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  • Industry: Chemicals & Performance Technologies
  • Type: White paper
  • Date: 12/12/2011

The GCC in 2020: The downstream expansion of the Middle East chemical industry 

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The Arabian Gulf (“Gulf”) petrochemical and chemical industry stands at an historic crossroads. Behind it lies three decades of exceptionally successful growth; leveraging advantaged feedstocks, economies of scale, integration and world-leading process technology to build a vibrant, influential and highly profitable petrochemical industry that is the envy of many other regions.

60 percent of the world’s oil reserves and 40 percent of all natural gas reserves, the Gulf Cooperation Council (GCC) states – made up of Saudi Arabia, Bahrain, the United Arab Emirates (UAE), Oman, Qatar and Kuwait – has benefitted from expanding global petrochemical markets and compelling cost economics. From an embryonic beginning in 1981, when the first exports of polyethylene were shipped from Qatar, the region is now set to capture 20 percent of total global petrochemical capacity by 2015. The Gulf petrochemical and chemical industry’s undoubted success in the USD3.4 trillion chemical market was principally built on the export of low-cost petrochemical commodities to rapidly growing Asian markets.


Over the decades, the GCC has developed a new generation of talented petrochemical leaders. These well-known individuals have won the respect of their global peers and are pushing their cash-laden, resource-rich corporations into the next phase of geographic and product expansions. Many of these CEOs have astutely developed global positions through acquisitions and alliances, and have made the GCC the pivotal player in the global petrochemical sector. According to Dow Chemical, the region is “the foremost global petrochemical hub”.1 More recently, new strategic priorities have developed for the petrochemical industry in the GCC as governments seek to diversify their economies and attract wider industrial investment to create the sustainable growth necessary to meet the aspirations of the next, and future, generations. Much of this will be focused on creating and capturing the value that is currently captured by the region’s export customers.


The petrochemical sector complements the well-established oil and gas ‘pillar’ industries in the hydrocarbon economies of the GCC and has been targeted by policy makers as having an instrumental role in diversifying their economies. Within the sector, opportunities exist to capture much of the added-value that is currently exported, and to create the building blocks for major downstream conversion industries offering rewarding and fulfilling employment opportunities. This, in turn, would lead to more sustainable growth through the multiplier effect of economic growth. In addition, attractive product differentiation opportunities exist for those Gulf commodity producers who are concerned about structural oversupply in the medium-term in their key export markets.


So the opportunity to grow with the huge demand for commodity and downstream derivative chemical products in the world’s emerging markets in the years ahead beckons.


However, real challenges have to be met and overcome. Global competition is intensifying – shale gas is a game-changer for North American competitiveness and the development of coal-based technologies such as MTO in Asia may fundamentally impact import needs. While GCC producers will maintain their global cost-advantage, low cost ethane feedstock is tight. The move to heavier feedstocks and, typically, a 20 percent premium on US Gulf Coast benchmark capital plant construction costs will reduce margins. Geo-political tensions are high, with the risk of protectionism greater and confidence uncertain in a post-stimulus world. Volatility plagues the certainty sought by financial investors and attempts to rein in inflation in overlystimulated economies could lead to a hard-landing in some of the largest chemical markets in the world. More regionally, social unrest has temporarily impacted local markets while the human costs of piracy in the Indian Ocean remain as concerning as the financial costs to the region’s vital supply chain links to Asia, Europe and beyond.


While chemical producers in each of the key global producing regions retain their unique strengths and weaknesses, they all share one similarity – adding value by producing downstream derivative products is heavily dependent upon developing or acquiring the requisite technology and know-how. In many downstream value chains, the essential proprietary technology for derivative products is often concentrated in the hands of relatively few owners. GCC producers pursuing this strategy will need to identify and gain access to these key technologies, or develop them locally in the high quality research institutions and product development centres that have been, or are being, set up in the region. So a new era has begun for the petrochemical producers in the region – strategic imperatives are changing, feedstocks are less accessible, refinery/petrochemical integration more essential and prevalent, added value more essential, decisions more complex and markets less certain.


But the region has enduring strengths that will secure its leadership role in the next decade – strong cash reserves and refinery/petrochemical integration, excellent infrastructure, feedstock advantages, proximity to both growth markets in Asia and established markets in Europe as well as long-standing relationships with downstream producers in Europe, Japan and the US to bring the required technology to bear. With the rapid expansion of its educated, urban youth, demographic pressures are increasingly making successful economic diversification and downstream expansion a necessity – for the Gulf petrochemical industry, the challenge has been set.

 

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