Over the past 30 years, the Middle East has become a key producer and major exporter of petrochemicals to world markets. A fact that has not been lost by its key beneficiaries, namely the Gulf Cooperation Council (GCC) comprised of Bahrain, Kuwait, Oman, UAE, Qatar and Saudi Arabia. Buoyed by locality of feedstocks and the regions proximity to Asia the GCC has been able to capitalise on its advantage and raise its competitiveness in the face of more traditional producers in Europe and lack of domestic capacity in Asia. However the global slump in oil prices, a shortage of advantaged feedstocks, and a large buildup of petrochemical capacity in the United States based on cheap shale gas has brought about a change in strategy. The regions woes may be further compounded by geopolitical developments following the renaissance in diplomatic relations between the West and Iran. The lifting of sanctions on the latter being imminent following an agreement to scale back and increase the transparency of its nuclear programme. The perceived resumption in large scale oil exports that this may bring could weaken the worldwide oil supply-demand balance according to analysts. It may also drive increased petrochemical investment in the country which represents its own issues.
CAGR production growth over the past 5 years has been assessed at 8% according to the GPCA but set against a backdrop of slowing Chinese growth, falling oil markets and challenging product prices GCC producers have seen sales decline to just under $88 billion in 2014 from $89.4 billion in 2013. All of these issues have meant that the GPCA has cut its growth forecast from 8.3% to 7.5% on a CAGR basis for the next five years. Confronted with all this, what can the Middle East do to maintain its position?
One answer would be innovation. There is certainly a shift away from bulk chemicals in recent years; to a greater focus on intermediate and speciality volumes – the Sadara project being one such example. Another answer would be one of more a strategic focus on where to place capital investment. The uncertain short term outlook that the prevailing wider market conditions have brought have led to two major projects being cancelled in Qatar. Firstly, the Al Sejeel project – a joint venture between Qatar Petroleum (QP) and Qatar Petrochemicals Co. – was shelved due to high investment costs. Whilst QP and Shell cancelled the Al Karaana project earlier this year, QP has said that they are studying other downstream alternatives in order to diversify and increase its share of the market. Indeed, the Middle East is still largely gas based, approximately 70% of the regions ethylene production is from ethane compared with global average of just 30%, according to IHS. As a result and due to the erosion of competitiveness, we see that the likes of Saudi Aramco and SABIC (along with its affiliates) are pursuing investments using other feedstocks such as naphtha and other liquids to compliment ethane. The Sadara project will be based on mixed feedstocks as will the Liwa petrochemicals complex.
The answer to the Middle East’s conundrum is therefore multifaceted. A combined approach of focusing on feedstock optimisation and diversifying into downstream products seems to be the way forward for the regions producers. This is particularly poignant when one considers that most oil and petrochemical majors are facing a challenging earnings environment and obviously the GCC wishes to combat this. The issue of Iran is a factor but we must treat it lightly. Whilst the agreement with the P5+1 has been passed by the Iranian Parliament and the Guardian Council as well as the fact that President Obama has now secured enough votes to get the treaty through the US Senate the likelihood of sanctions relief is high. Iran has been vocal in its plans to increase petrochemical capacity with many projects now slated. However, in all likelihood the levels of investment required is some way from fruition with Iranian technology and infrastructure needing huge levels of modernisation and investment. There is no doubt that Iran remains a factor in the region but it does not represent as much of an immediate threat to the GCC, as the media and Iran itself may have us think. Whatever happens the Middle East is a region which continues to be on the move and the Specialised Products markets will be intrinsically linked to these developments.