IHS World Markets Energy Perspective | |
Significance | Saudi Aramco has revealed plans to increase its domestic use of liquid petroleum gas (LPG) as petrochemical feedstock by 21% next year, effectively slashing its LPG exports by 23.5%, as it sees associated by-products such as natural gas liquids (NGL) as a good way of fuelling its industrialisation and economic diversification projects at a time when global markets for the NGL product family might become crowded. |
Implications | The push to bring more gas onstream to meet domestic shortages and the priority given to those oilfields with associated gas production to remain onstream when Saudi Arabia reined in crude output in mid-2008, both ensured that the kingdom's production of NGL, including condensate and LPG, rose significantly, and it looks likely to continue rising in the future. This is not a uniquely Saudi situation, with NGL production having risen sharply across the Gulf, as high gas demand or large LNG export plans have needed to be satisfied. |
Outlook | Saudi Aramco's plans are another strong indication of the priority put on domestic petrochemical industry expansion going forward, while at the same time making sure that the expanding industry does not use up more of the country's scarce gas resources or eat too much into its crude export capacity, although developing an industry on the basis of feedstock availability as opposed to demand might be a risky undertaking. |
Diversion
Saudi Aramco is expecting its liquid petroleum gas (LPG) exports to fall by about 23.5% to about 6-6.5 million tonnes during 2011, with sharply increasing volumes being diverted to the domestic market as feedstock for the kingdom's growing petrochemical industry. "The reduction in export volume is led by the need to meet domestic demand, particularly from Saudi Kayan Petrochemical Company", an industry source told Platts, putting the increased Kayan demand at about 2 million t/y, constituting effectively all of the export decline, of mainly butane. Kayan's steam cracker complex in the Jubail Industrial City is mainly LPG and naphtha-fed, producing about 1.33 million t/y of ethylene.
Saudi Aramco's LPG exports in 2010 are expected to reach about 8-8.5 million tonnes, roughly in line with 2009 exports, from a total LPG production of under 18 million t/y, which means that LPG use in the domestic petrochemical sector next year is likely to jump from about 9.5 million t/y to 11.5 million t/y, or about 21%, according to figures released by Platts. LPG is generally sold through term contracts by Saudi Aramco, with the industry source telling the news agency that the state-owned oil and gas giant was "nearly at a breakeven level in terms of committing the entire export volumes for next year through term contracts". The company started flagging greater domestic use of its LPG in the middle of the year, cutting its butane export volumes for three consecutive months between September and November, and leaving the lower export volumes unchanged in December.
Domestic Focus
Saudi Aramco has, during the second half of 2010, motioned for a stronger push on petrochemicals, after seeing the global economic recovery get under way and many of the projects mooted in the kingdom set to move ahead (see Saudi Arabia: 8 December 2010: Saudi Aramco CEO Says Gulf Petchem Producers Should Aim for Fivefold Sales Growth by 2020 and Saudi Arabia: 13 December 2010: Saudi Aramco, Dow, and Sumitomo to Decide on Jubail Project, Rabigh Expansion in 2011). Most of the projects will take place outside of Saudi Aramco's authority, but given its upstream monopolist position and the centrality of petrochemical expansion to current Saudi politico-economical planning, Saudi Aramco is tasked with meeting long-term feedstock allocation requests.
The Saudi government is in an increasing hurry to diversify the economy and industrialise the country, given the high proportion of youth in its growing population and the significant unemployment problems from which the country suffers. Building on existing industry know-how and feedstock access, the petrochemicals sector has always been seen as a natural starting point for diversification efforts and over the past decades international petrochemical companies have become increasingly keen to establish, or even move, parts of their production capacity portfolio to feedstock-producing countries. This is less to do with the economies of scale involved, as instead of having to transport feedstock to production facilities, the products have had to be transported to the markets, given that the end-markets still generally are made up of resource-producing countries, but rather the push to build production capacity in the large feedstock producers has come from the often highly subsidised domestic market prices on offer in those countries—a fact particularly true of OPEC member states including countries around the Gulf. Hence, countries like Saudi Arabia subsidise the feedstock of international petrochemical ventures in order to gain in domestic industrialisation and job creation, as well as to see some value added to its otherwise crude-dominated exports.
Outlook and Implications
Broadly Speaking
Rising natural gas liquids (NGL) production, including condensates, has been a feature of the Middle East and North Africa for most of the past decade, as there was a scramble to develop associated and non-associated gas reserves both for a growing LNG market and to meet spiralling domestic demand. Qatar's production of NGL will in 2011 overtake its oil production in size, pushing through the 1-million-b/d mark, while many other OPEC states have found rising LNG production a convenient way of raising their export earnings without breaking their OPEC quotas, given that NGL do not fall under OPEC's output regulating remit (see Qatar: 14 December 2010: Qatar Celebrates Completion of Its LNG Development and Qatar: 21 December 2010: Shell Moves In to ExxonMobil's Abandoned Qatari Petchem JV). With much of the Gulf continuing the scramble for gas to break out of yearly patterns of domestic shortages, more NGL production will come onstream in the coming decade as a result of gas development being prioritised, together with oilfields having high amounts of associated gas and NGL.
While providing potentially lucrative side revenues to their main crude exports, the Gulf states might soon, however, find themselves competing for their large NGL volumes in a global, but specialised, market. Using increasing amounts domestically and making the most of their competitive advantage in the petrochemical industry might therefore look doubly appealing, adding value to NGL and facing a smaller risk of suffering from a potentially weakening market should global NGL demand become saturated. Saudi Arabia is now hoping that the push to develop its petrochemical industry will rapidly gain momentum ahead of other Gulf countries, in order to prevent the potential oversupply problem shifting from the NGL market to the petrochemical industries sector and leaving the Gulf countries with a larger petrochemical production capacity than global demand calls for. Hence, while a rich, although potentially too rich, supply of NGL might seem like a tempting foundation on which to push massive petrochemical-sector-based industrialisation projects, establishing the expansion on feedstock availability rather than global product demand might be a risk should the whole region follow the accelerating trend, as recent Gulf discussions suggest.