Commodities 2023: Middle East's shift in focus from refining to petchems to gather pace

The energy-rich Gulf region is set to focus more on developing petrochemical projects rather than refineries in the coming years, taking advantage of the higher margins from these facilities, plant closures in Europe, a drop in Russian production and stronger global demand for petrochemicals than other oil products.

The global chemicals sector used more than 15 million b/d of crude out of a total demand of 94.5 million b/d in 2021, and is seen as a major source of future growth in all three of the International Energy Agency's oil demand scenarios out to 2050, it said in its World Energy Outlook 2022 published in October.

The Gulf region is well placed to capture a big slice of the global growth in petrochemical demand due its plants' economies of scale, vast energy resources, relatively low production costs and proximity to key markets such as Asia.

"You would expect to see over the next decade the share of oil that is going into petrochemical feedstocks climbing up and up and up, approaching 20% of total consumption, maybe even pushing beyond that," said Ciaran Healy, an IEA analyst.

For the Middle East, petrochemical feedstocks already account for about 25% of total oil demand, higher than the global average, he added.

"The further you go down that continuum or road of emissions reduction, the bigger the role of petrochemicals becomes because you are substituting more things out of transport."

Under the IEA's net-zero emissions by 2050 scenario, the chemicals and industry sector will account for more than half of global oil demand of 22.8 million b/d, while oil use in passenger cars is forecast to fall by 98%.

Crude-to-chemicals projects

Gulf energy producers invested heavily over the last decade in refineries, with Saudi Aramco bringing its 400,000 b/d Jazan facility onstream in 2021 and Kuwait finally commissioning this year its 615,000 b/d al-Zour facility following a decade-long delay.

Now these same producers are looking more at developing refineries integrated with petrochemical facilities or even skipping this step, as in the case of Saudi Arabia, which is mulling crude-to-chemicals projects domestically and internationally.

Investment in the Saudi petrochemical sector is expected to ramp up, S&P Global Ratings said in a Dec. 5 report, with its base case looking for higher capital expenditures in the medium term (at least for the next two years) for SABIC, which is 70% controlled by Saudi Aramco. SABIC's capex is expected to be $2 billion-$4 billion this year, and $4 billion to $5.3 billion next year, against $2.9 billion in 2021, according to S&P Global Ratings.

Aramco recently announced plans for the first large-scale deployment of its crude-to-chemicals cracking technology at the company's S-Oil affiliate in South Korea, and a joint project between Aramco and SABIC to develop a crude-to-chemicals complex at Ras al-Khair in the kingdom.

Aramco, which has a maximum sustainable crude oil production capacity of around 12 million b/d currently, with a target to raise that to 13 million b/d by 2027, plans to convert 4 million b/d of crude into chemicals by 2030.

In the UAE, state-owned Abu Dhabi National Oil Co. scrapped plans for a refinery and now is focusing on its petrochemical joint venture Ta'ziz, which has attracted the likes of Reliance Industries to some projects.

"Both SABIC and Aramco have developed and scaled up their own technology that enables them to produce chemicals, namely aromatics, at a competitive commercial rate higher than the existing technologies," Abdulwahab al-Sadoun, secretary general of the Gulf Petrochemicals and Chemicals Association, told S&P Global Commodity Insights on Nov. 28.

"Maybe more than one project will be executed in the region over the next five years, depending on the first project in Ras al-Khair. It is both integrated refining petrochemicals projects and oil-to-chemicals that is the trend we will see more of in the coming years."

Integrated refineries

Gulf petrochemical production grew 2.7% in 2021 to reach 154 million mt/year, and is expected to expand further in 2023, Sadoun added.

Currently, there are three crude-to-chemicals projects in China and one in Brunei, according to Rahul Bhutani, director of chemicals research and analytics at S&P Global. The Ras al-Khair project could be configured to maximize olefins production while boosting the petrochemicals output to as much as 50% as opposed to 10-20% under traditional refinery-integrated cracker route, he added.

Gulf producers have relied primarily on ethane as feedstock for petrochemical projects.

"With limited availability of ethane being a key challenge, the refinery-linked or crude-to-chemicals complex becomes a feasible alternative for companies to expand the petrochemical manufacturing base in the country," said Bhutani.

"Going forward, refinery operators in the Middle East are expected to shift towards petrochemical integration."

Middle Eastern countries are turning their attention to petrochemicals at a time when Europe is shuttering its relatively smaller and older plants due to the high gas costs and shunning imports from sanctions-hit Russia.

"In the short to medium term, MENA petrochemicals will be needed for compensating the drop in European supply resulting from plant closures across the continent -- including Ukraine which supplies around 20% of European olefins production -- over and above the usual captive markets of East Asia," said Ramy al-Ashmawy, senior energy specialist at multilateral financial institution Arab Petroleum Investments Corp.

"A healthy pipeline of committed and planned projects in MENA will be able to cater for demands of both domestic and global markets."