New Middle East petrochemical capacities will upset the market

Capacity tsunami set to strike

12 November 2008 20:35  [Source: ICB]

The tidal wave of Middle Eastern supply may have been slow to arrive, but it is still on its way. Now, the economic downturn means the flood will be even worse

THE INEVITABLE increase in Middle East capacity has been delayed for a long time - first because of equipment delivery delays and other resource constraints. Then, more recently, there have been suggestions that Middle East plant start-ups have been pushed back on the mistaken belief that markets would improve.

But this huge wave of capacity will be fully commissioned soon, and it will wreak more havoc on liquids-based producers who will have to shut down and could even be forced into bankruptcy or government rescue.

To put this into the context of overall numbers, ethylene capacity in the Middle East and China will account for 14.8% of worldwide installed capacity in 2008 (see chart).

Some 63% of global capacity additions in 2008-2012 are happening in the Middle East and China, raising their share of global production to 27.6%.

However, few projects beyond the current capacity boost have been announced.

"I can't see the need for any new capacity for possibly as long as the next 10-15 years. Why build anything?" says one industry source.

"Too much has been added on easy credit on the assumption that demand growth would continue at 2002-2007 levels. We are now facing an industry crisis as bad as 1980.

"The focus will instead need to be on maximizing efficiency of the companies that remain in operation. A big adjustment of existing supply has to happen, based on much lower demand growth."

This may turn out to be far too bleak an outlook and goes beyond the more moderate caution toward petrochemicals that's being displayed by the banks and other lenders (see page 26).

The extra supply will have significant implications to the way markets behave.

The Middle East plants could run at high operating rates, regardless of market conditions, because of low fixed and feedstock costs. China could also decide to maximize production because of a strategic desire to substitute imports.

Nobody is realistically expecting that petrochemical pricing will be driven by advantaged gas-based producers. The Middle East players would be committing virtual financial suicide if they were to do so, no matter how bad demand gets.

But the cost curve could still move so far to the left that the marginal producers are the well integrated oil-to-petrochemical majors. Anybody with poor refinery integration, or no refinery integration at all, could be out of the game altogether. The standalone producers - meaning those that have polymer plants but no captive ethylene or propylene supply - will be beyond hope.

Feedstock flexibility will be another key to survival. A cracker operator that can swing between naphtha and liquefied petroleum gas (LPG) feedstock, for example, might be in a stronger position. But the investments necessary to achieve this kind of flexibility will be much harder to make now than a few months ago, because of the credit crunch.

NOW FOR THE GOOD NEWS

This year was supposed to mark the big build-up in propane dehydrogenation-to-polypropylene (PDH/PP) capacity in the Middle East, but it hasn't happened.

Several plants have been delayed for technical reasons, including the 700,000 tonne/year plant from Saudi major PetroRabigh. It had been due online in the fourth quarter (Q4) this year but is now expected to start up in Q1 2009 at the earliest.

Two big Saudi Arabian cracker complexes with a great deal of associated PP, polyethylene (PE) and monoethylene glycol (MEG) capacity also look as if they have been pushed back to 2009 start-ups from this year.

Eastern Petrochemical (SHARQ) and Yanbu National Petrochemical (Yansab) - affiliates of Saudi petrochemical giant SABIC each with ethylene capacities of 1.3m tonnes/year - are again forecast be on stream some time in the first quarter.

But one project that is on track is the Saudi Ethylene and Polyethylene Co. (SEPC) 1m tonne/year cracker with downstream plants including 400,000 tonnes/year each of low density polyethylene (LDPE) and high density polyethylene (HDPE).

Propylene from the cracker, at Al-Jubail, in Saudi Arabia, will feed a 250,000 tonne/year PP expansion at Saudi Polyolefins Co. (SPC). SEPC is a joint venture (JV) between Sahara Olefins, with 24.4% equity National Industrialization (TASNEE), with 50.6% and global chemical group LyondellBasell, with a 25% stake. SPC is a JV between Tasnee and LyondellBasell.

Sahara Olefins and LyondellBasell are also due to start up 450,000 tonnes/year of PDH-based propylene and 460,000 tonnes/year of PP at Al-Jubail in the first quarter of next year under their Al-Waha Petrochemical JV.

Kuwait Olefins, the JV between US major Dow Chemical and Kuwait's Petrochemical Industries Co. and Al-Qurain Petrochemical, is due on stream in December this year. The 850,000 tonne/year cracker complex had been scheduled for start-up in August.

The final olefins and derivatives complex on the immediate horizon is Ras Laffan Olefins, the JV involving France's Total Petrochemicals, US-based Chevron Phillips and Qatar Petroleum, in Qatar. The 1.3m tonne/year cracker and downstream units are rescheduled to start up in Q1 2009. But demand could be even worse by the time product from the delayed and on-time units hits the market.

And demand has already been slashed, with the behemoth China alone expected to see zero or even negative growth in PE, PP and polyester in 2008. The danger is that the feedback effect on the real economy from the financial sector will drive consumption growth even lower. Beyond next year, even further volumes are due to hit the market.

Plastics major Borouge, a JV between Abu Dhabi National Oil Co. (Adnoc) and Austrian polyolefin producer Borealis be is scheduled to bring on stream a 1.5m tonne/year cracker and PE and PP plants in Q3 2010. Chevron Phillips and the private company Saudi International Investment Group are due to start up a 1.2m tonne/year cracker and downstream plants in Saudi Arabia in early 2011.

Commercial bids were due to be submitted for the technology provision and building of the Honam Petrochemical and Qatar Petroleum ethane/naphtha cracker complex in Qatar by the end of September this year. Start-up is due in the second half of 2011 for the South Korean/Qatari JV. But after that, things go very quiet indeed.

THE OUTLOOK

The industry source's scenario implies that even post-2012 projects backed by the sound, state-owned companies and international oil and chemical companies are at risk.

These include the giant Saudi Aramco and US-based Dow Chemical project at Ras Tanura, Saudi Arabia, and the Shell/Qatar Petroleum cracker project in Qatar. US-oil major ExxonMobil also has an ethylene project in the same country, with Total still interested in what would be its third cracker investment in Qatar.

But beyond another PDH-PP project being announced - which would be operated by SABIC subsidiary Arabian Industrial Fibers Company (Ibn Rushd) at Yanbu, Saudi Arabia - there is not a great deal more that's been announced for the Gulf Cooperation Council (GCC) region. The main reason is the well-documented ethane gas feedstock shortages and strong alternative values for the gas that is available.

There are many projects still listed for Iran - where feedstock is plentiful - but progress seems unlikely because of political problems (see page 30). Bureaucracy could also hinder investments in less-established petrochemical-producing countries, such as Egypt, which are again rich in cheap ethane.

A shift in government attitudes toward foreign investors has raised doubts over whether Algeria will become an alternative to the GCC. Total has an ethane cracker project in Algeria, which it hopes to complete within the next five years.

For firms that want to build in the GCC, the only route might be through integrating a petrochemical complex to the myriad refinery projects underway. But doubts have been raised over whether there is any advantage to using naphtha as a feedstock.


Ethylene capacities 2012 (m tonnes)

Current End 2012
Middle East/China 23.4 59.5
Rest of World 135.3 156.3
Total 158.7 215.8

Source: ICIS Training

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By: John Richardson
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