Booz & Company
Rebalancing Global Petrochemicals Markets following Shale Gas and Technology Developments
Booz & Company examines the need for GCC states to develop ‘on-purpose’ production technologies in order to better tackle feedstock disruptions across the petrochemicals industry
Dubai, UAE, 20 November 2012: With shorter gas supply in GCC, and new feedstock developments elsewhere, e.g., shale gas in the US, conventional gas in Iraq, the global petrochemicals industry has recently experienced significant disruptions. This is especially evident in the supply and pricing of key chemicals– ethylene, propylene, butadiene, and benzene – due to the changing mix of feedstock used in petrochemicals production. While the quantity of ethylene has surged, supplies of propylene, butadiene, and benzene have declined. In line with this, a study by management consulting firm Booz & Company found that ‘on-purpose’ or alternative production technologies for propylene and benzene could correct these supply imbalances, as well as reduce prices. The analysis also highlights how these feedstock developments affect the different players in the chemicals value chain. These include Gulf Cooperation Council (GCC) producers, global producers and consumers.
THE EMERGENCE OF NEW FEEDSTOCK SOURCES
The global petrochemicals industry relies on a few basic chemicals to create its end products. Crackers produce these as a by-product of certain raw materials (feedstock), such as “light” natural gas and “heavy” liquid naphtha.
“In recent years, the emergence of potential new sources of light feedstock has significantly changed the availability of the four chemical building blocks – as light feedstock sources are replacing heavier ones,” said Andrew Horncastle, a Partner with Booz & Company. “This is due to the fact that light feedstocks are mostly used to make ethylene, whereas heavy feedstocks produce propylene, butadiene, and benzene. These changing supplies – a result of developments in the Middle East, North America and China – have led to supply-demand imbalances and pricing distortions across global petrochemicals markets.”
Gas Developments in the Middle East
Whereas North America is awash with natural gas, the GCC finds itself in precisely the opposite position. Gas production – currently associated with oil – is increasing modestly in line with oil extraction; and, most of the anticipated supply is already committed to existing and new projects. National oil companies in the Middle East are responding to the shortage of natural gas by exploring non-associated gas, unconventional gas, and shale gas, while various petrochemicals companies have shifted to cracking more liquid feedstocks.
Outside the GCC, Iraq has an abundant gas supply in the form of associated gas – which is rich in Natural Gas Liquids (NGLs) content. The country has established an oil production target of 13 million barrels per day by 2017 and, such growth is also set to increase gas production.
Shale Gas Developments in North America
The U.S. chemicals industry is booming thanks to the wealth of shale gas resources that has created abundant and cheap natural gas and ethane supplies. This is reshaping the global petrochemicals playing field by giving U.S.-based players a significant cost advantage compared to European and Asian players.
The abundance of cheap shale gas-derived NGLs has displaced naphtha at many existing steam crackers. Although plans for about a dozen new crackers have been announced, producers are hesitant to add new capacity due to concerns about the future supply and price stability of feedstock.
Shale Gas Developments in China
In the long term, China could have a significant impact on global feedstock supply. The nation has the largest shale gas reserves in the world; and, although there is currently no shale gas production in China, the government’s five-year plan calls for 6.5 billion cubic meters of domestic production by 2015.
SHIFTS IN THE SUPPLY OF KEY CHEMICALS
The North American shale gas boom is changing the petrochemicals landscape. “And, with the Middle East stepping up exploration and China about to tap huge reserves, more supply and changes are on the way,” explained Asheesh Sastry, a Principal with Booz & Company. “Simply put, the global petrochemicals industry is headed toward a glut of ethylene supply.”
Crackers that can tap into these light feedstock sources will have a notable competitive advantage as they will be able to produce more ethylene at a significantly lower cost than many existing mixed feed crackers. As new capacity comes on stream to produce ethylene, margin will compress and prices will decline further – putting even more pressure on marginal producers.
“The downward trend in prices could mean that by 2025, 10 to 20 per cent of existing cracker capacity may come under threat and some may even be forced to close. This could seriously disrupt the production of other critical petrochemical building blocks,” added Horncastle.
These supply shortages and price distortions for propylene, butadiene, and benzene are creating opportunities for ‘on-purpose’ and alternative production technologies that were once marginal or uneconomical.
GCC PLAYERS MUST APPROACH ‘ON-PURPOSE’ CAUTIOUSLY
Over the last few decades, petrochemical companies in GCC have built significant capabilities based on the “cracker + 1” model of producing key petrochemical building blocks – and then converting them into basic chemicals. Furthermore, current feedstocks are sufficient to meet the capacity of the region’s producers.
“Going forward, however, looming gas supply shortages could challenge growth. GCC producers could therefore be tempted to adopt ‘on-purpose’ technologies in the region and internationally,” said Sastry. “Increasing ‘on-purpose’ production, however, will require that companies in the region develop or acquire more technology-centric capabilities.”
‘On-Purpose’ Technology Options
Three ‘on-purpose’ technologies currently supply the propylene market – propane dehydrogenation (PDH), methanol to propylene (MTP), and olefin metathesis. While ‘on-purpose’ production of propylene via PDH in the Middle East seems competitive , it could become marginal if PDH capacity in the US and CTP capacity in China were to grow as planned, as both of these have better economics than ME based PDH (at market prices of propane). Further, declining availability of propane in the region could constrain the growth of PDH technology. However, if ethylene and 2-butene are available at advantageous prices, the metathesis technology for propylene production could also be competitive. Nonetheless, if it is based on market prices, metathesis will remain a marginal technology. Economics of MTP in the Middle East might, at first, seem attractive. However, with propylene margins at about $600 per ton, MTP does not adequately compensate for the potential methanol margins.
On the aromatics/benzene side, GCC producers should consider the coal to BTX route – referring to mixtures of benzene, toluene, and xylenes, all of which are aromatic hydrocarbons. This is especially advantageous given the positive outlook for construction in the Middle East and in Asian countries such as India and South Korea.
GCC players considering investments in ‘on-purpose’ technologies also need to take into account higher capital costs, logistics costs, and destination markets. Capital costs and logistics costs in the region tend to be higher than in North America, which increases the total cost of production. However, investing into on-purpose technologies outside the Middle East, where feedstock is available at advantageous prices, could be an attractive option.
To conclude, feedstock developments have implications that resonate across the petrochemical industry. Today, producers have significant growth opportunities in regions such as the US and China, where feedstock is available for ‘on-purpose’ production. Producers globally have mostly invested in process technology, but now, they must reconsider product technology, their research and development strategy, and even the ways to play in this market. GCC companies will need to recognize that ‘on-purpose’ production in the region would be less attractive or marginal without the availability of advantageously priced feedstock. They also need analyse their value chains and protect their margins against raw material price fluctuations e.g. they could consider backward integration or margin management across the entire value chain. Finally they should augment their existing capabilities and seek new geographies where feedstock is available.