20 October 2008 00:00 [Source: ICB]
Petrochemical and polymer players worry about the "mountain" of Middle East capacity due on stream over the next two to three years, but what comes after may prove more influential.
The conventional wisdom has been that the region will become the supplier of low-cost olefin-based products and polymers to the world. Some also believe that a move to a broader feedstock slate will see regional producers gaining ground in other important petrochemical product markets.
That, however, was yesterday's view. The global financial crisis will rip through project plans and shift company strategies. A worldwide recession will not simply change the industry landscape, but the outlook, too.
To be successful in petrochemicals a company needs access to feedstocks, energy, technology, markets and capital. Push the envelope too far on any one of these and a project fails.
The steep increase in the cost of engineering, construction and commodities has delayed some projects, but so much new capacity is coming on stream that the next two years will be hard.
Yet other drivers make the outlook for projects planned to start up in the early years of the next decade decidedly uncertain.
Significant shifts in the global financial system will alter project profiles and push some plans to the edge. Shifting oil prices will challenge the viability of liquids-based projects. Government programs will also be reconsidered. Governments could ponder just how important a more broadly based chemical sector is to a developing, sustainable 21st-century economy.
Power and other infrastructure projects rapidly become more important than chemicals.
Until now, chemical production in the Middle East has been based on feedstock advantage, but low-cost opportunities have been dwindling. Finding them is likely to become more difficult, driving companies to take a more global view.
The petrochemical map will change, but possibly not in the way that many now think.
The faster-growing markets for petrochemicals are Asia, Latin America, and Central and Eastern Europe. If feedstock is available, the projects closer to market look increasingly interesting: methanol-to-olefins in China and the Caribbean, and gas plays in Central Asia, for example.
It is not surprising that global majors ExxonMobil and Shell's next big olefins projects could be in China. Middle East options have shifted to the back burner. Over the longer term, the energy majors will seek to take chemicals and refined products to market. Downstream integration is the key.
The search for feedstocks has widened, and as fields are developed, new opportunities arise. Russian energy giant Gazprom has offered an intriguing picture of developing gas-to-chemical operations in the country's Far East. The firm could add value to gas produced in these regions and push polyolefins into a widening Chinese market to gain competitive advantage.
Those wanting to advance major petrochemical projects over the next few years will need stable balance sheets or deep pockets - or both. The fundamentally disadvantaged will be exposed.
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