QATAR - The Regional Perspective.

Helped by soaring demand and the region's advantage in low feedstock costs, Qatar and other producers of petrochemicals are making a lot of money. In 2006, Qapco made a net income of $438m from sales of $598m - a profit/sales ratio of more than 70%. For SABIC's mega-JVs, economies of scale and marketing reach often result in this figure exceeding 80%.

Middle East petrochemical producers, especially in the Gulf, enjoy an unrivalled cost advantage when it comes to feedstock. In Saudi Arabia, by far the region's biggest player, ethylene is produced at about $150/ton, compared to an average of about $400/ton in Asia, $520/ton in Europe and $605/ton in North America. As oil prices have increased, so the difference has widened.

Ethane is sold to regional producers at $0.50-to-$2/m BTUs, frequently production cost. Elsewhere ethane is sold at $6-9/m BTUs. But this is not the only factor, as Gulf producers of petrochemicals benefit from world-class infrastructure where the pipelines, utilities and logistics are in place. Land is cheap and taxation is low. Electricity, taking up to 30% of a venture's running costs, is heavily subsidised throughout the Gulf, while most producers elsewhere are subject to market rates.

The average capacity of an ethylene cracker in Saudi Arabia is over 1m t/y, compared to 740,000 t/y for Dow Chemical of the US, its nearest private competitor. So about everyone involved in the petrochemicals business is flocking to the region for opportunities. Dow, the world's largest chemicals producer, earlier this year announced its intent to develop major projects in Libya and Saudi Arabia to add to its plants in Kuwait and a planned JV in Oman. The Netherlands-based Basell, the world's largest polyolefins producer, has long held stakes in JVs in Saudi Arabia. Total, ExxonMobil and Shell have stakes in chemical JVs throughout the region and are planning further ramp-ups in Qatar.

MEED on June 15 quoted Basell CEO Volker Trautz as saying: "All these actions are in line with the trend in our industry. Partnerships between Western companies that offer the technological know-how and customer base and companies in the developing countries that have access to abundant feedstock make a lot of sense".

Local and international investment has turned the Middle East into the world's fastest-growing petrochemicals region. Its share of global ethylene production is rising to almost 20% by 2020. The annual growth rate for the industry in the region is about 15%, compared to 9% in China - the next fastest growing region.

For the first time, investment is flowing out as cash-rich Gulf producers try to gain footholds closer to the end-user and get a better grip on the West's technological expertise. SABIC has bought production ventures in the UK and the Netherlands, and recently acquired the US-based GE Plastics for almost $12,000m. Abu Dhabi's International Petroleum Investment Co. (IPIC) has a majority in Vienna-based Borealis. Kuwait's Petrochemical Industries Co. (PIC) has stakes in MEGlobal of Canada and Equipolymers of Europe.

Trautz said: "In a mature industry, growth occurs through mergers and acquisitions (M&As), and new industry leaders emerge. In the case of our mature industry, we are witnessing a shift of the growth engine from the developed countries and regions to the developing parts of the world. The trend is eastwards - and the pace of change is likely to accelerate with more new players coming forward. These players will be seeking access to the mature markets of Europe and North America. They will be looking to gain access to technology and marketing expertise".

Despite this, however, companies in the sector are at a crossroads. While the sector is still raking in cash, there is considerable disagreement over its future direction. The biggest concern is feedstock. Even in the Gulf, which has over 30% of the world's gas reserves, there is not enough gas feedstock to go around. In some states, such as Kuwait and Bahrain, there has never been enough gas. In others, such as Qatar, a lot of the gas production is dry, with only small amounts of ethane and NGL to be extracted. And what gas is available is often exported in liquefied form to gain from its high calorific value, with Qatar being the world's biggest LNG exporter (gmt11QatrGasExpSep10-07).

In Saudi Arabia, the UAE and Oman, the shortage has been caused by soaring demand for gas, especially for power generation. The result is that there is little or no gas available for industry. This means potential investors can no longer rely on cheap ethane to form the commercial basis of investing in new production plants in the Gulf.

Gulf producers have to use mixed feedstock of ethane/propane or ethane/butane, or use heavier feedstocks such as naphtha, based on integration with refineries. Non-ethane-based production is considerably more expensive. NGLs in some Gulf states do not enjoy the same cost advantages as ethane. In Qatar, QP is selling NGLs at near market rates.

For the past three years, the industry has enjoyed a boom as demand, especially from China, has outstripped supply. But the sector is set for a slowdown by 2009. The Gulf's new product diversification round may come just as the market contracts. Data suggest there will be a surplus of polyethylene (PE) and PP of more than 3m t/y and 4m t/y respectively from 2008. Demand growth for ethylene will fall from 5% to slightly more than 4% by 2009 as the global economy cools and more capacity comes on stream. Ethylene demand growth in China is set to fall from 13% to 7.5% over the same period.

Trautz said: "We all know that new capacity builds have been made based on Chinese growth... Looking more closely at the Chinese supply/demand pattern, you will see that the imports into China over the coming years will stabilise if the demand in China remains as high as it is at present...Middle East products will have to find another home beyond the Chinese market".

The issue of rising engineering, procurement and construction (EPC) costs may alleviate the problem as project development concerns delay new capacity. Estimates vary depending on the type of work, but costs on some projects have risen 35-80%. The use of the cost-reimbursable contracting for major EPC work is now common, but it is hardly the panacea it was hoped it would be when it was introduced in 2004. Frequently, contractors are being replaced when their cost estimates, during the engineering stages, exceed their clients' budgets. It is not uncommon to find projects temporarily, or even permanently, shelved because of the capital cost. The situation is unlikely to change soon.

A MEED poll of major EPC contractors mentioned in mid-June showed that the next two years could be just as tight. As costs rise, feedstock dries up and products diversify, investors are starting to look outside the Gulf. Increasingly, more attention is being paid to Algeria and Libya as they aim to open up their economies. Both have ample amounts of cheap gas, a large resource of skilled and cheap labour, a ready market in Europe close to their shores, and for now are willing to stick to bulk chemical commodities. MEED quoted an investor as saying: "It is going to be an interesting future. The Gulf is not going to lose its dominance anytime soon, but it may well find itself with a considerable fight on its hands".

The Ras Laffan Industrial City (RLIC) will be one of the fastest growing industrial zones in the Middle East. QP is having a massive common sea-water cooling system built at the RLIC in a $600m EPC project for Phases 2-3 involving 765,000-cubic-metre-an-hour (cm/h) expansion of the existing seawater facility. The project's first part is to be ready in late 2007. Final completion is set for early 2009.

The expanded cooling system is to cater for new industry. Phase-1, completed in 2003 by CCC/Chiyoda, involved a 300,000-cm/h unit. CCC has the $100+m engineering, procurement, installation and commissioning (EPIC) contract on the LNG1/W4 project, which will see the QatarGas-II complex and a Ras Laffan ethylene cracker tied to the existing sea-water cooling system.

Under QR419m ($114m) EPC job won in mid-2005, Tekfen of Turkey has just completed the Ras Laffan-Mesaieed ethane pipeline. This can pump ethane to industries in Mesaieed, including Qatar Chemical Co.-I (Q-Chem-I).

A $4 bn petrochemicals complex at Ras Laffan, a JV of QP and ExxonMobil Chemical, took an important step in mid-2007 as bids for project co-ordination and construction services (PCS) were made. WorleyParsons of Australia, and Foster Wheeler and Fluor of the US had been invited for the contract, to be awarded in the third quarter. The main front-end engineering and design (FEED) packages are to be placed in the first half of 2008 and the main EPC contracts in 2009. To be completed in 2012, the complex will have a 1.3m t/y cracker, a 570,000 t/y linear low-density polyethylene (LLDPE) plant, a 420,000 t/y LDPE unit and a 700,000 t/y ethylene glycol (EG) plant. The steam cracker furnace and the PE units will use ExxonMobil technology. The cracker will use a mixture of ethane and propane sourced from upstream gas developments in the North Field.

This will be the first in Qatar to have an EG production capability. It is one of two grassroots petrochemicals complexes planned at Ras Laffan by IOCs pursuing integrated gas-to-liquids (GTL) ventures. The other, $4 bn, is being promoted by Shell, which is to take NGLs and ethane from its Pearl GTL venture to feed a 1.4m-1.6m t/y cracker and downstream units.