Next Steps for the Middle East Petrochemical Industry
The region’s producers are entering a world of limited new gas supply. To continue to grow at home and remain competitive, big changes will be required.
April 2014 | by Robert Emmerich
The Middle East petrochemical industry has seen spectacular growth over the past thirty years based on the availability of low-price gas feedstocks. But with advantaged new gas supply expected to end in most countries in the region over the next few years, petrochemical producers that want to expand domestically face major challenges. They can continue to build up their export industry using naphtha feedstock instead, but companies will have to find new ways to offset the handicap of their geographical location far from major growth markets. While obtaining naphtha at advantaged prices would help their position, the region’s petrochemical producers should become leaders in operating and functional efficiency. This will in turn require a broad mobilization to build the technical capabilities needed to develop and further grow their businesses.
Petrochemicals’ Child Prodigy Grows-up
The Middle East petrochemical industry has come very far, very fast. From the first joint-venture plant in 1981, the industry has expanded to a total annual petrochemical production of 121 million tons in 2012. Capturing the gas flows associated with oil production that were previously flared and instead channeling those flows as very low-priced feedstock for chemical production has made it possible to build an immense and highly profitable industry. The Gulf Cooperation Council (GCC) countries contributed eleven percent of global petrochemical-capacity growth over the past ten years and are now a leading global producer and supplier to world markets of ethylene and derivatives and methanol.
The expansion in petrochemicals has made an important contribution to the region’s economies, diversifying them away from their dependence on oil production. The region’s chemical industry currently supports an estimated 840,000 jobs: 110,000 in chemical production, and, indirectly, a further 730,000 jobs, including suppliers and contractors involved in areas such as gas production, outsourced maintenance, transportation services, and other logistics services. In Saudi Arabia, chemicals represented 4.5 percent of non–oil and gas GDP in 2011— a share that increases to eleven percent if indirect and induced contributions are included.
As job creation and economic diversification has become a more pressing issue in the past decade, the industry’s contribution has increasingly been recognized by national governments. Of course, 840,000 jobs can only go so far in meeting the employment needs of a working-age population of around twenty million across the GCC countries, but it represents an important step toward diversification.
While progress to date in building up industries such as plastics processing that could consume some of the region’s petrochemicals has so far lagged behind expectations, this largely untapped opportunity offers promise for the future. Chemical production more than three or four processing steps beyond the cracker or aromatics plant—“downstream activities” in chemical-industry parlance—accounted for three percent of capacity and four percent of chemical revenues in the region in 2010, compared with fifteen percent of capacity on average worldwide.
As the Middle East’s petrochemical industry has grown, a number of companies have emerged as leading global players. Sabic has acquired a petrochemical base in Europe, bought GE Plastics, and made production investments in China that it continues to expand. The portfolio of Abu Dhabi’s International Petroleum Investment Company includes Nova Chemicals and Cepsa as well as majority ownership of Borealis.
This internationalization trend has gained a further dimension over the past decade as Middle East oil producers have increasingly invested directly in emerging markets; some of these investments include petrochemicals as well as refinery units. Such moves clearly help to assure outlets for these Middle Eastern countries’ hydrocarbons in the markets that are the key drivers of oil-consumption growth. But to further the economic diversification and employment growth that most Middle Eastern countries are looking for at home, expansion of the domestic petrochemical sector would remain an important instrument. Superficially, the Middle East petrochemical industry is still in a good position: petrochemical production requires feedstocks, and the region sits on immense reserves of oil and gas, which could potentially feed continued growth in petrochemical demand.