10 August 2010 17:27 [Source: ICIS news]
By John Richardson
Now we are into a whole different world of economics where the word marginal is being muttered for the first time as feedstock slates become heavier and derivatives capacity more complicated.
The cause of this staggering turnaround is the well-publicised shortage of ethane in the Kingdom.
But what might not be as well-known are the complex and multiple causes of this shortage.
Short-term implications are disruptions to existing production. There is a risk of drawing hasty conclusions about the long-term consequences of this shift of competitive advantage, particularly as the ethane shortage has taken place in parallel with the shale-gas boom.
The risk comes from multiple unknowns that could either restrict further investment in
“Ethane is tight in
OPEC has reduced Saudi Arabia’s oil-production quota in order to help manage weaker global demand for crude, resulting in the country’s output being pegged at around 8.4m bbl/day.
However, it needs to be producing 10m bbl/day (it is capable of going up to 12m bbl/day) to provide enough ethane for crackers to run at 100%.
“Petrochemical producers can seek a top-up from non-associated gas-field operators,” added Armstrong, managing director of DeWitt, speaking at the company’s recent Asian Olefins Forum in
“But the cost of extraction from non-associated fields may be as much as $2/mBTU with the price for ethane fixed at around 75 cents/MBTU - so where’s the motivation for these gas producers to supply petrochemicals?”
Crackers are, therefore, being forced to run below their final capacity capabilities, said DeWitt’s Joe Duffy, who was speaking at the same event.
“So a cracker that, say, was originally designed to be 1m tonne/year will only receive feedstock to produce that amount, even though it can actually produce substantially more than that,” he added.
Such is the squeeze on ethane availability that ethylene exports from the Kingdom are being constrained.
“Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. In February it exported 5,000 tonnes and nothing since then because of feedstock shortages,” said Duffy, vice-president for ethylene, polymers and derivatives in Europe, the Middle East and
“Essentially, 500,000 tonnes/year of exports have gone to zero.”
This is just one of many factors that make the outlook for merchant ethylene exports from the
“Shale gas is a huge game changer, the biggest in my career,” added Armstrong, referring to the growth in this formerly non-conventional type of natural-gas production.
This has helped reduce
“In the gas industry they say that shale gas is so rich in NGLS (natural-gas liquids), in one particular area you can practically pour it.”
So could the boost to US competitiveness lead to the country expanding cracker and derivatives capacity, the very idea of which would have seemed ludicrous three years ago?
“Not if this leads to big volumes of exports. In my view, the lower feedstock prices will make the
“The danger is that exports can reduce the returns from your home market if they are priced at levels that are too low.”
But numerous shale-gas projects are being pursued throughout the world, including in
An alternative to ethane that’s already being used in a big way in the Kingdom is liquefied petroleum gas (LPG). The wave of crackers being commissioned at the moment runs on up to 40% of LPG.
The future of the domestic pricing formula for LPG, which enjoys a nominal 29% discount off prevailing CFR Japan naphtha prices, is a major concern here, though.
There might also be the risk that if Indian antidumping duties against polypropylene (PP) imports from
The alternative already being looked at in
“I did an internal rate of return (IRR) comparison for a straight ethane cracker in Saudi versus a pure naphtha cracker - and an ethane cracker had an IRR of 30% and a naphtha cracker around 2%.”
“Right now, though, the government’s view seems to be that petrochemicals have already received a great deal support and so the focus has switched to developing other areas of the economy,” said a second industry observer.
“But this could easily change, making the financing of increasingly more marginal projects easier.”
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