Will Politics Threaten Middle East Petrochemical Expansion?

It was recently reported by the chemicals industry media outlet ICIS that a political fallout amongst the Gulf Cooperation Council (GCC) members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) could threaten the regions supply of natural gas from Qatar and thus throw a proverbial spanner in the works for the raft of petrochemical expansion projects due to be built in the coming years.

Essentially, the fall out centres on Qatar’s support of Egypt’s ousted President, Mohamed Morsi of the Muslim Brotherhood. The movement is banned in Bahrain, Saudi Arabia and the UAE. Such is the resentment of said group and Qatar’s support of them that all three of the above removed their ambassadors from Qatar.

So why could this issue be so fractious?

Firstly, the GCC was founded in 1981 to foster greater economic cooperation amongst the six Middle East countries listed above. Any political difference between the members particularly on matters of foreign policy will no doubt jeopardise this. Indeed, cooperation is key to the Middle East realising its downstream objectives. Secondly, Qatar is, according to the EIA, the biggest exporter of LNG in the world. It is estimated the Gulf State has approximately 885,000 billion cubic feet of gas reserves and sits on what is believed to be the single biggest reserve in the world – the North Field. Three of the GCC members (UAE, Oman & Kuwait) are dependent on natural gas supply from Qatar whilst Saudi Arabia has enough domestic supply and Bahrain relies on other sources. However, supply worries are growing in both these states yet they resist buying products from Qatar.

Meanwhile, as the program for petrochemical growth plods on, gas demand is expected to increase rapidly which underlines the need for a stable natural gas supplier in the region. All GCC members rely on gas to run their power plants and as feedstock for their petrochemical production. According to the Gulf Petrochemicals and Chemicals Association (GPCA) the GCC is estimated to add 54 million tonnes to its 2012 annual chemicals production over a five year period to 183.6 million tonnes. Whilst other avenues of supply are possible the logistics and political ramifications they may have could be even more of an issue than the current problem. One such alternative is turning to Russia and Gazprom. Indeed, Bahrain already purchases much of its need from Russia but the current situation in the Ukraine over Crimea may test the countries will to follow this policy. Saudi Arabia is self-sufficient for now but with gas consumption rising each year it is quickly looking for alternatives to service its growing petrochemical demand – SABIC are actively looking into to building an oil-to-chemicals complex which should be online by the end of 2020. It is expected to use 10 million tonnes per year of crude oil as feedstock for the production of petrochemicals and speciality chemicals. However, this is some way off and is an expensive avenue to follow. Indeed, we cannot forget the more traditional feedstock of naphtha as well which is still an option.

There is little doubt that politics at government level have caused an issue for GCC members but it seems obvious that if they are to secure the feedstock they need then a resolution will have to be sought. How long this will take remains to be seen!

Written by Josh Saxby

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