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Petrochemical capacity in China and Middle East: Growth amid challenges
18 August 2021
Global oil producers, mindful of the seismic shifts in fuel
demand, are transitioning their yields from gasoline and diesel to
higher-growth products like petrochemicals.
By the end of this decade, most of the growth in oil demand will
come from the petrochemicals sector, with the Middle East region
and China emerging as key production hubs.
Here is a petrochemical industry outlook focusing on China and
the Middle East.
Petrochemical capacity in China: Boom faces credit,
environmental constraints
Asian petrochemical production will compete with Middle Eastern
output in the coming years as both regions are poised to become
important petrochemicals centers.
Mainland China's growth in petrochemicals over the past two
decades has been described as "prompt investment and strong
competition." Production technology was increasingly made available
as the country took huge strides in building large facilities. With
access to raw materials and easy financing, the industry shifted
toward specialty chemicals, reflecting demand trends and the
country's increasingly sophisticated industrial output.
However, Chinese players are adapting to new constraints with
the government's move to tighten credit across the economy. This
may prove to be an impediment for the capital-intensive
petrochemical industry. Environmental regulations are also being
ramped up throughout the country, which adds to operating
expenses.
Chemical production in Mainland China is still very much
scattered geographically with more than 650 large clusters spread
throughout the country for the petrochemical industry alone.
However, from this decade onwards, major investments will be
approved mainly in five large clusters. Emphasis will be given to
concentrating new, large-scale projects and moving existing ones
into a few, well-managed zones.
Mainland China has been following an "integrated refinery and
petrochemicals" track that achieves earnings comparable with the
most profitable refining sites in the world. The highest
concentration of integrated refinery-chemicals sites is in Asia,
with Mainland China having the largest number of them.
The country has also been the frontrunner in establishing large,
next-generation refining/petrochemical complexes with chemicals
yield of up to 40%, with several new and ongoing investments at
multiple locations planned during this decade. Some prominent
examples:
Zhejiang Petrochemical is building a crude-to-chemicals complex
in two phases in Zhoushan. The company is building two refineries,
each capable of processing 400,000l b/d. Overall, nearly 50% of the
output—some 20 million tons—will be petrochemicals.
Hengli Petrochemical has built a 400,000 b/d refinery at Dalian
that will yield 40% chemicals, largely paraxylene.
Shenghong Petrochemical will process 300,000 b/d, also with a
huge output of paraxylene. The Yulong project will be the latest
addition to the recent wave of large investments, which have been
mainly led by the private sector.
With such large projects slated to come online in next few
years, overcapacity is a possibility with an inevitable squeeze in
margins potentially triggering a wave of consolidation, especially
among smaller-scale players.
Interestingly, in Mainland China, private players are driven
more by incentives than growth outlooks for petrochemicals as taxes
are lower than those for refined fuels.
Planned megaprojects could help eliminate China's petrochemical
imports, but could also worsen its surplus of refined fuel
products. China is already grappling with distillation
overcapacity. New sites could also make it increasingly difficult
for Atlantic Basin refiners to export their surplus gasoline and
could accelerate refinery closures in Europe and the United States
in this decade.
The transformation from the large-scale production of refined
products and bulk petrochemical raw materials to the production of
value-added products and quality third-degree petrochemical and
specialty products will likely shift the pressure of excess
capacity to this sector.
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Petrochemical capacity in the Middle East: Growth could
be hampered by feedstock avails
The Middle East has made significant investments to increase its
crude oil processing capacity through last couple of decades. These
investments will continue through the early 2020s.
The region has also been making moves to diversify its products
portfolio through the addition of large petrochemical facilities.
The region's investment initiatives are aiming on
refinery-petrochemical integration as a means of producing even
more value-added products from indigenous crude resources.
The region is slated to see a substantial increase in
petrochemical production as several nations are building or have
firm plans to build mixed-feed crackers along with capacity for
ethylene derivatives, ammonia/urea, and other petrochemicals. It is
estimated that around $90-95 billion is planned for investment into
greenfield and brownfield petrochemical facilities through this
decade's first half, in and around the region.
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Click image to open larger view in a new window.
Availability of natural gas liquids (NGL) feedstock, such as
ethane, reduces the dependence on refinery-based liquid feedstocks.
However, this resulted in a lower degree of refinery petrochemical
integration in the Middle East as ethane/propane is used to
generate ethylene/propylene in standalone facilities.
The challenges for Middle Eastern players will arise from the
lack of new, low-cost gas feedstock availability in the future. New
petrochemical production projects in the region will rely on
refinery-based feedstocks, such as liquefied petroleum gas (LPG)
and naphtha, in increasing proportions. This will lead to the
region seeing increased levels of integration between refineries
and petrochemicals through mixed-feed olefin crackers and allied
units.
Middle Eastern players have enjoyed a petrochemical feedstock
advantage against the rest of the world, but at the same time they
are also anticipating a throttling down of the flow of gas-based
feedstock leading to lower reliability and likely price increases.
This has convinced producers to repurpose crackers and use more
refinery-based feedstock like naphtha and LPG.
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Key obstacles in the Middle Eastern scenario, which affect most
of the players, lie with the fact that most refineries and allied
assets are owned by their respective governments and investment
strategies have been usually linked to long-term energy policies on
fuels management. Investments in chemicals are often undertaken in
partnership with foreign investors and these investors often have
different objectives compared to state-owned refiners.
However, consolidation among major petrochemical producers in
the Middle East is picking up pace as state-owned companies look to
manage costs in the volatile global market. The integration moves
come as global oil and gas companies adjust to receding margins and
higher costs amid the backdrop of the COVID-19 pandemic and global
economic downturn. The most recent and largest consolidation in
memory saw the world's biggest oil producer, state-controlled Saudi
Aramco, acquire a 70% stake in SABIC.
The market downturn has led to petrochemical projects around the
world being delayed and investment decisions deferred as companies
reassess spends. Even Saudi Aramco has scaled back its 2020-21
capex plans in response to lower prices due to pandemic-led demand
destruction. The current downturn puts extreme fiscal pressures on
government and private sectors alike. A few committed projects are
expected to face strong headwinds or get cancelled.
The road to the predicted petrochemicals windfall is a tough one
with financial constraints, competition among producers, and
maneuvering geopolitics in a market grappling with bleak demand
scenarios and an ongoing pandemic.
Company Strategies and Performance (CSP) from IHS Markit
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major downstream operators globally. Learn more here.
Anubhav Gupta, Research and Analysis Associate Manager,
and Simratpal Singh, Research Analyst, are both with the Chemical
Consulting team for IHS Markit.