Saudi Ethane Prices Set To Rise To $2/mBTU
Source of picture: robertsamsterdam
By John Richardson
IT will only be a question of making a large rather than a huge amount of money if you only take into account the relatively minor increases being forecast for Saudi Arabia's petrochemical feedstock costs.
The cost rises would have been far more dramatic if Saudi Aramco had got its way in a debate with the country's chemicals producers, says HSBC in a report published last week.
Aramco had wanted to increase gas costs to bring them quickly in line with current US levels - $4-5/mBTU - but HSBC says: "We believe policy makers are in favour of a phased approach."
If the bank is correct this could have implications for investment decisions both in the States and Saudi Arabia.
The rise of shale gas has made the US a possible location for new capacity, a dramatic turnaround from just a few years ago when all the talk was of feedstock cost-driven plant closures.
US producers would still be comfortably to the left of the correct if HSBC is right. But based on raw material costs only, Saudi Arabia is forecast to remain in the most advantageous of all positions.
The cost increases being predicted by HSBC include ethane rising from 75cents/MBTU to tr $1.25/mBTU in 2012, $1.50/.BTU in 2013 and $2.00/mBTU in 2014.
Current implied ethane costs in Saudi Arabia are just $47/tonne, according to HSBC. An increase in the gas price to $2/mBTU by 2014 would therefore not make that much a difference.
It is not just about feedstock pricing, though, as construction costs in the Middle East in general can fetch a premium because of expensive labour.
Petrochemicals markets might become more regional on a rise in trade protectionism.
Fortunately, there hasn't been a dramatic increase in trade barriers since the economic crisis but as long as deep-seated economic problems in the west continue, this danger will persist.
Saudi Arabia, despite efforts to grow domestic downstream consumption, is likely to export most of its petrochemicals for a long time to come. It therefore benefits a lot from low import tariffs etc.
The debate about the future competitiveness of Saudi Arabia versus the US and elsewhere could be a side issue if the Kingdom cannot resolve its current shortage of gas.
Extensive naphtha cracking is an alternative to using ethane, propane and butane. But industry observers argue that the economics of using naphtha in Saudi Arabia are a lot weaker.
The very well-documented Saudi ethane shortage is a factor behind the dearth of new cracker complexes currently planned for start-up in the country after 2011.
Aramco is making strenuous efforts to boost gas supply in order to supply not only petrochemicals but also the electricity generation, desalination and fertiliser sectors, adds HSBC.
This is a double-edged sword: While these efforts might reap more feedstock for petrochemicals, they also reflect the rising alternative values for natural gas - one of the main reasons why the price of gas is expected to rise.
Fifty per cent of all Saudi off-shore platforms are now devoted to gas exploration compared with 20-40% in the past, says the bank. Aramco has set itself the target of delivering 3 to 7 trillion cubic feet of additional non-associated gas supply each year.
The reason, as we have said, is the rise in demand for gas from non-petrochemical applications - most significantly electricity.
Unless supply increases are concurrent with the growth in gas demand over the next two decades, more than 60% of total Saudi energy production would have to be diverted to meet local needs, says HSBC.
This would result in a big revenue loss for the country through a reduction in oil exports and global crude prices would rise.
So the race is on to meet ambitious growth targets for natural-gas extraction as the scale and nature of these investments places upward pressure on pricing.
Aramco is to devote 10 per cent of its total capital spending on developing six offshore gas facilities over the next five years, adds the bank.
This will be non-associated gas and so the economics are very different from associated gas, which comes as a by-product of oil production.
Foreign investors have to also be attracted to these dedicated gas fields. Prices charged for output from the wells has to be high-enough to meet their rates of return.
In the old days, back in the 1970s when the Saudi petrochemical industry was first established, life was a lot simpler.
There was less competing demand for gas and so there were fewer alternatives to providing feedstock to the industry at very attractive prices (before 1998, ethane costs were only 50 cents/mBTU).
A feature of the gas-cost debate appears to have been unexpectedly high oil prices over the last few years.
These are viewed as having created exceptional profits and a cost advantage in "excess of what had been implicitly guaranteed when the (petrochemicals) industry was established," writes HSBC.
What level of profitability will be deemed as acceptable in future?
How will this decision affect confirmed future gas prices and overall government support for the petrochemicals industry?