Economic Update

Published 06 Feb 2017

The state-owned Abu Dhabi National Oil Company (ADNOC) announced plans in November to more than double petrochemical production over the next decade as part of its 2030 strategy.

Released alongside the company’s five-year plan and operational budget, all three initiatives aim to strengthen ADNOC’s presence in the energy sector and enhance its competitiveness.

With high demand expected in the coming years, the petrochemical industry presents a strong investment case, and its expansion is being pursued as a critical element of Abu Dhabi’s ongoing economic diversification strategy.

On the back of weaker demand conditions for crude oil globally since mid-2014, commodity rich economies across the GCC have increasingly sought to expand downstream industries and the range of derivative products in order to become more resilient during cyclical slowdowns.

Expansion drive

ADNOC’s announcement came on the heels of the inauguration of the Borouge 3 petrochemicals facility in 2015. Considered the world’s largest integrated polyolefins complex, the plant has a production capacity of 2.3m tonnes per annum of polyethylene, 1.7m tonnes of polypropylene and 350,000 tonnes of low-density polyethylene.

Borouge complements a wide-ranging global petrochemicals portfolio owned by Abu Dhabi’s International Petroleum Investment Company, including Austria’s Borealis, Spain’s CEPSA, and Canada’s Nova Chemicals. Borealis, in turn, owns 40% of the Borouge joint venture with ADNOC. Combined, Borouge and Borealis have a production capacity of approximately 8m tonnes a year.

Continued expansion activity at the Borouge complex will add to this, with ADNOC officials announcing in November that production is set to triple to 11.4m tonnes per year by 2025.

Shifts on the horizon

Given the UAE’s natural gas profile, the expansion of the petrochemical sector solely on the basis of ethane cracking has reached its peak, necessitating a diversification of the feedstock towards heavier feedstocks such as naphtha, according to Ali Vezvaei, president of the Middle East and Africa at Linde Engineering, the engineering, procurement, and construction contractor in charge of previous Borouge expansions. 

“Naphtha is generally more economically stretched compared to ethane; however, thanks to innovative technologies and optimisation of derivatives, it has the potential to yield acceptable margins,” Vezvaei told OBG. “A deeper integration of refining and petrochemical assets should be taken into account while building a growth strategy on liquid cracking.”

In the case of naphtha, Abu Dhabi enjoys an abundance of liquid raw material from ADNOC’s oil refining arm, Takreer, which itself has undergone expansion in recent years. While this advantage could be offset by the higher costs associated with naphtha crackers, the price advantage of ethane has narrowed since mid-2014, when crude prices started to decline.

In high demand

According to the 2016 Medium-Term Oil Market Report by the France-based International Energy Agency (IEA), 11.5m barrels of oil per day (bpd) are used in petrochemical production. This is expected to increase by 2m bpd through to 2021 – an annual growth rate of 3%.

Currently, the Middle East consumes 15% of the total oil used in the production of petrochemicals, making it the second most important market for growth after the US.

Meanwhile, the demand for petrochemicals and associated products like plastics, detergents and cables is expected to continue its positive growth trajectory. According to the consultancy McKinsey, global demand for ethylene is expected to increase by 40m tonnes per year to around 175m tonnes by 2020 and nearly 220m tonnes by 2025.

Regional competition

As Abu Dhabi looks to tap this opportunity, it will face increased competition from within the GCC and further afield.

Saudi Arabia, through its national oil company Saudi Aramco, is looking to boost its petrochemicals production from 12m tonnes annually to 34m tonnes per year by 2030 as part of its long-term developmental plan Vision 2030.

To this end the Sadara Chemical Company – a joint venture between US-based Dow Chemical and Saudi Aramco – opened its 1.5m tonne per year mixed-feed cracker at the end of August.

Meanwhile, the US continues to benefit from an influx of cheap gas due to increased shale production. Expansion there will contribute, in part, to the increasing share of ethane-based petrochemicals in the future and a subsequent decline in the share of naphtha, according to the IEA.

With a high demand for petrochemicals and derivatives, China is also working to build up its own downstream capacity in an effort to offset imports.

In response to these external factors, players in Abu Dhabi and across the GCC will likely be forced to confront efficiency issues at plants, as well as logistics costs, to enhance their competitive position.