INSIGHT: Ethane price hike would be major blow for Saudi petchems

11 April 2013 11:34  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--A big question mark hangs over the Saudi petrochemical sector: Will the government raise ethane prices? And if so, by how much?

As chatter about the government mulling a price hike for the major ethylene feedstock grows, Jamal Malaikah, the president of local producer National Petrochemical Industrial Co (NATPET), is warning of dire consequences.

At the Gulf Petrochemicals & Chemicals Association (GPCA) Plastics conference in Dubai, Malaikah said any hike would be a “serious blow to Saudi Arabia’s primary petrochemical industry, making it less competitive”.

And the effects could be amplified in the context of the US shale gas boom and the resulting renewed competitiveness of US petrochemical producers.

Clearly, the global petrochemical sector is in the midst of a major shift in production footprint. Saudi Arabia has been short of natural gas liquids (NGLs) since 2009, according to Hassan Ahmed, analyst at financial advisory firm Alembic Global Advisors. Thus it is not surprising that most major petrochemical expansions in the kingdom are based on naphtha, or oil-based feedstock.

This includes Saudi Aramco’s $20bn (€15bn) Sadara joint venture with US-based Dow Chemical in Al-Jubail, which will be based on 70% naphtha feedstock. The second phase of Saudi Aramco and Japan-based Sumitomo Chemical’s Petro Rabigh project will use some ethane, but also 3m tonnes/year of naphtha as feedstock.

Malaikah estimates that gas feedstock costs for new crackers in the kingdom will be around $6/MMBtu – much higher than the current $4/MMBtu cost in the US, which has risen lately.

But importantly, US ethane prices have delinked from the overall upward rise in US natural gas prices, falling to all-time lows on record supplies. This has led to record olefins spreads and profits for US petrochemical producers.

Meanwhile, Saudi Arabia’s petrochemical producers are facing a potential ethane price increase. Not only that, but propane prices in the kingdom are pegged to naphtha prices – at about a 28% discount to Japan naphtha. With oil prices prevailing at high levels, especially in relation to US natural gas, this puts propane-based chemical production at a disadvantage as well.

Malaikah pointed out that propane costs in the US in 2012 were 23% lower than that of Saudi propane.

It is not only Saudi Arabia, but the entire Middle East region that is moving up the cost curve in global petrochemicals as NGL supplies fail to keep up with demand.

Some producers in the region are looking to the US for their next major expansions. As gas supplies run low in the Middle East pending further exploration efforts, US wet gas production is accelerating to the point that ethane is regularly being rejected from the petrochemical pipeline system and put to use as fuel instead.

Petrochemical producers abroad such as INEOS in Europe and NOVA Chemicals in Canada are tapping into abundant US ethane streams for delivery to their production facilities – by boat and by pipeline, respectively.

There is growing talk of interest in shipping cheap US ethane abroad for petrochemical production. While this can provide an alternative to high cost naphtha with some plant retrofitting, look for international petrochemical companies to also build major facilities in the US – both upstream and downstream.

Muhamad Fadhil and Prema Viswanathan contributed to this article

By: Joseph Chang
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