SABIC headquarters in Riyadh
Source of picture: france24.com
By John Richardson
The days when the price of future ethane supply in Saudi Arabia - at the time called an advantaged feedstock because nobody knew what else to do with it - was based only on the cost of separation and distribution have long gone.
Now we are into a whole different world of economics where the word marginal is being muttered for the first time as feedstock slates become heavier and derivatives capacity more complicated.
The cause of this staggering turnaround is the well-publicised shortage of ethane in the Kingdom.
But what might not be as well-known are the complex and multiple causes of this shortage.
Short-term implications are disruptions to existing production. There is a risk of drawing hasty conclusions about the long-term consequences of this shift of competitive advantage, particularly as the ethane shortage has taken place in parallel with the shale-gas boom.
The risk comes from multiple unknowns that could either restrict further investment in Saudi Arabia or result in the domestic industry continuing to expand at a healthy click.
"Ethane is tight in Saudi Arabia because of OPEC quotas - and also because as associated gas (a by-product of oil production) supply matures in the Kingdom, it is becoming drier (less ethane content)," said Earl Armstrong of petrochemicals consultancy, DeWitt & Co recently.
OPEC has reduced Saudi Arabia's oil-production quota in order to help manage weaker global demand for crude, resulting in the country's output being pegged at around 8.4m bbl/day.
However, it needs to be producing 10m bbl/day (it is capable of going up to 12m bbl/day) to provide enough ethane for crackers to run at 100%.
"Petrochemical producers can seek a top-up from non-associated gas-field operators," added Armstrong, managing director of DeWitt, speaking at the company's recent Asian Olefins Forum in Kuala Lumpur, Malaysia.
"But the cost of extraction from non-associated fields may be as much as $2/mBTU with the price for ethane fixed at around 75 cents/MBTU - so where's the motivation for these gas producers to supply petrochemicals?"
Crackers are, therefore, being forced to run below their final capacity capabilities, said DeWitt's Joe Duffy, who was speaking at the same event.
"So a cracker that, say, was originally designed to be 1m tonne/year will only receive feedstock to produce that amount, even though it can actually produce substantially more than that," he added.
Such is the squeeze on ethane availability that ethylene exports from the Kingdom are being constrained.
"Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. In February it exported 5,000 tonnes and nothing since then because of feedstock shortages," said Duffy, vice-president for ethylene, polymers and derivatives in Europe, the Middle East and Africa.
"Essentially, 500,000 tonnes/year of exports have gone to zero."
This is just one of many factors that make the outlook for merchant ethylene exports from the Middle East in general extremely hard to read.
"Shale gas is a huge game changer, the biggest in my career," added Armstrong, referring to the growth in this formerly non-conventional type of natural-gas production.
This has helped reduce US gas prices to the point where the country's ethane-based cracker operators have become a great deal more competitive. The other factor behind the decline has been the growth in liquefied natural gas (LNG) as the economic crisis occurred.
"In the gas industry they say that shale gas is so rich in NGLS (natural-gas liquids), in one particular area you can practically pour it."
"US ethylene costs are around $400-450/tonne at the moment, down from $700/tonne a few years ago. Saudi ethylene costs are $150/tonne, but could rise to $300-350/tonne on the limited gas availability."
So could the boost to US competitiveness lead to the country expanding cracker and derivatives capacity, the very idea of which would have seemed ludicrous three years ago?
"Not if this leads to big volumes of exports. In my view, the lower feedstock prices will make the US better-able to defend its big home markets from imports," said Duffy.
"The danger is that exports can reduce the returns from your home market if they are priced at levels that are too low."
But numerous shale-gas projects are being pursued throughout the world, including in China and Eastern Europe, and China has enormous further potential in coal-to-olefins.
An alternative to ethane that's already being used in a big way in the Kingdom is liquefied petroleum gas (LPG). The wave of crackers being commissioned at the moment runs on up to 40% of LPG.
The future of the domestic pricing formula for LPG, which enjoys a nominal 29% discount off prevailing CFR Japan naphtha prices, is a major concern here, though.
There might also be the risk that if Indian antidumping duties against polypropylene (PP) imports from Saudi Arabia are upheld on appeal to the World Trade Organization, the discount structure could be the basis of more antidumping, and possibly also countervailing, petitions from other countries.
Another alternative being looked at in Saudi Arabia is naphtha, but an industry observer said: "Naphtha, even with the current discount of around 28%, is way less competitive for cracking than ethane.
"I did an internal rate of return (IRR) comparison for a straight ethane cracker in Saudi versus a pure naphtha cracker - and an ethane cracker had an IRR of 30% and a naphtha cracker around 2%."
Saudi Arabia has vast financial capabilities to further support petrochemicals, regardless of feedstock economics.
"Right now, though, the government's view seems to be that petrochemicals have already received a great deal support and so the focus has switched to developing other areas of the economy," said a second industry observer.
"But this could easily change, making the financing of increasingly more marginal projects easier."