Gulf petchems producers revisit 2016 project spend amid low oil

Low oil prices will not put a dent in the strategic petrochemical megaprojects in the Gulf Cooperation Council (GCC) region, although smaller projects that have not been firmed up yet might be pushed aside until prices recover, according to Abdulwahab Al-Sadoun, secretary general of the Gulf Petrochemicals and Chemicals Association (GPCA).

Most of the petrochemical companies in the GCC region are wholly or majorly owned by the local governments and have access to special government funds, which can soften the effects of the low oil prices on capital budgets, Al-Sadoun told Petrochemical Update.

“The petrochemicals and the oil and gas projects are being built by the local players with the vision that the return will be on a long-term basis,” he said. “Those are capital-intensive projects so the developers have this in mind when they set to build these projects in the region.”

Yet, with deposits in regional banks declining because of the low oil price, GCC governments have turned to outside sources such as capital markets, private investment and public-private partnerships to finance their capital projects, including in the oil and gas sector, according to a recent study by Standard & Poor’s (S&P) Ratings Services.

The effects of volatile oil prices vary along the petrochemical value chain and are most acute for commodity petrochemicals, with delayed and dampened impact on the middle and end of the value chain.

Yet virtually all petrochemical producers in the region have said they are  focusing on bringing costs down by stripping unnecessary expenses and improving productivity and reliability.

According to Fawzy Harraz, PMT project controls manager at the Egyptian Ethylene and Derivatives Company (ETHYDCO), oil, feedstock and energy prices and forecasts will be the key factors driving investment incentives in new petrochemical and refining construction projects.

Given that the minimum investment cycle in the region takes at least 10 years, the overall investment process will remain at stake until the industry has a fairly reliable oil/feedstock pricing forecast that can be used with confidence to generate reliable and feasible economic models that can persuade lenders to finance the investment proposals, he said.

Looking ahead, more projects in the Middle East Gulf region that have not reached a final investment decision are said to be delayed or are being re-evaluated in light of the new market environment, while certain other investments are taking longer to materialize than originally planned, industry participants told Petrochemical Update.

Major petrochemical & refinery projects (announced, under construction) in the GCC (2016-2020)

Several projects in the GCC that have started construction but have not spent major capex yet have also been put on hold recently, though no public announcements have been made.

The depressed margins for many petrochemical and refined products could mean that some projects that are already under construction might see some intentional delays, according to AbdulAleem A. Khokhar, project manager - Business Development at the National Industrialization Company (TASNEE) in Saudi Arabia.

“The push to complete projects on time could ease a little bit, provided the oil price stays the same and the EBITDA margin of the companies is projected to be negative. If [the EBITDA] is positive, companies would still try to complete the project on time so they can reduce some of the losses,” Khokhar said.

Moreover, many of the major projects in the GCC are large integrated projects aimed to capitalize on economies of scale. Andy Gibbins, CEO of GLAS Consulting, expects this trend to persist in the region as building smaller-scale plants will become less economically viable in the future.

The petrochemical industry is still looking to expand in both Texas and the Middle East, top officials from Total and Phillips 66 said on February 23 on the sidelines of the IHS Energy CERAWeek conference in Houston.

Adding 2016 capacity

The GPCA projects that GCC chemical capacities will grow 6% in 2016. Only Saudi Arabia is projected to add major new petrochemical production capacity in 2016 based on the current pipeline of projects, with capacity slated to increase 10% on year on year, according to the GPCA.

More new capacity in the GCC in 2016 will come from an elastomers JV between SABIC and ExxonMobil Chemical, and several smaller projects that are scheduled to be on stream later in the year.

Meanwhile, in Oman, SABIC is still planning an oil-to-chemicals facility, and the Oman Oil Refineries and Petroleum Industries Company (ORPIC) is planning a 1.4 mtpa steam cracker as part of its Liwa plastics project.

Also in Oman, the Oman International Petrochemical Industries Company (OMPET) intends to build a 1.1 mtpa plant to produce PTA.

Kuwait is also moving ahead with its energy-related capital spending. In early 2016, Kuwait said it plans to launch a new integrated downstream company to manage a $27-28 billion oil refinery and petrochemical project in its southern Al Zour region.

In the United Arab Emirates, ChemaWEyaat is preparing to bring a major chemical complex on stream around 2018-2019, though the project has been reportedly delayed.

Changing spreads

The cost of ethane in the Middle East has historically been highly competitive to US pricing as it has been governmental policy to support the local petrochemical industries with low-priced ethane.

At the beginning of 2016, Saudi Arabia raised the price of ethane by 133%, from 75 cents/million Btu (MMbtu) to $1.75/MMBtu, and increased the price of methane by 67%, from 75 cents/MmBtu to $1.25/MmBtu. The government also raised the cost of electricity and water by 40%, and that of gasoline by 50%.

The ethane price will bring Saudi ethylene producers that rely mostly on ethane feedstock closer to those in the United States in terms of feedstock costs, though the new Saudi price is still lower than the depressed 2015 US ethane prices and, Saudi producers will continue to have the lowest feedstock costs globally.

Meanwhile, the Saudi government also benchmarked the propane prices from earlier 0.72x to 0.80x average naphtha prices, effectively reducing the discount on heavy feedstock from 28% to 20%.

Considering an average FBO price in 2015 for naphtha at $491/mt, the increase in propane cost would be about $39/mt, translating into an 11.1% increase in feedstock cost, according to a revised forecast by Aljazira Capital published in late January 2016. Based on an average polypropylene price of $1,048/mt, the PP-propane spread would contract by 5.6%.

To learn more about the effect of the oil price and feedstock costs & availability on capital project budgets, investment and product margins in the Middle East, read our 2016-17 Middle East Downstream Construction Outlook whitepaper.