INDUSTRY INSIGHT

Sustaining competitive advantage through strategic investment

A gradual but significant shift in the global chemical industry is under way. Evolving macro-economic factors such as end-user markets, fluctuations in oil and gas prices and changing feedstock dynamics are influencing investment in new chemical capacity globally, the choice of raw materials being utilized, the geographies in which new facilities are emerging and how chemical plants are being configured. Across the world, future demand patterns, rapidly evolving government policies and capital efficiency paradigms are shaping further the new supply and demand centers for base chemicals and petrochemicals and helping to determine which feedstocks dominate production now and into the future.

Arabian Gulf chemical producers have been acutely aware of these factors and over the past 10 years, new regional chemical capacity investments have been driven by competitive feedstock supply and integrated refining and petrochemicals production. A move to ramp up chemical capacity investment is largely driven by economic reasons. To be competitive, crackers are normally built either close to the feedstock source or with access to key market/s. Over the last decade, the latter has been a driving force behind GCC chemical investment, as regional players intensify their efforts to gain a foothold in key and strategic chemical markets overseas, as well as securing a market for their crude oil out.

GCC ethylene market overview

Ethylene represents the largest olefin market in the world and is one of the most important petrochemical building blocks that is used as feedstock to produce a diverse range of downstream chemicals that serve multiple end-user industries. Because ethylene is predominantly utilized captively, it serves as a litmus test of the overall health of the chemical industry, and therefore, understanding the developments, trends and market dynamics of ethylene is of great importance to the industry at large. To highlight the latest developments on the ethylene market and provide analysis into their impact on Arabian Gulf chemical producers, GPCA has developed a new report entitled ‘Ethylene: A Litmus Test for the Chemical Industry’. The below is a summary of report’s key findings.

The GCC region is a leading ethylene producer globally, representing 16% of the global ethylene output. Over the past three decades, the region has emerged as a leading ethylene production hub, growing by 9.8% per annum since 2000 and reaching 25.8 million tons of production capacity in 2018. The GCC has a significant competitive cost advantage compared to other parts of the world, as most ethylene production is ethane based.

Oil refinery industry plant in twilight time

Domestic ethylene capacity investment

Over the next decade, GCC ethylene capacity is forecasted to increase by 53% reaching 39.4 million tons in 2029. This translates to about 1.5 million tons of ethylene capacity addition every year, compared with 1.2 million tons during the 2010-2018 period. This massive new capacity increase is poised to significantly increase the competitiveness of regional producers globally and set the stage for a massive shift in global market competition.

Saudi Arabia will account for half of incremental capacity additions in the region and grow by 3.4% per year over the 2019-2028 period. While market share of ethylene capacity in Saudi Arabia is not expected to change much in volume terms, we expect to see feedstock mix changes and ownership restructuring. Feedstock mix change will be driven by refinery and petrochemicals integration. Several highly sophisticated mixed-feed cracker projects are being developed in the GCC. These include the Duqm Petrochemicals Project (DPP) and Liwa Plastics Complex in Oman, Al-Zour Petrochemicals Complex in Kuwait, Total and Saudi Aramco’s ‘Amiral’ mixed-feed cracker and derivatives complex in Saudi Arabia, Borouge 4 Petrochemicals Complex in the UAE, and Ras Laffan Petrochemical Complex in Qatar. Set to come on stream between 2020 – 2025, these investments will bring on stream a combined capacity of 13.4 million tons a year.

Overseas ethylene capacity investments

GCC companies are investing in ethylene production in key growth markets around the world, particularly in North East Asia, China specifically, and North America. With China striving for self-sufficiency, ethylene supply is expected to increase by 3.7% per year between 2019-2027. Top tap into this growth, regional producers are setting up ethylene production facilities in these markets, including petrochemical plants in Zhejiang, Panjin and Fujian.

North America is another key growth market for global ethylene supply and GCC producers are investing in projects in this region. They include the Texas Ethane Cracker by SABIC and ExxonMobil, Port Arthur Petrochemical plant integrated refinery by Saudi Aramco and Texas petrochemical plant developed by a consortium of players including Nova Chemicals (UAE)/ Borealis and Total.

Off the back of these investments, we estimate that by 2029 about one third of total ethylene production by GCC producers will be located overseas. Taking into consideration the increase in overseas projects by GCC producers, the region’s share in global ethylene supply will reach 25% by 2027, up from 20% in 2018.

Strategic considerations for GCC ethylene producers

Ethane availability for new projects in the GCC is limited. Therefore, future petrochemical growth in the region will require liquid feedstocks from refinery petrochemical integration. Refining and petrochemical integration can offer numerous benefits. Integrating an ethylene cracker with a refinery will lead to a range of new building blocks for the petrochemicals industry, which in turn provides opportunities for diversification of product portfolios within the chemical industry. This is a crucial element for the GCC and long-term national visions as diversification of the industry will bring more value addition and job creation.

As the GCC chemical industry continues to diversify its petrochemical feedstock, the role of oil refining will be increasing. Heavier feedstock mix will support the desire of producers to diversify into more sophisticated and higher value chain chemicals which in turn will support the development of more downstream industries.

Beyond feedstock advantage

The global ethylene market has been undergoing a series of disruptions, including the US shale gas revolution, declining oil prices and capacity expansions in Asia, and China in particular. These events shift dynamics and impact economics in the ethylene market, putting GCC producers at a less advantageous position. In order to sustain their competitive advantage, Arabian Gulf ethylene producers must develop a new set of capabilities, continue to invest in new technologies and focus on cost efficiencies. Developing a technology edge over the rest of market players will be an essential enabler of long-term competitiveness. The focus should remain on developing technologies in-house as well as through acquisitions with the objective to extract more value from current resources, increase sustainability and improve competitiveness. Acquiring access to leading edge technology for ethylene production would further enhance the global competitiveness of GCC players.

GPCA’s report entitled ‘Ethylene: A Litmus Test for the Chemical Industry’ was released during the 14th Annual GPCA Forum held on 3-5 December at the Madinat Jumeirah Dubai under the theme ‘Winning through Strategic Partnerships’.

To read the full report click here.