INSIGHT: Middle East moves up global ethylene cost curve

25 February 2013 14:56  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--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 on 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.

“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 because it is likely that 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 and Japan-based Sumitomo Chemical’s Petro Rabigh project will involve additional ethane but also use 3m tonnes/year of naphtha as feedstock.

SAUDI ARABIA NGL PRODUCTION AS % OF ETHYLENE CAPACITY

m tonnes, except for natural gas production

2005

2006

2007

2008

2009

2010

Natural gas production (bcf)

2,516

2,594

2,628

2,841

2,770

3,096

NGLs (18% of gas)

10.87

11.21

11.35

12.27

11.97

13.37

Ethylene equivalent

8.43

8.69

8.8

9.51

9.28

10.37

Installed ethylene capacity

7.34

7.82

8.2

8.8

11.96

13.29

% of capacity covered by NGLs

115%

111%

107%

108%

78%

78%

Sources: EIA, Alembic Global Analysis

In Qatar, in early 2005, the government placed a 5-year moratorium on additional development projects in its offshore North Field, the largest non-associated gas field in the world, noted Ahmed. And then in December 2009, an official at state-owned 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. 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,” said the analyst.

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.

In Iran, aside from the global trade sanctions led by the US, which is severely limiting its petrochemical and derivative exports, a plan approved by the Iranian parliament in October 2009 and started in December 2010 will eventually set natural gas prices 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, suggesting 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.

For US producers, Ahmed sees a peak in the commodity chemical cycle by 2015-2016, and one higher and longer drawn out than in past cycles.

"Our view of an imminent peak in the commodity chemical cycle is primarily predicated on what we consider to be a capacity vacuum arising between 2012 and 2017 as Middle Eastern producers exit the capacity game and US capacity additions are still years out," he said.

The amplitude of the peak will be higher for US producers, as they are further down the cost curve. Plus, the cost curve has become steeper than in previous years, he added.

($1 = €0.76)


By: Joseph Chang
+1 713 525 2653



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