Adnoc’s downstream investment forum in May highlighted the new importance the company gives to this part of its business.
It attracted industry luminaries: the chief executives of BP; Total; Eni; HSBC; Mubadala Petroleum; Siemens; Occidental; the chairman of China National Petroleum Corporation; and the oil and energy ministers of the UAE, India and Egypt. Now Abu Dhabi needs to press on with the previously under-appreciated job of turning oil into refined fuels and petrochemicals.
In recent years, two key imperatives have made downstream expansion a key theme for national oil companies. The first is the desire to secure a market position in the world's main growth markets. The first is the desire to secure a market position in the world's main growth markets. While in BP's energy outlook, US oil use will fall 3 million barrels per day (bpd) and the EU's 4.3 million bpd by 2040, China's will rise 3.5 million bpd and the rest of Asia's by 8.6 million bpd.
The second is the concern that demand for transport fuels may be about to drop in the quite near term because of improving efficiency and the rise of electric vehicles. BP sees world oil use dropping after 2035, well within the investment horizon of a new refinery today, leaving petrochemicals as the only growing sector.
Other countries see the same trends, and regional competition is hotting up. Saudi Aramco is reportedly planning to buy some or all of the Public Investment Fund’s 70 per cent stake in Saudi Basic Industries Corporation (Sabic), the other state giant. Integrated operationally, this would reduce competition for feedstock, share overheads and ease Aramco’s task of building up its own petrochemical business. The two are already cooperating on an enormous, $20 billion, “crude-to-chemicals” plant at Yanbu’ that is intended to simplify petrochemicals by cutting out the intermediate refining step.
Iraq indicated last week that it would go ahead with Nebras, an $11bn petrochemical joint venture with Shell, with Aramco also in discussions to join. Iran has built up a large basic petrochemical industry sourced from its giant natural gas reserves, though many plants remain unfinished because of lack of financing. Private Egyptian company Carbon Holdings secured financing last month for a $10.9bn complex processing naphtha, a light product of oil refining.
But for the other GCC countries, the phase of making basic petrochemicals from cheap methane and ethane, the main constituents of natural gas, is giving way to a second stage focused on intermediate and speciality chemicals, such as synthetic rubber, adhesives and sealants, and plastic automobile and aviation components. More sophisticated technologies will create more related industries and employment. Integrated refineries and petrochemicals will share utilities, control rooms, maintenance and back-office functions; save on waste heat; and exchange feedstocks and intermediate products.
Abu Dhabi’s downstream sector has potential to grow – the Gulf Petrochemical Assocation assessed UAE 2016 petrochemical capacity as 13 million tonnes per year (Mtpa), compared with Saudi Arabia’s 106 Mtpa. Its new strategy has to close that gap.
At home, it has reincarnated the decade-old Chemaweyaat plan, with a scheme to make Ruwais the world's largest integrated refining and petrochemicals complex, boosting Adnoc's petchems output from 4.5 Mtpa to 14.4 Mtpa by 2025. The centrepiece mixed-feed cracker will process a blend of ethane and naphtha.
Internationally, its first step is partnering with Aramco and Indian state firms in a giant new 18 Mtpa refining and petchems complex at Ratnagiri on India’s west coast. This new strategy carries several challenges. Mixed-feed crackers and speciality chemicals do not have the advantage of low-cost feedstock that drove the GCC’s first generation of plants, while the US has enjoyed a long period of low ethane prices because of its shale gas.
The Middle East end-product markets are fairly small and unintegrated, so most output will have to be marketed to Europe and Asia. As well as incurring transport costs, this also exposes sellers to the risk of tariff barriers if the world turns to protectionism.
In the longer term, the reliance on petchems is under environmentalist pressure. Single-use plastics, such as shopping bags and drinking straws, face bans as waste accumulates in the oceans. Recycling and bio-materials may shrink the industry’s use of hydrocarbons.
Abu Dhabi’s new strategy will rely on its competitive strengths: the UAE’s business-friendly environment, well-integrated logistics, access to finance, and attractiveness to international partners. Maximising the emirate’s existing assets is key: Mubadala already owns a large refining and petchem portfolio, including 64 per cent of Borealis which already partners Adnoc in Ruwais, and Europe-focused Spanish refiner Cepsa.
The Saudi plants’ operational performance and profitability are not particularly impressive. Learning from this, Adnoc will need to develop its skills in operating complex plants and marketing their products, a more involved task than selling crude oil. An integrated view of the industry’s complex product chains will point to products likely to be in under supply. It will need to develop research and innovation, and possibly consider select international acquisitions.
Although downstream is a crowded space with tough and experienced competitors, the imperative is clear. The range and rank of attendees at Adnoc’s forum is a testament to Abu Dhabi’s appeal. Swift, bold and capable execution will enable the company to stride ahead.
Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis