Middle East Petrochemicals Overview Q213

Saudi Dominance Set To Continue
Ethylene Capacities ('000 tpa), 2011-2017

The Asian petrochemicals market will be crucial to growth and profitability in the Middle Eastern petrochemicals industry in 2013. Uncertainty has increased due to the volatility caused by the eurozone crisis as well as plant restarts in Asia and this has been reflected in fluctuating product prices, although the trend has been downwards. Over the short-term, the Asian petrochemicals industry will be plagued by the weak global economy. However, this has not affected our long-term forecasts for capacity, which envisage China and India increasing their capacity and share of the regional market as they strive towards self-sufficiency. The main risk is regional over-supply as production is ramped up at a time of slower demand growth.

Kuwait And UAE Challenge Region's Bigger Producers

Over the five years to 2017, the Middle East could add up to 5.75mn tonnes per annum (tpa) of ethylene capacity. Half of all the new ethylene projects being developed globally are located in the Gulf. Saudi Arabia accounts for around 63% of total investment in the region, while Qatar comes second, with a 14% share. Bahrain is the only Gulf Cooperation Council (GCC) state with no petrochemicals facilities and no plans to build any. The Gulf Petrochemicals and Chemicals Association (GPCA) has forecast that the region will account for 40% of total global petrochemicals production within 10 years, but has also warned that this would bring fresh challenges for the region's producers in terms of the need to secure more feedstock. Saudi Aramco and Sumitomo Chemical will double capacity at their Petro Rabigh joint venture (JV) at Rabigh in Saudi Arabia over the next five years. Aramco and Dow Chemical's 50:50 JV will also invest US$20bn in a manufacturing complex at Jubail in Saudi Arabia, including a combined 3mn tpa of higher-value product chains, which is scheduled to be completed in 2016. Meanwhile, Borouge, a JV between Adnoc and Borealis, is in the process of expanding polyolefins capacity from 2mn tpa to 4.5mn tpa by 2014.

In Saudi Arabia, growth in capacity will be generated by both basic chemicals and more speciality chemicals that add value to production, particularly in acetyls, low-density polyethylene (LDPE), oleochemicals and aromatics. However, concerns over rapid capacity growth continue to mount due to plunging profitability as product prices have declined and softening demand in Asia has hit operating rates. The focus in coming years will be on developing high-performance and speciality grades, which can add value to exports and put the Saudi industry in direct competition with Japanese producers and other more mature markets. As a result, Saudi Arabia's manufacturing base will grow, moving the country away from exporting basic chemicals and importing finished goods as it grows its five industrial clusters - mineral and metal processing, automotive, plastic and packaging, home appliances and solar energy.

Kuwait, the UAE and Qatar are also likely to pursue diversification, although on a smaller scale. Kuwait is set to be a growth driver in the Gulf states, benefitting from cracking heavier feedstock to produce a wider range of products. Kuwait Petroleum Corporation (KPC) is pressing ahead with more basic chemicals capacities and is setting out to establish the country's third olefins project, Olefins III. Scheduled for completion by end-2016, Olefins III will boost the country's ethylene capacity to 3.1mn tpa, while PE will nearly double to 1.6mn tpa. By using a mixed feed, the complex will be able to diversify production. Meanwhile, the UAE's petrochemicals industry will benefit from the rapid expansion of capacities in highly integrated, state-of-the-art complexes but will be limited by the narrow product range and lack of downstream diversification. These include Borouge 3, which is expected onstream in mid-2014, and the first stage of Chemaweyaat's complex, Tacaamol, which is due onstream by 2016. Qatar will benefit from its access to cheap feedstock. However, this competitive advantage is being eroded by rising gas prices and the pressure on feedstock supply caused by growth in cracker capacity, which has out-paced growth in gas supply. Qatar also has a narrow portfolio that focuses on PE that makes it vulnerable to external shocks at a time of heightened competition and increasing Asian self-sufficiency.

While the Arab Gulf countries look towards growth and diversification, Iran's export-oriented petrochemicals sector is facing a bleak future while it continues to defy the UN Security Council over its nuclear programme. With a surge in capacity coinciding with a decline in key industrial consumers, BMI believes that new capacity is unlikely to provide growth in production. While the plants may nominally come onstream, operation rates are likely to be low and plants will be operating at a loss.

Trends point to a complete failure of the Iranian government's 20-Year Outlook Plan (1995-2015), which aimed into raise Iran's share of Middle Eastern petrochemicals output from 12% to 34% with the addition of up to 100mn tpa of capacity, from which 75% of the output would be exported. The failure to attain these goals puts the NPC's US$12.3bn investment plan for 2010-15 in jeopardy and could lead to a freeze in plant construction. New complexes in Ilam (500,000tpa ethylene from 2014) and Assaluyeh (1.2mn tpa ethylene from 2015) are at risk of being delayed or cancelled. The NPC aims to raise ethylene capacity at the Kavyan complex to 2mn tpa by 2015, making it the country's largest ethylene production site, but this could also be postponed. The West Ethylene Pipeline, fed by Kavyan, is also in danger of failure and its route could be shortened, threatening the planned polymers plants that it supplies.

Ethane Reliance A Structural Weakness

Aside from factors such as the slowdown in global petrochemicals consumption growth, both Iran and Qatar share a common structural problem: their overwhelming reliance on ethane feedstock. Middle East feedstock streams are highly focused on ethane, which comprises 69% of the region's feed slate, with a further 17% coming from propane, while naphtha contributes just 11%. The exception is Israel, which receives all its feedstock from local oil refining - with naphtha accounting for up to 80% of feed.

Iran and Qatar rely on domestic gas fields, which contain three quarters of the region's gas reserves. Elsewhere, gas production is associated with oil deposits, making it less flexible in terms of controlling the rate of extraction. Associated gas is also used for reinjection to sustain oil output. However, the demand for natural gas has grown exponentially throughout the Middle East due to low pricing, thereby putting feedstock availability for new multi-million tonne projects at risk.

Natural gas costs had been up to 70% cheaper than in Europe and North America, but inefficient gas production has led to a decline in ethane supply. While ethane has cushioned the region from the effects of high crude prices, there are growing concerns that allocations will not be fulfilled as the petrochemicals industry competes with other sectors for gas. Most gas in the region is sour, increasing the cost of processing and putting pressure on margins.

Reliance on ethane is also limiting product diversification due to the fact there are significantly fewer by-products compared to naphtha. In polymers, this will invariably lead to an overwhelming reliance on polyethylene (PE) grades. Research and development will need to focus on greater utilisation of PE as an alternative to polypropylene (PP) in engineering plastics applications.

In the Middle East, there is tension between the requirement to supply domestic markets to fuel economic growth and the desire to achieve higher revenues via export sales agreements. Domestic requirements include electricity generation, with natural gas seen as a cheap and easy way to meet consumption growth, which has registered a compound annual growth rate (CAGR) of 6-8%. The UAE is particularly vulnerable to a gas supply deficit during summer months, forcing it to rely on supplies from Qatar while it taps largely undeveloped offshore sour gas fields.

Moreover, cracker capacity has risen at a faster rate than gas production, with Saudi Aramco halting all new ethane allocations in 2006 and some supply agreements having since fallen by the wayside. Meanwhile, Iranian gas reserves are under-utilised, a situation that is likely to continue while international sanctions are in place. Qatar has also halted new allocations until 2014 as it reassesses sustainable rates of gas production. At the same time, OPEC is limiting crude output, which in turn limits associated natural gas production.

In contrast to the Middle East, competitors in the US and Brazilian petrochemicals sectors are registering growth in ethane feedstock availability from shale and pre-salt reserves. Brazilian crude production growth is also expected to boost naphtha supply. As such, the Middle East cannot rely on its feedstock advantages indefinitely.

A tightening of the market, the rising costs of extraction and a need for incentives to encourage the drilling of non-associated gas are prompting governments to raise gas prices, thereby reducing the differential with naphtha and eroding the region's competitive edge. However, over the short-term, with crude prices remaining stubbornly high, Middle Eastern ethane-based petrochemicals production is still likely to prove a challenge to naphtha-based production, particularly in Europe.

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Sector: Petrochemicals