Insight from Dubai: Middle East seeks refuge in petchems amid bleak oil demand forecasts

Despite global oil demand plunging an unprecedented 8% this year and drastic OPEC+ cuts, Middle Eastern energy producers are still counting on higher petrochemicals production to temper a bleak outlook for peak oil consumption that has spooked crude markets.

Even before the coronavirus pandemic, producers had little choice but to focus on petrochemicals, as the sector will account for 60% of global oil demand in the next decade due to rising consumption of plastics, according to the International Energy Agency.

In the last decade, road transport fuels represented 60% of oil demand. Probably for the first time, the IEA in this year's annual World Energy Outlook indicated oil demand may plateau from 2030.

The IEA's view on petrochemicals growth resonates with that of the multilateral energy sector lender, Arab Petroleum Investments Corp. In its 2020-2024 gas and petrochemicals outlook published Oct. 12, Apicorp raised its forecast for planned petrochemical projects during the period by $4 billion from its previous estimate to $95 billion.

"By the end of this decade, most of the growth in oil demand will come from the petrochemicals sector," Apicorp said. "The 2020 crisis and the delayed economic recovery might underscore this trend."

Egypt, Iran and Saudi Arabia are the top three countries in the Middle East and North Africa in terms of committed petrochemicals investments, it added.

But the road to the predicted petrochemicals bonanza is pockmarked with financial constraints, geopolitical threats and competition among producers to supply a market grappling with peak demand scenarios and a pandemic that has no end.

Nevertheless, changing global oil consumption habits have led Middle Eastern oil producers to focus on integrating their large-scale refineries, with petrochemical facilities as a first step.

Asia and the Middle East, which accounted for two thirds of global refining investment over the past five years and for more than 80% of refining capacity currently under construction, will emerge by 2030 as the largest global refining centers, overtaking traditional ones, according to the IEA.

Aramco's refinery blues

As the world's top oil exporter, Saudi Arabia wants to a piece of this refining pie.

In Saudi Arabia, the 400,000 b/d Jizan, or Jazan, refinery in the south is linked to a petrochemical facility. The start-up of the refinery, which was supposed to take place last year, has been postponed to this year.

The Jizan refinery is located in a region that suffers from sporadic missile and drone attacks from Iranian-aligned Houthi rebels in neighboring Yemen that are intercepted by Saudi defense, posing a potential threat to the facility's existence, let alone supply agreements.

A piece of Aramco's downstream puzzle, Jizan will help the state producer reach 6.8 million b/d in gross refining capacity by the end of 2020. Aramco's refining business consumed 39.5% of the company's crude production in the first nine months of this year.

But the business is a loss-making venture. Downstream EBIT in the first nine months of 2020 swung to a loss of Riyals 23.3 billion ($6.2 billion) from a profit of Riyals 4.87 billion a year earlier. Aramco blamed the dismal results on "the macroeconomic difficulties brought on by the COVID-19 pandemic."

Although Aramco has promised a staggering $75 billion dividend this year to investors, it still has to prop up its existing refining and petrochemical projects. Aramco and Japan's Sumitomo Chemical will lend $2 billion to Rabigh Refining and Petrochemical Company, or Petro Rabigh, the Saudi joint venture that is facing a capital shortfall due to the pandemic and periodic maintenance.

Despite being in the red, Aramco's downstream business wants to expand globally as well. A 300,000 b/d refining and petrochemical joint venture project with state-owned Petronas in Malaysia was supposed to be up and running last year but has also been delayed to a 2020 start-up.

But the biggest setback to Aramco's petrochemical ambitions is its reassessment of a new $20 billion oil-to-chemicals project, a joint venture with Saudi Industries Corp., or SABIC, which the national oil producer acquired this year for $69 billion.

The two companies are now studying the integration of Saudi Aramco's existing refineries in Yanbu with a mixed feed steam cracker and downstream olefin derivative units, as an alternative to building a new plant.

The acquisition of 70% of SABIC was supposed to set Aramco on a path to become a petrochemical behemoth with combined production of 90 million mt/year.

Elsewhere in the Gulf, delays are besetting other refining and petrochemical projects. Kuwait's 615,000 b/d Al Zour refining and petrochemical project is a decade late due to the country's complex local challenges.

In the UAE, Abu Dhabi National Oil Co.'s strategy to attract $45 billion in investments to its downstream sector in partnership with international oil companies has yet to yield big tickets deals. The company's push to double its refining capacity and triple its petrochemical production capacity has no set timeframe.

In Egypt, the ministry of petroleum and mineral resources is focusing on two integrated projects. One is an $8.5 billion complex in Al Alamein in the Western Desert that includes a 2.5 million mt/year crude and condensate refinery. The project, which is expected to be completed by 2024, will meet local petrochemical demand and could also export products.

Another $6.2 billion project in the Suez Canal Economic Zone is expected to produce up to 1.9 million mt/year of petrochemicals and up to 900,000 mt/year of refined products. The project would import crude to process into petrochemical and refined products.

The two complexes are part of 11 projects that are on the cards, costing $19 billion in total. Egypt, which wants to wean itself off refined products imports by 2023, consumed 30.2 million tons per year of oil products in 2019, nearly a third of that coming from imports at a cost of $6.8 billion, according to the petroleum ministry.

But financing for these large-scale projects may be a hurdle, given the country's reliance on foreign debt.

In Iran, the government is even more keen to boost its petrochemical profile because its energy industry is buckling under the weight of US sanctions, re-imposed in 2018. Iran increased its petrochemical output by 8% in the seven months ending October in its fiscal year that started in March 2020.

Petrochemicals revenue could help compensate from losses arising from lower crude sales, which have plunged since the re-imposition of sanctions. Iran, which produced 66 million mt/year in its last fiscal year, wants to reach 100 million mt/year by March 2022, generating $25 billion in revenues, and even hit 133 million mt/year by March 2025.

However, production from the Middle East will be competing with Asian output in the coming years, as both regions vie to become petrochemical giants at a time when peak oil demand is predicted to be just around the corner. And amid the ongoing coronavirus pandemic, finances will continue to be slim, jeopardizing the grand plans of both regions when they most need a boost.