Here is the first in my series of articles on the New Petrochemical Landscape following the Executive Summary last week – Winners and losers as demographics, debt, geopolitics, sustainability and crude-oil-to-chemicals (COTC) rewrite the rules. Today, I look at COTC and how this could significantly reshape global cost curves and trade flows.
By John Richardson
THE CONVENTIONAL view is that petrochemicals is the great hope for oil producers and refiners as demand for gasoline declines because of electrification and as consumption of transportation fuels in general slips due to greater fuel-efficiency.
Yes and no, as I shall explore in further articles. The future of demand growth is immensely complicated, far more so than in the past when you could reliably assume its growth as multiples over GDP.
Nevertheless, you can see the logic for the oil producers and refiners. Why not turn more oil into petrochemicals, regardless of demand growth, through old and new technology solutions that beat competitors on the cost curve?
Beyond the standard, cost-per-barrel or tonne arguments, there are also the political, geopolitical and social factors.
China’s efforts to turn more oil into petrochemicals – which to date seems to involve tweaks to existing refinery processes rather than anything than be truly described as COTC – are driven by the desire to reduce dependence on imports for supply security reasons.
The petrochemicals self-sufficiency push, which was given extra impetus by Beijing in 2014, is also about adding economic value as the population rapidly ages and as wage costs go up. Petrochemicals is seen as a higher-value industry.
In Saudi Arabia, the big picture imperative is to avoid being forced to leave barrels in the ground as demand for transportation fuels declines.
Better to turn these barrels into petrochemicals than be forced over the long term to leave reserves stranded at the expense of the overall economy.
Another fascinating aspect to all of this is the race to minimise carbon released into the environment for every tonne of petrochemicals produced.
COTC processes lay claim to be lower carbon than conventional processes. And in Saudi Arabia, carbon capture and storage (CCS) and electric furnaces to heat steam crackers powered by renewable energy are being planned alongside OTC investments.
As a new green cost curve develops, this promises to add to the competitiveness of COTC investments already made strong by lower operating and capital expenditure costs than conventional processes.
Adapting well-established refinery technologies
McKinsey, in a June 2022 paper, summarised the challenge for refiners when they wrote: “Globally, refiners have the capacity to process nearly 100m bbl/day of crude oil per day.
“As global demand declines, refinery utilisation is expected to drop in the key markets of Western Europe and Asia. By the middle of this decade, utilisation in those markets could drop from the current rate of 85 percent to percentages in the low-70s.”
On the tweaks to well-established refinery processes, McKinsey wrote that the fluid catalytic cracker (FCC) was attracting most of the attention.
FCC gasoline contained naphtha and aromatics that could become petrochemical feedstock, but few FCCs were designed for this process, wrote the consultancy.
FCCs also produce light olefins, including propylene, but the yield is usually small. So, refiners had shifted to catalysts to produce higher percentages of olefins, the paper continued.
Technology developments include high-severity FCCs. The process was developed by JX Nippon Oil and Energy Corporation, King Fahd University of Petroleum and Minerals, Axens, and Saudi Aramco.
In 2019, South Korea’s S-Oil, the Aramco subsidiary, became one of the first companies to commercialise this technology.
The configuration and operating conditions of refinery units can be changed to further boost petrochemicals output. A good example are the hydrocrackers, which produce diesel, naphtha, and liquefied petroleum gas (LPG).
Hydrocracker capacities can be increased to result in more petrochemical feedstock. Changing the operating conditions of the hydrocrackers can also achieve further increases in feedstock supply.
When it comes to reformers, McKinsey added: “Refiners can maximise value from aromatics by increasing reformer severity, leaving benzene precursors in the feedstock, and adding aromatics separation and conversion units at the back end.”
These tweaks to technology, as mentioned earlier, have been implemented in China – for example, at Hengli Petrochemical. The company’s refinery can reportedly generate 40% petrochemical feedstocks rather than the 10% produced from standard refineries.
Hengli, which came onstream in 2020, has capacities including ethylene at 1.5m tonnes/year and paraxylene (PX) at 5m tonnes/year.
Another project in China, Zhejiang Petroleum and Chemical’s (ZPC) COTC phase 1, achieved “a 45% conversion [to petrochemical feedstock] per barrel of oil”, wrote Paresh Avinash Kulkarni, Senior Consultant, Chemicals Practice, Frost & Sullivan in a May 2021 article for a Gulf Petrochemicals and Chemicals Association newsletter.
The Zhejiang complex, which came onstream in 2021, has the capacity to produce 1.4m tonnes/year of ethylene and 2m tonnes/year of PX.
Saudi Aramco and breakthrough approaches
Employing new technologies in a single FCC unit is said to result in petrochemical feedstock accounting for 40% of a refinery’s output. This rises to 50-60% through reconfigurations, whereas Saudi Aramco is working on technologies with the potential of 70-80% conversion to feedstocks.
In the first half of 2026, the Shaheen refining petrochemical project is due to come onstream in South Korea, which will again be operated by the Aramco subsidiary S-Oil. This is definitely a breakthrough COTC project.
The complex will use Thermal Crude to Chemicals (TC2C) technology, which has been developed by Aramco with CB&I and Chevron Lummus Global (CLG). The TC2C unit will connect to an existing S-Oil refinery.
“The TC2C™ process deploys deep process intensification to manufacture high-value chemicals with reduced greenhouse gas emissions and optimized energy efficiency and scale,” wrote CLG in a technical paper.
Operating and capital expenditure costs of using the technology were 30-40% lower than conventional technologies, said CLG.
Advantages also include the ability to use low value refinery fuels products as cracker feedstocks – slurry oil and light cycle oil. Pyrolysis oil produced from the steam cracker can be recycled and converted into further feedstocks.
A wide range of crudes can be used in a refinery running on the technology – extra light, light, medium crudes and condensates.
Another advantage of TC2C is that it also produces ultra-low sulphur diesel that complies with the International Marine Organisation (IMO) 2020 regulations. The regulations, introduced in January of that year, stipulate lower sulphur content in marine fuels.
The Shaheen project’s downstream capacities include a 1.8m tonne/year mixed-feed cracker, a 880,000 tonne/year linear low-density polyethylene (LLDPE) unit and a 440,000 tonne/year high density polyethylene (HDPE) plant.
The diagram below shows the configuration of the whole complex.
Another project which falls into the OTC category is the one being pursued by Saudi Aramco and SABIC at Ras Al-Khair in Saudi Arabia.
This could convert 400,000 bbl/day of oil into chemicals – 9m tonnes/year of base chemicals including 5m tonnes/year of olefins.
Aramco’s investments in China and Saudi Arabia
It will be fascinating to see the extent to which OTC technologies are employed in China in general as part of the country’s continued petrochemicals self-sufficiency drive.
As this 12 October 2023 ICIS News article details, Aramco’s investments in China are big.
The company signed a memorandum of understanding (MoU) with Shandong Yulong Petrochemical and its owners Nanshan Group, Shandong Energy Group, “to facilitate discussions” on the possible acquisition of a 10% share in the Chinese petrochemical firm, Saudi Aramco said on 11 October.
Under the MoU, the Saudi energy firm, said it would “potentially supply Shandong Yulong with crude oil and other feedstock”.
Last December, Saudi Aramco signed an MoU with Shandong Energy Group to collaborate on an “integrated refining and petrochemical opportunities” in the eastern region. The project in Longkou, Yantai city, China, is expected to produce 3m tonnes/year of ethylene and 3m tonnes/year of mixed xylenes.
In September, Saudi Aramco had announced that it was interested in taking a 10% stake in China’s Jiangsu Shenghong Petrochemical Industry Group, a wholly owned subsidiary of Eastern Shenghong.
These possible acquisitions of strategic stakes followed the completion of a $3.4bn stake purchase in Rongsheng Petrochemical in July. Rongsheng owns a 51% equity interest in ZPC, whose complex has the capacity to process 800,000 bbl/day of crude oil and 4.2m tonnes/year of ethylene.
Aramco and Sinopec are also pursuing a greenfield project in Gulei, Fujian province, which includes a 320,000 bbl/day refinery and 1.5m tonnes/year cracker. ICIS expects a startup in 2028.
Aramco also announced last December that it had signed a memorandum of agreement with SABIC and Sinopec for a petrochemicals project in Yanbu, Saudi Arabia.
There is also the Amiral petrochemical joint venture between Aramco and Total Energies in Saudi Arabia. The $11bn project, centred on a 1.7m tonnes/year cracker, is due to startup in 2027.
And in a 23 October article, ICIS news wrote that Aramco may be re-examining investing in Vietnam following its withdrawal from a joint-venture project with PTT in Vietnam in 2016.
“Aramco wants to understand the market and seize opportunities to invest in Vietnam, especially in building petrochemical refineries,” said the Vietnamese government.
Although China’s petrochemicals demand growth has moderated to much lower-than-expected levels, even what I believe will now be only 1-3% growth per year will still deliver lots more demand in volumes. This is because the booming growth of the last 30 years has created a much bigger base of demand.
With Beijing seemingly determined to ensure that more of the extra volumes are met with local production, one can see the logic of further foreign investments in petrochemicals.
China’s government is also keen to reduce carbon emissions per tonne of petrochemicals output, as this is seen as “higher value” – part of China’s efforts to move up the manufacturing value chain as it tries to escape its middle-income trend.
To this end, BASF said in a 4 September 2023 press release that 100% of the electricity for its Zhanjiang Verbund petrochemicals project in Guangdong province will be renewable. The €10bn project, which will include a 1m tonne/year cracker, is due for start-up in 2026.
Aramco’s investments in China, and back home in the Kingdom, are also focused on reducing carbon emissions per tonne of petrochemicals output.
The new green cost curve and the CBAM
“By 2030, the Kingdom has promised that 50% of its energy will come from renewable sources,” said the World Economic Forum in a June 2023 report.
This would reduce dependence on fuel oil for power generation and would link with the push by Aramco to make use of electric furnaces (run on renewables) to heat up its Saudi cracker furnaces, replacing natural gas.
Saudi Arabia is also said to have very cost competitive CCS due to favourable geology.
Turning to North America, the Inflation Reduction Act in the US is incentivising the development of a CCS hub in Houston.
In Canada, Dow has plans to make use of CCS and carbon utilisation as part of its Fort Saskatchewan Path2Zero expansion project. The project centres on 1.8m tonnes/year of new ethylene capacity due for start-up in 2029.
The EU’s carbon border adjustment mechanism (CBAM) was introduced on 1 October this year, covering iron and steel, cement, aluminium, fertilisers and electricity, and includes a transition period.
The CBAM involves a levy on imports, based on their carbon emissions, to level the competitive playing field for local manufacturers facing higher costs of carbon.
“Before the end of the transition period the Commission shall assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals and polymers, with the goal to include all goods covered by the ETS [Emissions Trading System] by 2030,” said the European Parliament in a December 2022 press release.
Europe is the world’s second biggest polyethylene (PE) market behind China and the third biggest polypropylene (PP) import market behind Turkey and China.
So, you can see the logic here. If the CBAM applies to polyolefins and other petrochemicals, Aramco’s exports to Europe from its OTC plants, and from the ethane crackers in North America, could carry a carbon advantage.
This could combine with low-cost-per-tonne economics to place a lot of pressure on higher-carbon content and higher-cost exporters. The consolidation of older and smaller assets in Europe, where the cost of carbon abatement is thought to be high, might also be accelerated.
Conclusion: The winners in a lower deep-sea export growth world
The scale of what Aramco is planning in terms of total global liquids conversion to chemicals is big. Mohammed Y. Al Qahtani, Aramco Senior Vice President of Downstream said in a December 2022 Aramco press release that the company could eventually converts up to 4m bbl/day of liquids into chemicals by 2030.
The extent to which this upper limit will include conventional use of refinery feedstocks to make chemicals or petrochemicals versus OTC investments in brownfield and greenfield plants is not clear.
But it does seem clear that Aramco is going to play a much bigger role in deep-sea petrochemical export markets.
And I see far more limited growth in deep-sea exports over the next 20 years than the previous two decades, for the reasons I outlined in my Executive Summary, which launched this series of blogs earlier this month.
In summary here, this will be because of geopolitics re-shoring, ageing populations, sustainability, climate change and China’s increased self-sufficiency.
China might end up as one of the winners that dominate the deep-sea export markets along with Saudi Arabia, the United Arab Emirates, Qatar and North America.
The above chart which lists some of the major new global cracker projects that we know about. There of course may be other projects that have yet to be made public.
I believe that the petrochemicals landscape has radically changed, and for good.