INSIGHT: Middle East builds on shifting sands

23 August 2010 13:41  [Source: ICIS news]

By Malini Hariharan

MUMBAI (ICIS)--Good things do not last forever and nowhere is this more evident than in the Middle East where feedstock issues have been clouding prospects for new cracker projects and affecting operations at existing plants.

“We are trying to figure out at what price to offer gas or naphtha to ensure a project is viable and also give best returns for the resource to the country,” said a source from a state-owned upstream company in the region.

Ethane is no longer available in required volumes and the cost of extracting the little that is available is much higher than current prices, which are in the $0.75-3.50/MMBtu range across the region. As for propane, butane and naphtha, the source posed the question of whether they should be sold in the international market or provided to local projects at subsidised prices.

Parts of the Middle East are sitting on huge reserves of non-associated gas. But many of these reserves have high sulphur content and treating the gas could push up costs to more than $4/MMBtu.

Iran, with the world’s second-largest reserves, has for a long time had the potential to be a game changer, but its problems have multiplied after the recent round of sanctions by the US and the EU.

The country’s ability to draw foreign investors has become even more restricted and in the absence of foreign money, technology and expertise, completion dates of its many projects - with a total ethylene capacity of around 5m tonnes/year - remain highly elastic.

Ahmed Hassan of Alembic Global Advisors estimated in a recent report that Iran’s five crackers brought on stream from 2005 had experienced start-up delays of 18-24 months and operating rates in the 50-60% range during the first two years of production.

“Iran continues to suffer from extreme skilled labour shortages coupled with political-sanction-driven inability of foreign companies to do business with and in Iran,” he explained. “Additionally, once these facilities are eventually up and running they tend to operate at reduced operating rates as utilities and feedstock supply projects do not come on stream at the same time. We do not see this situation reversing any time soon.”

He pointed out that the latest sanctions were also likely to affect routine operations.

“Iranian petrochemical producers may also see reduced operating rates stemming from import restrictions. Iran imports from Europe a large amount of catalysts, additives and specialty polymers which are not produced in the country,” he said.

And another headache for Iranian companies, which are gradually being privatised, is rising feedstock costs as the government is keen to obtain a better value for its gas resources.

Meanwhile, competition for the few remaining parcels of ethane in the region is heating up. Take the case of Qatar, which has sufficient ethane for a world-scale cracker until a moratorium on new gas projects is lifted in 2014.

ExxonMobil appeared to have won the race after an announcement earlier this year for a joint venture with Qatar Petroleum to build the world’s largest cracker for start-up in 2015.

However, recent media reports quoting sources close to the project have stated that ExxonMobil may no longer be part of the project. And although ExxonMobil said that it is still keen on the venture, it remains to be seen if the Qataris have changed their mind.

Two other companies competing for a cracker project in Qatar are Total and Shell Chemical.

The shortage of ethane in Saudi Arabia is well documented and it has only two cracker projects in the pipeline beyond 2012 – an expansion by PetroRabigh and a new venture by Dow Chemical and Saudi Aramco.

Over in Abu Dhabi, progress of the first phase of Chemaweyaat, a refinery-linked petrochemical project announced in 2008, appears to have slowed down. With construction contracts yet to be awarded, the company could find it very difficult to meet its 2014 deadline for commissioning the project. According to recent media reports, the project is also likely to move from Taweelah to Ruwais to be closer to the refinery that will provide feedstocks.

Mixed-feed cracker projects relying on propane, butane and even naphtha have become the norm in the region, with new plans being announced despite questions about their attractiveness for investors, especially if feedstocks are not subsidised.

Kuwait’s Petrochemical Industries Co (PIC) recently announced that it is looking to invest $5bn (€4bn) in a 1.4m tonne/year mixed-feed cracker and derivatives complex. This comes even as Kuwait became the first country in the region to import liquefied natural gas (LNG) last year to solve its persistent energy shortage.

The projects environment in the Middle East has irrevocably changed, but governments continue to push for new investments as they aggressively pursue their ambition of industrial diversification, value addition and employment generation.

($1 = €0.79)

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
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By: Malini Hariharan
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