GPCA ’15: Mideast petchems must focus on integration, downstream

DUBAI (ICIS)–Middle East petrochemical players should focus on integration of refining operations and make strategic decisions in investing further downstream, to maintain current growth rates, according to a joint report by McKinsey & Co and the Gulf Petrochemicals and Chemicals Association (GPCA) released on Wednesday.

“If we put aside the feedstock advantage, the Middle East is not an ideal place for chemical production. The local consumption is small, meaning products are exported at additional transportation and tariff cost,” stated the report titled “Thoughts For A New Age In Middle East Petrochemicals”, which was issued during the 10th GPCA Forum in Dubai.

The Middle East has struggled to achieve operational or capital expenditure excellence and is reliant on outside technology and licensing, the report noted.

“Given the recent high demand for ethane in the region, a lot of petrochemicals capacity has started using liquefied petroleum gas (LPG) and naphtha as alternative feedstock. This moves the Middle East towards the right of the global cost curve, making the region less competitive than the US’ purely ethane-based crackers,” it said.

To cope with these challenges, the Gulf Cooperation Council (GCC) producers could drastically increase their returns from systematically improving manufacturing, marketing and sales, research and development (R&D), as well as product development, according to the report.

Additional value can also be captured from higher integration with refining capacities.

“To date, the region has been behind other global leaders in terms of petrochemicals integration with refining. While the benefits of integrating cannot fully justify new capex [capital expenditures] into petrochemicals capacity on its own, it can generate around $50-100 margin per tonne of ethylene,” the report said.

Lastly, Middle East players should be strategic in investing into downstream sectors, which can provide limited opportunities in terms of economic return, the report noted.

“Many recent investment projects in the Middle East have found that economic return declines with every step further in the value stream, while job creation per dollar of investment rises,” it said.

“If the region decides to continue expanding its downstream production in order to create employment, Middle Eastern players should benefit from transparent dialogue with governments, quantifying projects’ actual economic benefit and highlighting the need for support in offsetting the costs of additional job creation,” according to the report.

The GPCA Forum 2015 runs on 17-19 November.