Middle East petrochemical push signals oil's future

Aramco acquired Anglo-Dutch major Shell's 50 per cent stake in a refining joint venture in the industrial city of Jubail for $631 million. Getty Images

A third wave of petrochemicals expansion is underway in the Middle East. Plastics and chemicals will account for the largest share of global crude demand growth by 2030. Investment into downstream petroleum industries will be a critical demand driver for oil markets in the future.

Industrialised economies use up to 20 times more plastic and up to 10 times more fertiliser than developing nations on a per person basis, underscoring the huge potential for global growth. The International Energy Agency expects petrochemicals to account for almost half of global oil demand growth by 2050, equivalent to almost 7 million barrels per day.

However, chemicals and plastics have become dirty words for many consumers, with a growing international campaign gaining momentum to ban single use products like bottles and cups.  Despite the environmental backlash particularly in Europe, Japan and South Korea which have ramped up recycling efforts, S&P Global Platts Analytics expects demand for the material and other associated materials to remain on a growth trajectory.

“Petchems and plastics demand are highly correlated to population and GDP growth,” said Platts Analytics’ Jennifer Van Dinter. “The focus at present in the petchem market is targeting economic growth in China and India and bringing western development trends to those economies.”

Middle East petrochemicals producers are racing to expand. Saudi Arabia – already the region’s largest producer – is leading the charge. Last month Saudi Aramco unveiled a deal with France’s Total and Daelim of South Korea to build a new 80,000 tonnes a year polyisobutylene plant by 2024. The product is used for adhesives and lubricants.

The deal comes as Aramco pursues a tie-up with Saudi Basic Industries – the world’s third largest petrochemicals producer. Aramco and Total are also planning to construct a huge petrochemicals complex in Jubail, next to the Satorp refinery utilising 1.5 million tonnes a year of ethylene – key for plastic packaging. The state-controlled upstream giant is also working with Sabic on another major project to convert crude oil to chemicals at Yanbu on the eastern Red Sea coast.

Abu Dhabi is also targeting significant petrochemical production growth. Adnoc is expanding its global refining and petrochemicals footprint, with plans to transform its main Ruwais facility into a sprawling integrated refining and petrochemicals complex. Last year the company said it aims to double crude refining capacity and triple petrochemicals production in a $45 billion (Dh165bn) investment drive alongside its partners.

In Oman, the sultanate is investing heavily to create an integrated refining and petrochemicals hub in the port of Duqm outside the Persian Gulf. The Duqm refinery – a joint venture between Kuwait Petroleum International and Oman Oil Company – includes a petrochemicals complex. The facility is expected to reach completion by 2023. The Duqm industrial zone, which aims to attract investments of up to $15bn over the next 15 years, is Oman’s biggest single economic project and part of the sultanate’s efforts to diversify its economy away from oil export revenues.

Meanwhile, state-owned Kuwait Petroleum Corporation is eyeing a further expansion of its petrochemicals segment. The company is mulling a potential fourth petrochemicals complex, called Olefins-4, to produce plastics. The project would add to KPC's petrochemicals capacity on top of Olefins-3 and Aromatics-2, which are being built at the Al-Zour refinery. The 615,000 bpd Al-Zour refinery and petrochemicals complex in the south of the country is expected to come online in 2020 after years of delays.

And it is no longer just the Middle East which is banking on petrochemicals as the key source of oil demand growth. The US and now China are muscling in, with Deloitte stating that between 2010 and 2017, availability of low-cost shale gas resulted in an unprecedented petrochemicals capacity creation and expansion, primarily along the US Gulf Coast. And now the next wave is imminent.

“The Middle East (advantaged supply) and China and India (demand) are leading the way for oil-to-petchems refineries and projects,” said Ms Van Dinter from S&P Global Analytics. “The North American petrochemicals complex has put significant investment dollars behind the ethylene value chain (which goes to making plastics among other products) in the form of ethane-fed steam crackers,” she added.

And in Europe, Ineos recently chose Belgium for a €3 billion investment to build two new petrochemical facilities in the port of Antwerp and represents the group’s biggest capital investment to date.

The Middle East is not the only region now placing a big bet on petrochemicals and shows a new-found confidence of where oil demand will come from. For the global oil industry’s sake, it’s a calculated gamble that needs to come off.

Paul Hickin is head of oil EMEA at S&P Global Platts