Petrochemicals feedstock developments across the globe namely shale gas boom in the US, gas shortage in the Middle East and Coal-to-Olefins developments in China will provide new opportunities to GCC players, according to a report.

Following two decades of expansion driven by an abundance of natural gas, the GCC petrochemical firms have established a leading position in their industry.

However, recent shifts in both supply and demand have led to growing gas shortages of natural gas in the region. At the same time, feedstock developments in other parts of the world pose threats as well as provide opportunities to GCC players, said Booz & Company in its latest report on feedstock developments.

'The region’s diversification effort to increase non-oil-related GDP has seen boosts in local employment, including in industrial sectors that are energy-intensive, and driven by low gas prices,' remarked Andrew Horncastle, partner with Booz & Company.

'As a result, the GCC is projected to experience a sizable—and growing— shortfall in natural gas for the coming years. Consequently, ethane supply is not expected to grow significantly and most of the anticipated supply is already committed to existing and new projects,' he added.

Adapting to this, petrochemical companies have shifted to more liquid feedstocks. Most new major projects across the region (such as the Saudi Aramco-Dow Chemical venture, Sadara) are expected to use mostly liquid feedstocks, said Horncastle.

This move to liquid feedstocks will reduce profit margins and overall competitiveness for GCC players, as they do not offer the same cost advantages as gas feedstocks, he added.

Elsewhere in the world, feedstock developments are making petrochemical players more competitive, said the report by Booz & Company.

New sources of shale gas in North America, promising production technologies such as coal-to-olefin initiatives in China and conventional gas from the redeveloped sector in Iraq are all impacting the industry, it added.

Each development presents a significant potential discontinuity, but they all include uncertainties regarding precise production levels, the degree of competitive advantage for local petrochemical companies, and other factors.

'A significant uncertainty regarding shale gas is the ‘richness’ of the US basins, or the relative levels of ethane and propane in the gas they generate,' remarked Asheesh Sastry, principal with Booz & Company.

“Reliable development of North America’s shale basins though will have to overcome environmental challenges, such as those posed by hydraulic fracturing or ‘fracking’ techniques and the production of high amounts of methane gas, as well as infrastructure obstacles,” he added.

The European petrochemical industry is driven by naphtha feedstocks, with a smaller percentage of natural gas. Natural gas from conventional sources is declining rapidly, and although shale gas has been discovered in some regions, it is unlikely to replace that supply.

China’s technically recoverable shale gas reserves are estimated at 1,275 Tcf, primarily in the Sichuan and Tarim basins, which feature the right geologic conditions. Other major basins in China, such as the Ordos, have the potential for coalbed methane and tight gas.

“The sheer size of China’s shale gas reserves poses a threat,” remarked Horncastle.

“Production is not likely to increase substantially until 2020, and even then, the specific impact of the disruption is hard to quantify at this point – a more immediate and potentially larger disruption could come from China’s significant, recent investments in leveraging coal as a feedstock for petrochemicals,” he added.

Iraq, he said, was emerging as a potential new source of feedstocks. 'The country’s oil and gas sector is undergoing a comprehensive redevelopment program and the government is now seeking to tap its sizable reserves.'

Iraqi oil production is subject to a wide range of uncertainty. Consequently gas production, ethane production and ethylene capacity in Iraq are subject to similar disparities regarding growth potential.

Despite this uncertainty, we believe that the country could potentially add significant ethylene capacity by 2025, said Horncastle.

Regardless of their impact in the short term, these feedstock sources present both material threats to the profitability of GCC players and new growth opportunities to consider.

'At a time when petrochemicals production cost in the Middle East could rise due to the move to liquid feedstocks, the cost and margin advantages that the region's petrochemical companies have enjoyed during the past few decades will likely decline marginally,' remarked Sastry.

However, the Middle East producers may have an opportunity to set up projects in the US, China and Iraq, he added.

Should China’s energy industry figure out a more efficient means of shale gas extraction, its large reserves will significantly impact upon the market. Middle East producers must hedge their bets, by maintaining both a strong market position in China and sufficient flexibility to react as the situation changes.

While dramatic changes aren’t immediate for the current capacity of the region’s petrochemical producers, Middle East companies must now work harder to identify new sources of growth, said Sastry.

The three strategic responses that they can take are make big investment in petrochemical projects in North America driven by shale gas developments; extend downstream into performance and specialty chemicals and lastly consolidate the industry within the GCC and build scale.

Investing in North America projects requires enhancing several core capabilities that GCC petrochemical players already possess: financial strength, the ability to bulk produce basic chemicals in an efficient and cost-effective manner, strong partnerships with other enterprises, and a supply chain and distribution network that can be leveraged to source from vendors and deliver to customers in various regions.

In addition, GCC players will need to refine their capabilities in terms of establishing large, capital-intensive projects in a cost-effective and timely manner, said the report.

Extending downstream into performance and specialty chemicals entails expanding the current product portfolio away from basic chemicals toward end segments.

It potentially allows GCC companies to leverage heavier feedstocks within the region and maximize integration synergies. To succeed, petrochemical players will need to diversify their business models in order to reflect different market positions and value propositions for each customer segment, said the report.

Consolidating the industry within the GCC is the most complex strategic option and will involve the full complement of institutional capabilities, including financial strength, partnering and integration, efficient bulk processing of basic chemicals, a strong supply chain and distribution network, and the ability to establish capital-intensive projects in a timely manner, as well as strong innovation and a solid understanding of suppliers’ and customers’ business models and needs, the report added. 

“GCC petrochemical players have some clear choices in how to respond to this competitive threat, through a number of strategic options both upstream and downstream in the value chain,' said Horncastle.

'However, each option requires a specific set of underlying capabilities, he added.-TradeArabia News Service