Diversifying Downstream

With Qatar looking to boost diversification in its hydrocarbon extraction-dependent economy, two downstream operators in the natural gas industry have recently come to the fore.

Forming the primary components in this effort have been the Qatar Petrochemicals Company (QAPCO) and the Qatar Fertiliser Company (QAFCO). These two firms make use of the associated gas flowing from the Dukhan oil field and natural gas from the giant North Field to produce additional hydrocarbon-based products for export, adding to the diversification of the Qatari economy.

QAPCO, established in 1974, is a joint venture (JV) between Qatar Petroleum (QP) — which owns an 80% stake — and the French company ATOFINA, a wholly owned subsidiary of TOTAL FINA ELF, which controls the remaining 20%.

QAFCO, meanwhile, is the oldest JV in Qatar, being founded in 1969. QP holds a 75% stake in the company, while Norsk Hydro Norway owns the remaining 25%. Today, it is the largest single fertiliser producer in the Middle East — and the only producer in Qatar.

First, QAPCO though. Starting commercial operations in 1981, its manufacturing facilities consist of an ethylene plant with a total capacity of 525,000 metric tonnes per annum (MTA), two low-density polyethylene (LDPE) plants with a combined annual capacity of 360,000 MTA, and a sulphur plant producing 70,000 MTA. The production capacity of ethylene is now being expanded to 720,000 MTA under an expansion project to be completed by mid-2006.

A medium-sized company, QAPCO normally earns roughly USD300-325m a year, with net profit over USD125-140m — although company managers expect this revenue to more than double by 2008, after the coming online of its affiliate, QATOFIN, with total output forecast to reach 2m MTA.

The company produces low-density polyethylene used in many thermoplastic-processing techniques, such as for making films, pipes, cables, wires and other major moulded products. Many of QAPCO’s estimated 5000 customers, who hail from some 75 countries, use QAPCO’s products to produce plastic bags and films used for packaging. Key export markets include China, India and the Gulf Cooperation Council (GCC), though now Europe and the US are receiving greater attention in company marketing strategies.

QAPCO has also started focusing on an after-sales service that can provide customers with support services ranging from developing logistical operations to marketing strategies.

The company can also load ships carrying its exports on site, better meeting the stringent deadlines of the export chain.

With global plastic consumption standing at some 60m tonnes, and experiencing some 3-5% growth each year, QAPCO feels that there is a great deal of room in the market — and is confident that it will continue to develop as a key global player in polyethylene. The company’s major competitors are primarily from the GCC, with competition fierce in neighbouring Middle East countries, as well as in Asia.

However, QAPCO management believes it has a competitive advantage. This lies in the relatively cheaper costs upstream in accessing the North Field’s 900tn cubic feet of natural gas — with these translating into lower costs downstream. This is considered particularly beneficial given that feedstock accounts for about 70% of production costs. Furthermore, the increasing number of liquefied natural gas (LNG) deals being signed with the US and UK will likely result in the increased production of lean gas, which will mean more ethane gas for the production of ethylene and polyethylene. QAPCO expects this to allow the company to capture a greater slice of the market. Qatar’s closeness to Asia is seen as particularly beneficial in this regard.

QAPCO sees these factors as being key to attracting additional customers and foreign partners, especially companies with important technology and marketing capabilities.

The company has a number of projects either completed or ongoing. These include the Qatar Vinyl Company (QVC), which is a limited shareholding company split between QP, QAPCO, Norsk Hydro of Norway and ATOFINA. The shares breakdown to 25.5%, 31.9%, 29.7% and 12.9% stakes, respectively. QVC’s plant is designed to produce 290,000 MTA of caustic soda, 370,000 MTA of ethylene dichloride (EDC – about 50% of EDC production is designed to be used for VCM production) and 230,000 MTA of vinyl chloride monomer (VCM). An expansion project to increase VCM and EDC capacityis under consideration.

In addition, the Qatar Plastics Products Company (QPPC) is a JV between QAPCO, Qatar Industrial Manufacturing Company (QIMCO) and the Italian FEBO, with each holding a 33.33% share. QPPC is to produce heavy-duty bags, plastic sheets and other such products for industrial purposes.

QAPCO, ATOFINA and QP have also entered into a JV to establish QATOFIN, a world-class linear low-density polyethylene (LLDPE) plant in the industrial city of Mesaieed, which is expected to produce around 450,000 metric tonnes of polyethylene each year (expandable to 600,000 metric tonnes) for export mostly to Asia and Europe. QAPCO holds a 63% interest, while ATONFINA and QP hold 36% and 1% stakes, respectively.

Elsewhere, the Ras Laffan Cracker is an ambitious project to establish an ethane cracker plant and a 120km pipeline from Ras Laffan to Mesaieed. QAPCO and ATOFINA, as QATOFIN on the one hand, will own a 45.69% stake in the cracker venture, while on the other, QP and QPC, as Q-CHEM II, will own a 51.31% share in it. The remaining 1% share will be held by QP separately.

Turning now to QAFCO, its production currently consists of three trains, which together produce a total of 1.4m tonnes of ammonia and 1.7m tonnes of urea annually. The company has begun a fourth train, QAFCO 4, which when completed is expected to make QAFCO the single largest producer of urea in the world.

As with QAPCO, QAFCO sees its close access to gas supplies and the large markets in Asia as keys to competitive pricing and larger profits. Indeed, the company’s profits are thought to have jumped more than 100% this year, from USD65.7m in 2002 to over USD137.4m this year. QAFCO attributes this huge increase to a narrowing in supply and demand, stronger gas prices and the fact that some fertiliser producers who rely on imported gas have left the market.

Given that the price of gas is proportionate to the distance it is exported, QAFCO believes this trend will likely continue, as such producers — and especially those further away from gas production facilities — will be at a growing competitive disadvantage against downstream producers.

With chemical fertilisers being used in some 90% of food production around the world, and a 2% increase annually in demand, QAFCO is also focusing more on the production of granule fertilisers for more developed markets. This is because developing markets in India and China remain sensitive to domestic producers’ demands, which depend heavily on state subsidies.

While India has historically accounted for the bulk of ammonia exports worldwide, urea shipments to the country have been marginal. QAFCO anticipates that once these markets begin to open up more, the company will quickly establish itself as a key supplier.

Yet, while QAPCO and QAFCO have yielded concrete results in the diversification effort, there is no escaping the fact that they are tied directly to the production of hydrocarbons. A recently-released UN report on the development of human capital in the Arab world noted this dependence as a key hindrance to the development of human potential — and this is something the Qatari authorities have also been conscious of.

Such reliance means that even though QAPCO and QAFCO are spin-off industries, they are heavily impacted by price swings in the world feed market as well as prices of finished products in the international market.

While the rebound in feed prices and global economic activity after the 2000-2001 global slump contributed to QAFCO’s impressive increase in profits, QAPCO’s profits for 2002 actually represented a 13% decline on those of 2001. However, this was not only due to the decline in finished product prices on the international market, but also a result of absorbing the high cost of importing ethylene feed that year. This shortage was the result of exceptional production shortages. QAPCO expects to show impressive results for 2003, with estimated gross earnings of USD360m and net profit of over USD190m. The QVC also expects to earn over USD240m in 2003.

Also, QAPCO’s QVC operation has yet to turn a profit, although officials remain optimistic that QVC will become a star contributor in future to the Qatari economy.

Another important consideration in the diversification programme is Qatarisation — providing key jobs for Qataris. The government has mandated targets for the percentage of Qatari employees in key industries. However, QAPCO’s operations are more capital intensive than labour intensive and some have speculated that QAPCO may not reach the target of 50% Qatarisation by 2005 due to a shortage of technical staffwithin the state. Similarly, QAFCO may also miss its target deadline, but this is largely due to the increase in positions created as a result of the company’s expansion with QAFCO 4.

While some of the concerns with regard to the market situation are noted, officials counter that market fluctuations are a normal part of almost any business. In terms of Qatarisation, QAPCO sponsors a specialised programme on petrochemicals at Qatar University and has instituted other training programmes to place Qataris in key managerial and administrative positions. QAFCO also maintains that the dramatic improvements in the country’s education system will result in more Qataris being absorbed into the industrial sector.

In response to the reliance on hydrocarbons, as one industry insider put it, Qatar’s competitive advantage still resides in its massive reserves of natural gas, so it makes sense that current diversification efforts focus on that sector.

The rising demand for natural gas, Qatar’s 900tn cubic feet of reserves and the country’s small population suggest that while there may be occasional rough waters, the course downstream appears promising.