News focus: Middle East moving up the cost curve in petrochemicals

22 February 2013 10:09  [Source: ICB]

Saudi Arabia ramps up efforts to find more gas, but costs in the region may already be moving up

The story is almost as old as the hills: Saudi Arabia is running out of ethane supplies as the US enjoys an abundance of the gas, thanks to shale.

But 80% of Saudi Aramco's capital expenditure on domestic hydrocarbons exploration is being spent on searching for more gas, perhaps the highest percentage ever, according to a Middle East-based chemical analyst.


 Saudi Arabia is replacing oil with gas for its power generation

Copyright: RexFeatures

And in a further indication of the dash for gas, King Abdullah, Saudi Arabia's ruler, recently gave instructions that gas should be used instead of oil for Saudi power generation, said Leslie McCune, who runs the consultancy Chemical Management Resources, which specialises in the Middle East.

"The opportunity cost of burning crude oil is clearly its export value," says McCune. "This value is huge, given today's benchmark price of Brent crude oil of around $117/bbl and Aramco's extraction costs of $2-$5/bbl. Extraction costs for gas are three times higher but the net saving of not burning crude oil would still be $70/barrel."

Hassan Ahmed, analyst at Alembic Global Advisors, contends that the cost of gas extraction from non-associated fields in Saudi Arabia "may be as much as $2/MMBtu - well north of the $0.75/MMBtu the petrochemical industry in Saudi Arabia sources its gas at".

Saudi Arabi, Qatar and Iran are "witnessing a dramatic uptick in raw material prices - be it due to the dearth of natural gas or structural country specific changes", says Ahmed.

"These changes come at a time when, stemming from the availability of low cost shale gas, the US industry is moving down the cost curve. We believe the market is still not fully appreciating Middle Eastern producers' move up the cost curve," he adds.

McCune noted that there is a great deal of excitement about a shale gas field that has been discovered in Waad Al-Shamal (Arabic for "the promise of the North") in Saudi Arabia, north of Medina.

"Early studies indicate that the field is wet. However, if it is to be exploited, large amounts of purified water is required, which is not plentiful in Saudi Arabia," he said. "One way around this problem is that there is an existing water pipeline running from the petrochemicals city of Yanbu, on the west coast, to Medina. It might be possible to extend the pipeline to where the shale-gas reserves are located in the north of the Kingdom."

Despite all the potential for new gas supplies in Saudi Arabia, observers believe the US still has a window of opportunity.

The only cracker due to start-up in Saudi Arabia over the next five years is Sadara, the joint venture between Saudi Aramco and Dow Chemical. Scheduled to be fully on stream in 2016, the cracker will run on 70% liquid and 30% gas feedstock.

While ethane is priced in line with local natural gas prices, "propane and butane are priced at a 30% discount to Japanese naphtha to comply with [World Trade Organization] rules", noted Ahmed.

"Herein lies the problem - in the current energy price environment, while a pure ethane-based producer in Saudi Arabia remains most advantaged, mixed feed facilities in Saudi Arabia generate economics which are now disadvantaged relative to US ethane-based producers," Ahmed said.

In the US, six new 100% gas-fed crackers are scheduled to come on stream over the next five years, in 2016-2017, with another due around 2019-2020.

The new crackers, expansions of existing facilities and restarts of previously shut-down facilities could add 10.2m tonnes/year to US ethylene capacity - a 38% increase.

Meanwhile, as excitement builds over the potential for more gas supplies in Saudi Arabia, concern is also growing over the future cost of gas.

"Rumours circulated recently of an increase in Saudi ethane prices from $0.75/MMBtu to $2-3/MMBtu. One producer is said to have lodged a protest." said McCune.

Jamal Malaikah, chief operating officer and president of Yanbu-based polypropylene (PP) producer National Petrochemical Industrial Co (NATPET), was quoted in the UAE's National newspaper on 7 January as saying that this was the "wrong time" for the Saudi government to re-examine gas costs.

"We still have an advantage in Saudi Arabia but we believe that advantage will be affected by the sheer volume of shale gas in the US," he said.

NATPET's PP production is based on propylene via propane de-hydrogenation (PDH).

Propane and butane pricing in Saudi Arabia is based on prevailing CFR (cost and freight) naphtha prices in Japan minus a discount of around 28%.

"The discount might be reduced slightly, but I believe it will never be removed entirely," said McCune.


By: John Richardson
+65 6780 4359

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