene in the first quarter of 2008 and Al-Waha Petrochemical in the first quarter of 2009.

Middle East PP additions will take the region's share of global capacity to 15% by 2011 from only 6% last year. In 2006, capacity totaled 3m tonnes/year.

Other big additions include 800,000 tonnes/year by Borouge in Abu Dhabi, due onstream in 2010. This will be fed by the Middle East's first metathesis unit.

Asian naphtha cracker operators have long seen PP as a means of differentiating themselves because the Middle East, up until now, has been mainly an ethane and therefore an ethylene-based industry.

But from 2008, the global PP market will be under pressure from Middle East supply that will be both highly competitive and very marketable, because the best of the Western technologies are being used.


The Kingdom's nearest rival for additional ethylene volumes until 2012 is Qatar, where only 2.37m tonnes/year of capacity is likely to be commissioned.

The 1.3m tonne/year Qatofin/Q-Chem project is due for start-up in the first quarter of 2009.

And the Qatar Petroleum/Honam Petrochemical project, which has a capacity of 870,000 tonnes/year, is scheduled to come onstream in the second half of 2011.

Equate, the Kuwaiti and Dow Chemical joint ­venture (JV), will add 850,000 tonnes/year of capacity in Kuwait in the second half of 2008.

And Borouge, the JV between Borealis and ADNOC, will add a 1.5m tonne/year cracker in Abu Dhabi that will also include a downstream metathesis unit and the PP plant already mentioned.

The damage to global markets at a time of increasingly certain global growth could have been a great deal worse: Iran's Olefins Nos. 10, 11 and 12 projects were originally scheduled to have been onstream by 2008 - a total of 4.8m tonnes/year of ethylene capacity.

But there are now doubts over whether these projects will proceed at all, because of the political environment.

Still, though, there is enough olefins and derivatives capacity being added to cause a sharp drop in operating rates.

Our calculation of 9.55m tonnes of extra ethylene capacity in 2008 (see table) is based on the assumption that the Jam Petrochemical and Ayra Sasol crackers in Iran (Olefins Nos. 9 and 10) will not be in commercial production until next year. Both are currently being started up.

We've also assumed that production at Marun Petrochemical (Iran's Olefins No. 7) will not be stabilized until next year, so this plant has also been listed as a 2008 start-up.


Consultants estimate that global ethylene consumption will total anywhere between 114m-120m tonnes this year, with growth for 2008 forecast at 4-5%.

This would result in an oversupply of 3.55m tonnes in 2008 if the market totals 120m tonnes this year and growth next year is 5%.

Annualized capacity doesn't, of course, mean production. But the signs are that most of next year's crackers are on schedule.

Oversupply could well be the result with markets lengthening even further in ­subsequent years. The current betting is that the bottom of the cycle will arrive in 2010-2011.


Now for the good news for anyone outside the Middle East: the Saudi Arabian gas shortage could make it harder for projects to be realized.

Mohamed al-Mady, SABIC's CEO, said late last year that ethane would be tight "in the long term."

This is a result of new oil production capacity failing to match the growth in demand for associated gas from petrochemicals. There has also been no further news on the long-stalled Core Joint Ventures in the Empty Quarter region, which would make available big quantities of nonassociated gas.

The two INEOS/Saudi partner crackers - totaling 2.4m tonnes/year of capacity - have been shelved because of a failure to win feedstock allocation.

The Aramco/Dow project seems likely to be allocated feedstock, if this hasn't happened already. The same applies to SABIC's 1.3m tonne/year PetroKemya 4 project, due onstream in 2012.

But there have been no announcements beyond these projects.

In Qatar, a moratorium on new gas-based projects across all industries could limit the number of crackers built.

The moratorium was put in place because of concerns over the stability of the North Shelf gas field (the Iranians call it the South Pars field). The field has huge reserves, but the concern is over the effect that the rate of extraction will have on its stability.

Opinions vary over how long the moratorium will stay in place, with some suggesting it could be removed by the end of this year. Others argue that it could remain until as late as 2012 and would therefore severely delay any project where gas hasn't already been allocated.

The other issue is the alternative value of liquefied natural gas (LNG) production.

Future cracker operators might have to pay more for their feedstock to compensate Qatar for extracting ethane from LNG.

"The large LNG projects in Qatar don't include ethane recovery - it is left in the gas to satisfy heat-value specifications in countries such as Japan," says an industry source. "If you remove the ethane, you have to replace it with propane to meet these specifications."

Whether the gas supply issue will affect the ExxonMobil and Shell Chemicals projects remains unclear.

Mike Dolan, president of ExxonMobil Chemicals, told ICIS news in an interview in November that studies into the US major's 1.3m tonne/year cracker project scheduled for 2012 were taking longer than expected because of tight construction markets.

Shell Chemicals has plans for a 1.3m tonne/year cracker which is due for commissioning in 2011-2012. Commenting on its status, a Shell spokesman said: "Our discussions with Qatar Petroleum are ongoing. We still have great interest in a project where we can leverage Shell's technologies, project management and marketing expertise, with a partner like Qatar Petroleum that can provide an attractive feedstock position."

Gas supply is also an issue in Oman. The Dow Chemical/Oman Petrochemical Industries 850,000 tonne/year project has been delayed from 2009 until 2011 or later because of concerns over feedstock supply and rising capital costs.


But don't bet on the Middle East failing to find solutions to gas supply problems, whether through pipelines or making better use of the much more abundant methane. Where there is political will and extremely wealthy and successful companies, there will be a way.

Qatar has the world's third-biggest natural gas reserves. Once the moratorium is lifted, therefore, the potential to move gas around the region from Qatar by pipeline is enormous.

The Dolphin pipeline, the first stage of which is from Qatar to the United Arab Emirates, is already under construction, with a second phase linking Qatar to Oman planned. Further links could be announced.

Methanol-to-olefins (MTO) projects are also an obvious next step to take advantage of the plentiful methane supplies. The MTO projects already being built in China might serve as commercial proving grounds.

This could all add up to lots of new cracker projects being announced for start-up after 2012.

Ethylene capacity due onstream in 2008

Company Country Location Capacity (tonnes/year) Onstream date
Haldia Petrochemicals India West Bengal (+)150k, (T) 670k Q2 2008
Jam Petrochemical Iran Assaluyeh 1.3m Q4 2007
SEPC Saudi Arabia Al-Jubail 1m Q1 2008
Kuwait Olefins Kuwait Shuaiba 850k H2 2008
Eastern Petrochemical Saudi Arabia Al-Jubail 1.3m Q3 2008
Jubail Chevron Phillips Saudi Arabia Al-Jubail 300k Q1 2008
Yanbu National Petrochemical Saudi Arabia Yanbu 1.3m Q2 2008
Lotte Daesan Petrochemical South Korea Daesan (+)350k, (T) 1m May 2008
Arya Sasol Iran Assaluyeh 1m Q4 2007

ICIS insight Asia/International e-Chem produce a quarterly report on the Middle East, which includes value-added analysis and constantly updated Excel spreadsheets of projects. For more details, contact Roland Kester Cher at rolandkester.cher@icis.com

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