Middle East petrochemical producers will face new challenges this decade

Shifting sands

11 June 2010 00:00  [Source: ICB]

It will be a challenging decade for Middle East petrochemical companies as gas-based feedstocks dwindle and product diversification comes to the fore

Malini Hariharan/Mumbai

PETROCHEMICAL COMPANIES in the Middle East are gearing up for a new decade - one that poses an entirely different set of challenges and opportunities versus the last.

The past 10 years was all about exploiting competitively priced feedstocks to build strong manufacturing positions mainly in ethylene and its key derivatives, polyethylene (PE) and monoethylene glycol (MEG).


 Chris Eyles/Rex Features

Nearly 16m tonnes/year of ethylene capacity was brought on stream during 2000-2009 and another 3.3m tonnes/year will be added in 2010.

There continues to be strong interest in building more crackers in the Middle East but business dynamics have changed, making project planning a complex task.

On the feedstock front, gas availability has become tight in many of the countries as strong economic growth has seen demand grow faster than supply. A cut in oil production following the 2008 economic crisis has also constrained availability of associated gas, which has affected operations at some petrochemical plants.

For new projects, finding ethane has become a challenge. Available supplies have been allotted and companies have to wait for new gas processing projects to be completed for additional volumes.

In the case of Qatar, more ethane is likely to be available only after a moratorium on new gas-based projects is lifted in 2014.

Only one new cracker project, a joint venture (JV) between Qatar Petroleum and US-based ExxonMobil, has been confirmed for start-up in 2015, while UK-headquartered Shell Chemicals and France's Total Petrochemicals are looking at various routes to secure approvals for their proposed cracker projects in the country.

Ben van Beurden, executive vice president of Shell Chemicals, said in May that the company was looking to integrate the proposed cracker with Shell's Pearl gas-to-liquids (GTL) facility, which is due to start next year.

"The situation on feedstock supply is dynamic and I think we have submitted a very good proposition to Qatar. I think they are impressed with our proposal and I am confident our day will come," he said.

Total Petrochemicals has also submitted a proposal to the Qatari government, says a source close to the company.

In the meantime, the company and its partners in Qatar-based Ras Laffan Olefins are studying an expansion of their newly commissioned cracker, initially utilizing around 1m tonnes/year of ethane that will become available from the Pearl GTL venture. But the study will also examine the feasibility of using propane for the expansion, says the source.

Another concern for companies planning new crackers in the region is the cost of gas.

Saudi Arabia's ethane price ($0.75/MMBtu) and the discounts offered on propane and butane supplies are widely expected to be revised next year.

Iranian producers, too, are bracing themselves for a new gas price regime and negotiations with the government have already started. The impetus here is the rapid privatization of the petrochemical industry (see related article) and the government's desire to bring prices in line with international levels.

An Iranian industry source disclosed recently that the government is considering linking the ethane price to its heat value or relating it to propane and butane, which are widely traded in the international market.

Across the region, the cost of new gas allocations is also likely to be higher, as many new fields that are currently being developed offer sour gas with high sulfur content.

"Cost of extraction and the cost of new facilities will be reflected in the price [of ethane]; the cost of cleaning is high and the price should be more than $4/MMBtu," says the source close to Total.

The complex feedstock scene in the region is reflected in the feedstock slate of some recently commissioned crackers, which use a mix of ethane, propane and butane. This trend is likely to continue, with naphtha also being added to the feed mix.

For instance, the second phase of Petro Rabigh, the joint venture between Saudi Aramco and Japan's Sumitomo Chemical, uses 30m standard cubic feet of ethane and 3m tonnes/year of naphtha to produce olefins, aromatics and a wide range of derivatives.

Middle East governments have been pushing companies to expand their derivatives slate to capture the full petrochemical value chain. And a wider feedstock slate is helping project planners achieve this objective.

"Most countries are looking for a broader spectrum of products. If you want to be attractive to a country, you have to think of a [wide] product portfolio. Some products need a mix of cracker feedstocks and having them can make a project economically attractive as pure naphtha cracking in the Middle East is not economic," explains the source close to Total.

Total is exploring production of more petrochemicals downstream of its JV refinery project with state oil company Saudi Aramco at Al-Jubail, Saudi Arabia. The project, due to be commissioned in 2013, already includes paraxylene (PX), benzene and propylene.

It is also likely that the refinery will supply feedstocks to a petrochemical project being developed by Aramco and us major Dow Chemical. This latter mega project had been planned for Ras Tanura but, in a bid to bring down costs, the two companies now plan to relocate it to Al-Jubail.

Countries such as Saudi Arabia and Abu Dhabi have also been trying to develop a local plastics processing industry to utilize polymers that are currently exported (see related article). Conversion zones have been identified near major petrochemical production centers and a variety of fiscal incentives are being offered.

However, with not too many processors queuing up to start in the near future, export volumes are set to grow.

Middle East consumption of polyolefins currently accounts for less than 20% of total regional capacity. Exports, especially to China, will remain key to the fortunes of most companies.

The significance of the Chinese market has also prompted Middle East companies to leverage their oil connections to secure a stake in cracker projects in China.

Saudi Arabia's SABIC has successfully partnered with China's Sinopec to commission a cracker and derivatives venture at Tianjin. Kuwait Petroleum Corp. and Qatar Petroleum are also pursuing JV cracker projects in China.

Feedstocks and markets are not the only challenges confronting Middle East players. The last few years have shown that executing projects on schedule and keeping them within budget is not easy.

"The pressure [on services] caused some vendors to produce more than their capacity, at the expense of quality"
Jamal Malaikah, president and chief operating officer, National Petrochemical Industrial 
A majority of the projects commissioned during 2008-2009 have seen delays ranging from a few months to a year. The heaviest delays were in Iran as US sanctions made it difficult for Iranian companies to tap international expertise to execute their projects.

But even outside Iran, companies have experienced difficulties in starting up and stabilizing operations at the new plants. There have been reports of problems in quality of material and design issues.

Jamal Malaikah, president and chief operating officer of Saudi Arabia's National Petrochemical Industrial pointed out in April that the quality of construction materials may have deteriorated as a result of mass production necessitated during the plant construction boom in the past five years.

"There was a lot of pressure on services, EPC [engineering, procurement and construction] contractors, on vendors, on engineering manpower. The pressure caused some vendors to produce more than their capacity, at the expense of quality," he said.

Availability of skilled manpower has been another issue that has plagued projects. And a related problem has been juggling different cultures and work ethics as Middle East companies increasingly rely on a mix of local and global talent.

Given this diverse set of challenges, it is not surprising to note that the region does not have too many cracker projects in the pipeline for the next five years. With projects getting more complex and costly, companies are being forced to go slow.

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By: Malini Hariharan
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