MIDDLE EAST FUTURE
The industry's presence in petrochemicals could be slowed by war in Iraq and by logistical challenges

ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU

SAND AND SUN Chevron Phillips completed an ethylene joint venture in Qatar earlier this year. CHEVRON PHILLIPS PHOTO

The Middle East is probably the most important influence on the global petrochemical industry today and will remain so for many years to come. The region's unparalleled production cost advantage and the willingness of its governments to diversify their oil-based economies have fostered exponential growth of an industry that may forever change the commodity petrochemical business.

The Middle Eastern industry has grown from being insignificant 20 years ago to being home to about 10% of global ethylene capacity today. For Europe and the U.S., the region is both threat and opportunity, gobbling up the export market on the one hand and presenting a profitable place to invest on the other.

For Asia, the Middle East is a threat but also an important emerging source of petrochemical products. But the Middle East's success isn't unbridled. Prospects of a war in Iraq are raising concerns, and logistical and feedstock challenges could hem in the region's growth.

For Makoto Takeda, head scientist at Tokyo-based Dia Research Martech, the reasons for Middle Eastern countries to focus on petrochemicals are obvious. "The Middle Eastern oil-producing countries, led by Saudi Arabia, have in recent years promoted a policy of reducing their dependency on the oil economy and are actively tackling the petrochemical industry as a pillar for fostering domestic industry," he says. "With their background of superiority in feedstocks, they are proceeding with expansions for their petrochemical industries at a pace, in some cases, unrelated to the world's supply-demand balance of petrochemicals."

Ethylene can be made in the Middle East for a fraction of the cost of making it in Asia, the destination for most Middle Eastern exports. The price of ethane in Saudi Arabia is set at 75 cents per million Btu, which translates to an ethylene production cost of $100 to $110 per metric ton, according to Takeda. In Iran, ethane costs $1.25 per million Btu. In contrast, this year making naphtha-based ethylene in Asia costs five to six times as much as ethane-based ethylene in Saudi Arabia.

No company has benefited more from this advantage than Saudi Basic Industries Corp., or SABIC, the majority of which is owned by the Saudi Arabian government. In 25 years, the company has grown to 40.6 million metric tons of petrochemical production and sales of $9 billion in 2002.

In a bid to get a foothold in the European petrochemical market, SABIC purchased DSM's petrochemical business for $2 billion last year. The business has a capacity for about 2.6 billion metric tons of polymers and had 2001 sales of $2.1 billion, making SABIC the 11th largest petrochemical producer in the world. SABIC has said it is considering acquisitions in other regions, namely Asia.

SABIC is also taking a large step with Jubail United Petrochemical Co., which it is building alone. The venture will begin during the second half of 2004, bringing 1 million metric tons of ethylene plus ethylene glycol and -olefins to the market.

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"It makes sense to use the Middle East supply source as a base load for the world, because that is an attractive and economically viable solution."

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IN A SPEECH LAST YEAR, Abdullah S. Nojaidi, the firm's executive vice president for planning and investment, said SABIC is far from done expanding, and has set a goal of 48 million metric tons of capacity by 2010. "Saudi Arabia alone has over a quarter of the world's proven oil reserves and well over a century's worth of natural gas," he said. "This means petrochemical producers in Saudi Arabia can depend on the continued availability of feedstock and energy resources for many years to come."

Tapping these resources will be the Saudi Gas Initiative, which ExxonMobil and Shell are lining up to help develop. Sources have said the project could support three or more ethylene crackers. However, talks on the initiative stumbled last year.

Iran, through the government-owned National Petrochemical Co. (NPC), has made its petrochemical industry a strong second to Saudi Arabia. Iranian petrochemical output was 12.5 million metric tons in 2001--about 1.5% of Iran's gross domestic product. NPC exported $850 million in petrochemicals in 2002. Of this, 66% went to East and Southeast Asia, 12% went to India, 6% went to Europe, and 12% stayed in the Middle East.

Iran has set a goal of 30 million metric tons of production, 70% of which would be exported, by 2005. At that level, the country expects that its petrochemical output will be valued at $6.9 billion, or 3.4% of its GDP.

Much of the production is planned for the Petrochemical Special Economic Zone (Petzone) centered around the southern town of Mahshahr. Part of Petzone is an olefins project, slated to come onstream this month. It will have capacity for 520,000 metric tons of ethylene, plus propylene, high-density polyethylene (HDPE), and linear low-density polyethylene (LLDPE).

Another olefins project in the same area is expected to have 1.1 million metric tons of ethylene, as well as propylene, low-density polyethylene (LDPE), polypropylene, HDPE, and ethylene glycol.

NPC has also set up the Pars Special Economic/Energy Zone to make petrochemicals near the Persian Gulf port of Assaluyeh. One project, set for completion in 2005, will include a 1 million-metric-ton ethylene cracker together with downstream HDPE, LDPE, and styrene units. Because of U.S. trade sanctions, Iran rarely teams up with foreign investors, but last month NPC signed on South Africa's Sasol as a partner in a polyethylene plant at the site and may sign on SABIC.

Another project in the Assaluyeh region, slated for completion in 2005, aims to have 1.3 million metric tons of ethylene capacity along with downstream HDPE, LLDPE/HDPE, polypropylene, -olefins, and ethylene glycol plants.

And in the offing for NPC is a 500,000-metric-ton ethylene cracker, with derivatives, on Kharg Island in the Persian Gulf. The company is also looking at an ethylene, propylene, HDPE, and polypropylene complex to be commissioned in 2006 in Ilam.

Seeing the success of Saudi Arabia and Iran, a number of other countries in the region, including the United Arab Emirates, Kuwait, Qatar, Oman, and Egypt, have either completed major petrochemical projects or are planning them.

In the United Arab Emirates, Borealis--itself 25% owned by International Petroleum Investment Co. of Abu Dhabi--completed its Borouge cracker joint venture with Abu Dhabi National Oil Co. in late 2001. The company has 600,000 metric tons of ethylene and two 225,000-metric-ton plants for LLDPE/HDPE.

Henry Sperle, executive vice president of technology and projects at Borealis, says Borouge has so far exceeded expectations and adds that the partners are considering expansions. For example, the polyethylene plants can be expanded to a total of 600,000 metric tons. He also notes that natural gas development under way will make more ethane available for petrochemical projects in 2007 and could support a new 1.2 million-metric-ton cracker.

Dow Chemical says it has had similar success with its Equate joint venture with Kuwaiti government-owned Petrochemical Industries Co. and Boubyan Petrochemical Co. The venture has an 800,000-metric-ton ethylene cracker with ethylene glycol and polyethylene derivatives.

Dow wants in on expansions that Kuwait is considering, says Theo Walthie, business group president for hydrocarbons, energy, and ethylene oxide/glycol at Dow. "We are extremely satisfied with the relationship, the reliability, and the economic and safety performance," he says, noting that the current capacity could be doubled.

Qatar is also carving a role in the industry. Earlier this year, Q-Chem, a joint venture between Chevron Phillips Chemical and Qatar Petroleum, started Qatar's second ethylene complex. The facility includes a 500,000-metric-ton ethylene cracker, a polyethylene plant, and a 1-hexene unit in Mesaieed.

Qatar Petroleum is planning other projects. Last year, it formed another joint venture, Q-Chem II, with Chevron Phillips, set to build polyethylene and -olefins plants in Mesaieed, each with a capacity of 350,000 metric tons. In addition, Qatar Petroleum and Atofina are major partners in Qatofin, which is planning a 450,000-metric-ton polyethylene plant. And Qatofin and Q-Chem II are planning a 1.3 million-metric-ton ethylene cracker in Ras Laffan. All these projects are expected to be completed in 2007.

Egypt has yet to develop a sizable petrochemical industry, but is reportedly considering a 1 million-metric-ton cracker with an international partner. Andrew Spiers, vice president of Nexant/ChemSystems, says factors such as Egypt's growing feedstock availability, large domestic market, and logistical advantages into Europe bode well for the country.

Oman is also considering a cracker, though Spiers says that earlier initiatives along these lines with BP did not proceed. However, the country is planning to build a 340,000-metric-ton polypropylene plant with LG International by 2006.

WHILE THE PROSPECT of a war in Iraq would seem like an obvious concern to potential Western investors, most observers aren't too worried. A spokesman for Equate, whose petrochemical complex is close to the U.S. troop buildup, says his company is ready. "We'll continue to operate unless a situation arises that mandates, or could mandate, the temporary closure of our facilities," he says.

Because of the Iran-Iraq War, the Gulf War, and economic sanctions throughout the 1990s, Iraq doesn't have much of a petrochemical industry. According to Spiers, Iraq operates a 130,000-metric-ton ethane-based ethylene cracker in Basra that is connected to small polyethylene and polyvinyl chloride plants. The complex was rebuilt after bombing during the Gulf War, but the PVC plant never restarted, and the ethylene plant is running at very low rates. If there is a regime change, an Iraqi chemical industry could develop as it has in other Middle Eastern countries, but observers say that is at least a decade away.

But there are limits to Middle Eastern petrochemical growth other than war, Spiers says. The feedstocks aren't unlimited, he says, and government-owned oil companies are looking to charge more for them. Moreover, future feedstocks will cost more to get out of the ground.

In addition, Spiers says, logistics are an issue. Middle Eastern petrochemical suppliers enjoy cheap rates on Asian container ships that unload goods in the Middle East and go back empty. "But if you imagine a fourfold increase in exports, you can't just assume that container availability will increase at the same rate," he says.

Dow's Walthie is still optimistic about the area. "It makes sense to use the Middle East supply source as a base load for the world, because that is an attractive and economically viable solution," he says. "But there will not be enough ethane forever to supply the world."

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