Plastic fantastic
Last Updated: May 10. 2008 9:48PM UAE / May 10. 2008 5:48PM GMT
The process by which Abu Dhabi’s natural gas is transformed into a Chinese car bumper more than 6,000km away is an unknown method to most people.
But governments in the Gulf are betting that by the end of the next decade, many consumers around the world will drive cars made, in part, from plastics manufactured in the region. The UAE and Saudi Arabia, in particular, are hoping that massive investments in chemical infrastructure and technology will diversify the revenue base for their oil-dependent treasuries.
Abu Dhabi’s plans to produce plastics for the Chinese car market illustrates how complex that wager will be.
First, natural gas must be harvested from wells in the Western Region and piped to Ruwais, where ethane is separated from the mix of compounds that occurs in natural gas.
The ethane gas is “cracked” with blasts of steam at high temperatures for short periods, producing ethylene. That is converted to propylene, then a catalyst is introduced to create polypropylene.
The little pellets of tough plastic that emerge will eventually be shipped to a planned compounding plant in Shanghai, where reinforcements, other modifiers and colouring will be added. Next, they are trucked to a factory, where they will be moulded into the bumpers and interior panelling of a Chinese-made car.
Car bumpers are but one piece of a strategy to develop a sophisticated, multi-step chemicals industry.
Last month, Borouge, the Abu Dhabi-based plastics maker, announced it would consider building a third plant at Ruwais that would more than double the company’s annual output of plastics. With its new plant in Shanghai and hefty stakes in two European chemical companies, Borouge wants to go global and grab a piece of the huge profits that come with selling more sophisticated products that require a highly skilled workforce.
The company’s expansion is one small piece of a global shift in the petrochemical industry from established bases in North America and Europe to the Middle East and Asia, where they gain a cost advantage in hydrocarbon feedstock at a time of rising energy prices.
Jean-François Seznec, a professor at Georgetown University in Washington DC and an expert on Gulf chemicals, said governments had realised they could employ more people and make more money by selling sophisticated products derived from crude oil and natural gas. So-called “downstream” operations enable producers to sell each part of their precious resource at a premium.
“Everybody in the region realises – at least the leadership in the region realises – they cannot just keep producing oil or just gas in Qatar,” Dr Seznec said. “Sooner or later, it’s going to run out.”
Abdulaziz Alhajri, the chief executive of Borouge, said regional petrochemicals producers were bringing advanced stages of plastics and chemicals production to the Gulf that were traditionally undertaken overseas.
“Today, the compounding and the downstream and some of the ingredients that we use in our industry are imported from outside,” he said.
But he noted that the model was steadily changing. “I see the future as very bright for the UAE, the overall Middle East,” he said.
In addition to the Borouge expansion, the International Petroleum Investment Company (Ipic), a Government investment fund, and Borealis, one of Borouge’s parent companies, announced plans earlier this year to build the largest integrated chemicals and plastics complex in the world at Taweelah, near the border between Abu Dhabi and Dubai.
The plant will use naphtha, a derivative of crude oil, as a feedstock and produce plastics, petrol and basic chemicals.
The UAE is not the only one working on such a plan. In Saudi Arabia, the government plans to make the kingdom the largest producer of chemicals in the world in less than five years.
But building a sophisticated chemicals industry takes more than new plants, as companies have to either acquire or develop the catalysts and specialised equipment that allow them to compete in a market that is well established in the West.
Saudi Arabia’s drive to reach the top is being put into action by the twin behemoths Saudi Aramco and Saudi Arabia Basic Industries, or Sabic, which began laying the groundwork for its rise in the 1990s. Aramco has focused its downstream operations on refining and petrochemicals based on crude oil, while Sabic has steadily moved towards higher-end chemical products derived mainly from natural gas.
Sabic’s petrochemicals growth has been driven and sustained by access to cheap ethane feedstock, according to John Vautrain, a senior vice president at the petrochemical research firm Purvin and Gertz. He noted that Sabic pays US$0.75 for a million BTUs of ethane, 15 times cheaper than some competitors. The historic average price for ethane in the United States has hovered just above US$4.50 per million BTUs.
“They have a powerful platform for growth. Cheap ethane gives them an enormous cash flow,” he said. “They have such an enormous advantage, no one else can touch them.”
Sabic’s ambitions are well known. In 2006, the chief executive, Mohamed al Mady, announced that Sabic wanted to “be the preferred world leader in chemicals” by 2020.
Mr Seznec said the company had steadily moved into more and more sophisticated chemicals in the past 10 years, with a two-pronged strategy of signing joint ventures with Western companies and also buying up the companies themselves, along with the patented technology and skilled workers.
The strategy required a large cash reserve and a disciplined company leadership that had been able to set its sights on the long-term horizon, Mr Seznec said.
“This is really due to the vision of people. Money by itself is important, but it is not a sufficient variable to really create this growth,” he said. “I mean, Iran has the money, but they don’t do anything with it.”
The company’s headline-grabbing move came last summer, when it bought GE Plastics, a US-based company, to give itself more exposure to advanced chemicals technology.
Abu Dhabi has made its own moves to acquire sophisticated technology. The Abu Dhabi National Oil Company (Adnoc) created Borouge from a joint venture with the European chemical company Borealis. Ipic then bought a 65 per cent stake in Borealis itself and a 19.6 per cent share in OMV, the largest refiner and petrochemicals company in Austria.
Even with these investments, however, Mr Seznec noted that Saudi Arabia’s technology remained far ahead of the curve.
“I think the Saudi products will be a lot more downstream because, as they go into fine chemicals, they’ll be way beyond the more basic chemicals that are going to be produced by Kuwait, Abu Dhabi and Qatar,” he said.
Mr Vautrain, the Purvin and Gertz analyst, noted the industry was entering a down cycle in terms of profit margins due to a glut of petrochemical products coming on to market, and the low-cost producers in the Middle East would increase their advantage.
“Overseas assets may become cheaper,” he said. “This is the time to do deals.”
Mr Seznec said the drive to develop a chemicals industry was not merely fuelled by a need to diversify the region’s economies, nor simply about making more money. It is also an effective strategy for conserving the region’s vast hydrocarbon reserves.
“At the end of the day, instead of having Saudi Arabia sell US$200 billion [Dh734.6bn] of oil, for instance, they will be selling maybe US$100 billion of oil, but then they’ll start selling US$100 billion worth of petrochemicals,” he said. “In the process, they will need to produce only one-fifth as much oil because there’s so much value into this business.”
Unfortunately, other GCC states face more challenges in entering the chemicals market. Bahrain, for instance, already has diversified industries, with several large refineries and the largest aluminium smelter in the world, but now has perhaps only eight years of natural gas left.
Dr Seznec said Kuwait half-heartedly moved downstream in a venture with Dow Chemical. But he said it lacked large natural gas reserves and had not moved towards using crude oil as a feedstock. It is now experiencing political infighting that could upend any attempts at large-scale economic reform. And despite recent announcements, Qatar was more concerned with managing lucrative LNG exports than committing to a large-scale petrochemicals expansion, he said.
But in Saudi Arabia and the UAE, Mr Seznec has been following events closely and is hopeful, almost gleeful, about the future.
“What they’re trying to do is go into value-added productions, knowledge-based industries, basically, and that’s going to make them able, first of all to use a lot less of their resources to make a lot more money,” he said. “And in the process create employment for the locals, and in the long term make these countries major industrial producers in the world by 2020.”
@Email:cstanton@thenational.ae
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