Commentary: How far up the global ethylene cost curve will the Middle East go?

22 February 2013 10:07  [Source: ICB]

Ethane crackers in the Middle East remain at the low end of the cost curve, but with more use of naphtha and LPG in new projects, watch the region's overall cost position rise

Just how far up the global ethylene cost curve will Middle East crackers go? One Wall Street analyst sees dramatic cost escalation for producers in Saudi Arabia, Qatar and Iran as ethane supplies dry up and feedstock costs rise, especially for mixed feed crackers that use ethane as well as liquefied petroleum gas (LPG) - propane and butane.

It's certainly worth watching as US producers move down the cost curve as a result of the shale gas boom and resulting low ethane prices. All the new crackers being built in the US are based on ethane, while Middle East projects are largely mixed feed.

While Middle East ethane crackers still enjoy the lowest costs in the world, with a 46% cost advantage relative to US ethane crackers, Middle East mixed feed crackers have a 24% cost disadvantage to US ethane crackers, according to Hassan Ahmed, analyst at Alembic Global Advisors.

SAUDI SITUATION
"NGL [natural gas liquids] production in Saudi Arabia has remained relatively flat over the last few years while ethylene capacity has increased considerably," said Ahmed. "Saudi Arabia has been running short of NGLs since 2009 and not surprisingly is considering heavier feeds like naphtha for further chemical expansions."

The analyst added that state oil and gas company Saudi Aramco has not made any new ethane allocations to the chemical sector in Saudi Arabia since 2006, probably because it foresaw ethane shortages.

Saudi Aramco's $20bn (€15bn) Sadara joint venture with US-based Dow Chemical in Al-Jubail will be based on 70% naphtha feedstock, with ethane, propane and butane comprising the rest.

The second phase of Saudi Aramco's and Japan-based Sumitomo Chemical's Petro Rabigh project will involve additional ethane, but also use 3m tonnes/year of ­naphtha as feedstock.

QATAR MORATORIUM
In Qatar, in early 2005, the government placed a 5-year moratorium on additional development projects at its massive offshore North Field, noted Ahmed. In December 2009, Qatar Petroleum said a decision on new North Field developments would not be taken until 2014, essentially extending the moratorium.

"This has clear ramifications on petrochemical supply in Qatar," said the analyst. "Even if the very day the moratorium were lifted, the decision to add a new cracker was announced, it would still take four years to bring it on stream."

Analysing raw material cost data from the state fertilizer company QAFCO from 2004 up until 2009, when it stopped releasing certain details from its financial statements, Ahmed concludes that natural gas prices charged to the chemical industry in Qatar may have risen from $1.25/MMBtu in 2004 to around $3.00/MMBtu in 2009.

IRAN LIFTS GAS PRICES
In Iran, aside from the global trade sanctions that are severely limiting its exports, a plan by the government started back in December 2010 will eventually set natural gas prices at levels closer to market prices, noted the analyst.

"Industrial projects, including the petrochemical projects, now have to pay around $2/MMBtu for natural gas for the first year of the reform plan, which is considerably higher than the past price of $0.53/MMbtu in early 2010," said Ahmed.

Looking ahead, Iran plans to increase gas prices to 65% of the average export gas price within 10 years, which would suggest gas prices of $5.20-6.50/MMBtu, the analyst added.

Ultimately, all these changing cost factors are worth another look when considering the Middle East's position on the global ethylene cost curve.


By: Joseph Chang
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