The Future Of “On Purpose” Technologies

Two major gas trends are providing an opportunity for GCC players to invest in “on-purpose” production technologies. The first is the gas shortage in the GCC that is fuelling aggressive gas developments in the region. The second is the US shale gas boom and its effect on the supply of key chemical building blocks.

Less availability of domestic gas
is affecting the GCC power sector. It 
is also constraining the expansion of the region’s petrochemicals industry. Major regional players are therefore accelerating gas development from more difficult and unconventional sources. Although mainly intended
 for the power sector, this has positive implications for petrochemicals. Saudi Arabia has ambitious plans to develop non-associated and shale gas. Oman is developing its tight gas reserves. Abu Dhabi is proceeding with its flagship sour-gas projects.

Meanwhile, the US natural gas bonanza is giving US-based players a significant cost advantage over their European and Asian competitors. It
has also disrupted the availability and price of several key chemical building blocks–ethylene, propylene, butadiene, and benzene. Crackers produce these building blocks as a by-product of feedstock. Crackers are now consuming more “light” natural gas, now cheap, and reducing consumption of “heavy” liquid naphtha, which is now expensive. As gas developments proceed in the Middle East, the global trend towards using light feedstock will accelerate.

The change in feedstock consumption has already meant higher prices for propylene, butadiene, and benzene
and lower prices for ethylene. Light, cheap feedstocks produce ethylene as a byproduct – ethylene supplies have surged, slashing prices. Heavier, costlier feedstocks produce propylene, butadiene, and benzene as byproducts. Supplies of propylene, butadiene, and benzene have tightened and their prices have climbed. Indeed, their rising prices have made “on-purpose” production technologies, previously considered so expensive as to be uneconomic, look attractive.

Given these dynamics, GCC petrochemical producers must decide whether to invest in these “on-purpose” technologies to guarantee their access to these vital chemicals and perhaps
for export. While a tempting possibility, GCC petrochemical producers need to carefully consider four key points.

First, GCC petrochemical
producers need to recognise that
their “on-purpose” production needs advantageously priced feedstock, otherwise it can become less attractive, or even economically marginal.

Second, they need to take into account that their capital and logistics costs tend to be higher than in North America, increasing total production costs. Propane dehydrogenisation to produce propylene may be profitable in the GCC today, but it risks becoming marginal as such facilities open in the US.

Third, GCC players need to analyse their value chains to protect their margins against price fluctuations of propylene, butadiene, and benzene. They could consider backward integration or margin management across the entire value chain.

Fourth, companies wanting to invest in “on-purpose” production need to augment their existing capabilities. 
 At present, their capabilities are production-centric, mostly relying on
the “cracker+1” model of producing the key petrochemical building blocks and converting them into basic chemicals.
By contrast, “on-purpose” production requires companies to develop or acquire technology-centric capabilities.

Global feedstock disruptions are providing important new opportunities to GCC players. To date, many have invested in process technologies to bring down costs. Going forward
they must rethink their research and development strategies, which might include focusing on technologies to create “on-purpose” production. Some are already moving ahead. SABIC, for example, is considering investments
in the US shale gas business, while others are considering “on-purpose” propylene production in Turkey. Irrespective of a company’s positioning, now is an opportune moment for GCC players seeking to capture the next wave of growth to carefully revisit and reformulate their strategies.