GCC petchem expansion may be at risk on Qatar gas question

21 May 2014 05:20 Source:ICIS News

Focus story by Muhamad Fadhil

Qatar gas field and plantDOHA (ICIS)--Member countries of the Gulf Cooperation Council (GCC) are divided over Qatar’s role as a major gas supplier in the Middle East going forward amid a political rift that could affect the region’s drive to grow its petrochemical capacity, industry sources said on Wednesday.

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE form the GCC – a regional union established in 1981 to foster greater economic cooperation among the six Middle Eastern countries.

“The GCC is split: UAE, Oman and Kuwait are friendly to Qatar because they require gas, [while Saudi and Bahrain], despite being short of feedstock, ... are still resistant to buy Qatari products due to politics,” according to a source close to a major Saudi producer.

Qatar is the world’s largest exporter of liquefied natural gas (LNG), with natural gas reserves of 885,000 billion cubic feet in 2013, according to data from the Energy Information Administration (EIA).

The country has abundant supply in the vast North Field – the world's biggest natural gas deposit – and can “support the entire GCC without any problems”, said a Qatari-based petrochemical analyst.

The other five GCC members are facing gas shortages due to an imbalance between supply and demand, according to a source close to a Middle Eastern petrochemical producer.

“There is a gap between demand and supply. The shortage is largely due to increasing domestic consumption and a lack of ready availability [in the five countries],” the source said.

Saudi Arabia and Bahrain resist purchasing Qatari gas purely because of political reasons, according to a source close to a GCC-based producer.

“Saudi, Bahrain and Qatar are all part of GCC. But, tensions are always [simmering] among them and [could] ultimately affect bilateral cooperation,” the source said.

In early March, Saudi Arabia and Bahrain, as well as the UAE, withdrew their ambassadors to Qatar over political differences. Qatar is vocal in its support for Egypt’s ousted President Mohammed Morsi of the Muslim Brotherhood movement, which is outlawed in Bahrain, Saudi Arabia and the UAE.

Meanwhile, gas demand in the Middle East is expected to balloon as the region embarks on growing its petrochemical capacity, underscoring the need for a stable supplier of gas in the region.

All GCC countries rely on gas to run their power plants, and as feedstock for their petrochemical production.

The GCC is estimated to add 54m tonnes to its 2012 annual chemicals production capacity over a five-year period to 183.6m tonnes, according to the Gulf Petrochemicals and Chemicals Association (GPCA).

“GCC governments always look to expand the petchem sector. But, plants in the region require lots of gas,” a UAE-based oil trader said.

Kuwait, Oman and the UAE have been increasingly reliant on Qatari gas to meet their growing energy needs, according to a GCC-based petrochemical distributor.

“Qatar is so close by and this proximity helps them get their gas quickly,” the distributor said.

In April, Kuwait signed an agreement to import LNG from Qatar to meet its energy requirements until the end of the year, but few details of the deal between Kuwait Petroleum Corporation (KPC) and Qatargas were made public. The deal could “be the start of closer cooperation” between the two countries, according to KPC.

Oman and the UAE, meanwhile, purchase Qatari gas through a subsea pipeline from the North Field.

According to pipeline operator Dolphin Energy Limited (DEL), it transports 1.924 billion cubic feet per day (bcf/d) of gas from Qatar to Oman and the UAE.

“The project started some time back. Without it [piped gas from Qatar], how would the country [UAE] be able to function? UAE requires gas to run the country and its downstream plants,” a UAE-based petrochemical trader said.

In contrast, Bahrain depends on imports of Russian gas, while Saudi Arabia counts on domestic supply for its requirements.

Bahrain is located near the North Field but procures gas from Russia, which is a key global exporter of LNG.

“Bahrain traditionally buys a lot of gas from Gazprom. So, they don’t need Qatari gas so much,” according to a source close to a Qatari-based petrochemical producer.

Russian state-owned company Gazprom is one of the largest extractors of natural gas in the world.

Saudi Arabia, on the other hand, has its own gas production that can fulfil the country’s domestic demand, according to the EIA.

Industry sources said there are growing fears that the country may run out of gas in the near term amid increased consumption, and any shortage could lead to a spike in gas prices.

The country's natural gas demand is estimated to almost double by 2030 from 2011, according to the EIA.

Ethane crackers in the country had enjoyed discounted gas rates in the past, but prices may rise in future should there be an acute shortage of gas supply, a source close to a GCC petrochemical producer said.

For now, Bahrain and Saudi Arabia can get by without seeking Qatari gas, but they may have to change their stand on the issue “at some point”, according to a GCC-based chemical manufacturer.

Geopolitical tensions between the West and Russia over the eastern European country’s annexation of Crimea, which forms part of Ukraine, may test Bahrain’s resolve to skip Qatari gas, the manufacturer said.

“Anything can happen in Russia with all this turmoil, and Bahrain may not want to take any risk. It may need to work with Qatar sooner than it would prefer,” the manufacturer said.

Bahrain may look to import gas via a pipeline from Qatar, although no fixed plans are known at the moment, according to the EIA.

Saudi Arabia may also need to evaluate the benefits of working with its neighbour, given the pressure of increased gas consumption each year, a GCC petrochemical buyer said.

“If Saudi [Arabia] can set aside its differences [with Qatar], then a working relationship [between the two] is possible. The country [Saudi Arabia] will need a lot of gas in future so it may need to start importing either from Qatar or elsewhere,” the buyer said.

With major petrochemical projects coming on stream soon, Saudi Arabia's requirement for ethane - the main feedstock for petrochemical production in the Middle East - will surge.

“Saudi [Arabia] is growing at a rapid pace. More gas will be needed if you consider the combined requirements from new and existing petchem plants,” a Saudi based end-user said.

Ruling out imports from Qatar, Saudi Arabia’s hopes of raising its gas supply is tied with oil production.

“More crude will be produced [from oil fields] in Saudi over the next few years. This would mean more gas will be extracted as well,” according to a UAE-based analyst.

More than half of Saudi’s proven natural gas reserves are found at the Ghawar, Safaniya and Zuluf oil fields, according to the EIA.

To circumvent the expected gas shortage, upcoming Saudi petrochemical plants will also use liquids and oil for feedstock diversity.

“Saudis aim to be self-sufficient. Diversification of feedstock will be a key priority for the country,” according to a Middle East petrochemical trader.

In 2015, Saudi will welcome a world-class petrochemical complex operated by the Sadara Chemical Co in the industrial city of Jubail. Sadara Chemical is a joint venture between Dow Chemical and Saudi Aramco. (Please see table below)

Comprising 26 manufacturing units, the complex will be the first in the Middle East to use naphtha as feedstock.

Saudi petrochemical giant SABIC, meanwhile, has plans for an oil-to-chemicals complex that should start operations by end-2020. It expects to use around 10m tonnes of crude oil annually as feedstock for the production of petrochemicals and specialty chemicals.

“Naphtha and oil are viable alternatives to natural gas. So, Saudi may not need to bend over backwards for Qatari gas after all,” a source close to an Omani producer said.

Middle East Petrochemical Projects

Company Product Capacity (tonnes/year) Location Expected Start Up
Borouge Polypropylene (PP) 960,000 Abu Dhabi mid- or end-2014
Low Density Polyethylene (LDPE) 350,000
Sadara LDPE 350,000 Jubail 2015
Amines 210,000
Glycol Ethers 200,000
Propylene Glycol 70,000
Methyl di-isocyanate (MDI) 400,000
Toluene di-isocyanate (TDI) 200,000
Polyether Polyols 390,000
Orpic Polyethylene (PE) 838,000 Sohar 2018
PP 215,000
Benzene  46,000
Muntajat Ethylene  1,400,000 Ras Laffan 2018
PP 760,000
Linear Low Density Polyethylene (LLDPE)  430,000
Butadiene 83,000

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By Muhamad Fadhil