INSIGHT: Crude to chemicals will drive the next industry transition

LONDON (ICIS)–The latest annual IEA Energy Outlook highlights how changes in crude oil processing, particularly in the Middle East, India and China, will fundamentally shift the supply picture for petrochemicals. In global markets, the consequences for non-integrated and publicly traded petrochemical companies are significant.

We are not talking here about the demand pull from a growing and increasingly prosperous middle class – and the arguments that swirl around that – but the supply push from the converters of crude.

An analogy might be that of a great ocean liner slowly but surely changing direction. The vessel’s momentum is immense – for the major oil producers it is the need to extract as much value as possible from the barrel in order to drive economic growth. It can swamp some boats. It will rock smaller ships.

Chemical yields from a typical refinery are less than 10% so the extent to which that changes will have an enormous impact on the chemical industry.

A great deal is happening now. The IEA notes that several refineries in Asia have co-located steam crackers and paraxylene (PX) production facilities. High-severity fluid catalytic cracking technology lets refiners lift chemical product yields to greater than 30%.

Integrated refinery and petrochemical complexes in China are aiming for chemical yields of about 40%.

But this is only the beginning. The oil to chemical projects planned for the Middle East re-align the refinery, converting even more of the oil barrel into chemicals with a lesser fuel (diesel) output.

Typical refiners make most of their profit from selling road transport fuels – gasoline and diesel. The IEA says that prices for petrochemical feedstocks trend lower than crude oil. “In theory, foregone profits in one area would be compensated by higher prices for products in high demand such as naphtha and LPG.

While it is conceivable for the prices of these products to increase to some degree, it is hard to envisage a rise that fully compensates for the reduction in road transport fuels sales.”

The IEA goes on to look at the new International Maritime Organisation low-sulphur fuels regulations that come into effect in 2020, on refinery output. It illustrates, the agency says, how “changes in product demand can send ripples through the refining industry and then through the wider energy system”.

In the IEA’s just published World Energy Outlook 2017, petrochemicals are seen as the most significant source of growth in oil use out to 2040.

The increase could be as high as 5m bbl/day, although growth is likely to be constrained by increased plastic recycling. The agency suggests that if average rates of recycling were to rise from around 15% today to 34% by 2040, the reduction in crude oil consumption would be 1.5m bbl/day meaning that petrochemicals use would still rise by 3.3m bbl/day.

The incentive to extract greater volumes of chemicals from the oil barrel is already driving change. The IEA notes that almost all new refinery capacity under development integrates some petrochemical output, meaning that the refining and petrochemical industries are becoming more closely linked than ever before.

And, in the planning of some of the major oil producers and refiners, this involves growing, or repositioning, state-held refining and petrochemical assets together.

The joint Saudi Aramco/SABIC crude oil to chemicals (COTC) project in Yanbu, Saudi Arabia, is expected to process 400,000 bbls/day of crude into about 9m tonnes/year of chemicals and base oils. A 2025 start-up is planned.

The partners say that by 2030 the COTC complex is expected to have a 1.5% impact on Saudi Arabia’s gross domestic product (GDP).

Earlier this year, Abu Dhabi said that ADNOC (the Abu Dhabi national Oil Company) would build the world’s largest oil refinery and chemicals complex to help triple petrochemicals production to 14.4m tonnes/year by 2025.

Saudi Aramco and ADNOC are investing $44bn in the Ratnagiri refinery and petrochemicals complex in India. It is expected to process 1.2m bbls/day of crude oil, through refinery, aromatics and petrochemical units, to produce 18m tonnes/year of chemicals.

These are the sort of numbers, in terms of volumes of feedstock processed and chemicals produced that the world will have to deal with in future.

As process technologies are modified to maximise chemicals as proposed to fuel output so the volumes of chemicals produced from integrated refineries and petrochemical complexes will increase.

Potentially, greater volumes will be introduced onto petrochemical markets at one time driving even greater petrochemical industry volatility and impacting profitability.

The refiner and petrochemical producer may be challenged to produce attractive returns but the pressure will be to ensure that the refined or processed barrel of crude is put to best and most profitable use. That pressure fundamentally changes the operating environment for the more traditional or standalone player.

By Nigel Davis