Cancellation of US$6.5 bn Shell project in Qatar to change MEG market outlook, IHS says

Royal Dutch Shell and Qatar Petroleum’s (QP) joint announcement that they have cancelled their planned US$6.5 billion Qatari petrochemical project, called Al-Karaana, will significantly change the global supply and demand balances for mono-ethylene glycol (MEG), a key chemical component essential for the manufacture of polyester fibres, fabrics, anti-freeze agents, and polyethylene terephthalate (PET) resins used in bottling, according to analysis from Tison Keel, director, global EO& Derivatives, IHS Chemical.

Shell and QP cancelled Al-Karaana, which was to include a world-scale steam cracker with feedstocks coming from natural gas projects in Qatar, citing high capital costs (received in EPC proposals) and the current economic climate in the energy industry, which rendered the project “commercially unfeasible.”

The Al-Karaana project was initiated with a heads of agreement between QP and Shell in December 2011 and envisioned the construction of a world-scale petrochemicals complex at Ras Laffan, Qatar, by 2018. The complex was to be operated as a stand-alone joint venture between the two companies, with the Qatari company owning 80% and Shell 20%.

Escalating capital costs too much for these oil and gas players to absorb

Keel says both QP and Shell are heavily exposed to oil and gas markets, with a majority of their revenues linked to oil and gas production, which weighed significantly on the decision to cancel Al-Karaana. “The willingness to commit to a project that would have cost well in excess of the expected US$6.5 billion for these companies was clearly not viable in today’s tighter global capital markets. However, despite expectations for an oil price recovery by the time this project would be operational, the strain that several billion dollars of additional debt would have placed on the reduced revenue flows for these companies could not be ignored,” he adds.

High capital costs not an issue, but polymer market prices

The weakening earnings for cost-advantaged producers in the Middle East will place significant strain on profitability for major chemical producers in the region. The exposure that fixed-cost, or low-cost ethane-based operators have to changes in polymer and other derivative markets is large.

“The reduction seen in Asian and European market prices, which have yet to fully absorb the impacts of the current energy market, will directly lower earnings for Middle East producers, with only those exposed to market-related feedstock pricing seeing any similar impact on costs,” says Keel.

Though from an operational perspective, these Middle East units are still the lowest, but companies who have been used to US$1,000/tonne margins may struggle when those margins are only US$300 per tonne to US$400 per tonne, according to Keel.

“Besides the Al-Karaana project, we anticipate similar cost pressures for other early-stage projects in the region. However, the capital concerns that have hit Al-Karanna are not impacting those projects in start-up or close to start-up phase, such as Borouge 3 in Ruwais, United Arab Emirates or the Sadara joint venture between Saudi Aramco and Dow,” he adds.

“The situation for US producers is not dissimilar to that being experienced by their Middle East counterparts: a low-cost industry faced with severe margin contraction. The recent downgrades in earnings outlooks by investment analysts who cover the US chemical companies are a clear reflection of this pressure.”

However, the global olefins industry is still far from experiencing a role reversal. US and Middle Eastern olefins producers may have to get used to lower margins for some time, but there will be no shortage of outlets for their products, and their costs mean they will keep on producing.

A weakening outlook for MEG markets also a consideration

The Al-Karaana olefins complex was to be designed to produce 1.1 million tonnes/year of ethylene and 170,000 tonnes/year of propylene. Downstream units had been expected to include a 1.5-million tonnes/year ethylene glycol plant; a 300,000-tonne/year linear alpha-olefins unit; and a 250,000 tonnes/year oxo-alcohols plant.

The Al-Karaana project included two MEG units, with total capacity for 1.5 million tonnes/year of production, due on-stream in 2018. The project cancellation significantly changes the MEG global supply-demand balances for the period 2018 to 2025. Prior to the cancellation, it appeared that the combination of the Qatari JV, along with several new, low-cost EO-MEG units in North America (based on ethylene from shale ethane), and rapid build-up of coal-to-MEG (CTM) capacity in China, had the potential to create a very large over-supply of MEG relative to demand, leading to lower prices. While this potential over-supply and resulting sell-price issue was not mentioned explicitly in the cancellation announcement, an anticipation of lower margins for MEG was almost certainly a contributor to the company’s conclusion that the project was “commercially unfeasible.”

Keel says in North America, the EO-MEG investment picture is still not clear. One company, Sasol, has approved a project that would build 300,000 tonnes/year of new EO capacity, and that would include new MEG production that IHS Chemical estimates at 300,000 tonnes/year. Lotte Chemical and MEGlobal both announced in 2014 that they planned front-end engineering & design (FEED) studies for world-scale MEG units on the US Gulf Coast. Indorama Ventures (Bangkok) recently stated that it is “exploring the possibility of putting up another MEG plant and participating in a cracker project in the US.”

Market rumours have identified Formosa Plastics Company (Taiwan) as another potential investor in MEG, though that company has not made any public statements on the matter. On the other hand, INEOS Oxide (UK) shelved their plans for a new, US Gulf Coast world-scale MEG project that was originally announced in 2011, citing concerns over high capital costs, similar to Shell’s recent announcement.

Considering all the available information, IHS has projected in its IHS Chemical 2015 World Analysis - Ethylene Oxide/Ethylene Glycol report that there will be at least three new, world-scale EO-MEG units built in the US by 2019. Three US units, plus CTM capacity from China, along with other miscellaneous investments, and the previously assumed Al-Karaana project, would have added approximately 12 million tonnes/year of MEG capacity by 2020, while MEG demand is expected to grow by only 8 million-9 million tonnes in the same timeframe. The 2018 to 2019 Qatari capacity addition was the probable “trigger” for a multi-year MEG margin “trough.”

The net result would have been a sharp reduction in the MEG global industry capacity, dropping to about 80% and, historically, such a low rate has correlated with very poor margins for MEG producers, especially those based on naphtha. The removal of the Shell-Qatari project from the mix would bring global MEG supply nearer to balance with the projected 2020 demand, and result in a more reasonable industry operating rate closer to 84-85%.

In conclusion, Keel says that the Al-Karaana project, viewed on its own, would have been profitable, since it was based on low-cost light feedstocks. With that in mind, neither Qatar Petroleum nor Shell would have likely cancelled a project of this scale based solely on a projected margin trough of a few years. However, Shell is the number two global producer of both EO and MEG, and also enjoys a leading position as a vendor of technology licenses in the business. As a result, Shell leadership was compelled to consider the impact on their overall global business, and they would have keenly felt the impact of a multi-year margin “trough” caused by over-supply.

This petrochemicals project is the second in the Emirate to be canceled by Qatar and may impact the country’s stated ambitions to expand its petrochemicals sector as part of a plan to diversify and increase its share of the worldwide chemical and petrochemical market. Last year, high investment costs drove Qatar to scrap the Al-Sejeel project at Ras Laffan, which was planned by a joint-venture of QP and Qatar Petrochemical Co. (Qapco).

That complex was slated to produce 1.4 million tonnes/year of ethylene, 850,000 tonnes/year of HDPE, 430,000 tonnes/year of LLDPE, and 760,000 tonnes/year of PP. The cancellation of that project would have had a minor negative impact on the linear alpha olefin (LAO) plant at Al-Karaana. However, Industries Qatar (Doha), the stock exchange–listed company that owns 80% of Qapco, says that an alternative downstream project, which will have better economic returns, is being developed.

Qatar, owner of one of the world’s largest gas reserves, has said it is planning to invest US$25 billion in its petrochemical sector through 2020. The two cancelled projects account for much of the expenditure. The Al-Sejeel project was estimated to require US$6.3 billion and Al-Karaana US$6.5 billion. QP will now look at finding alternative and less costly ways to utilise its ethane, the stranded feedstock that otherwise has a low value, by maybe debottlenecking. Though the scale of capacity required would make such debottlenecks very large and point back toward cracker investments, potentially waiting for a time in which capital costs are less of an obstacle.

QP and Shell’s existing partnerships include Pearl GTL, the world’s largest integrated gas-to-liquids plant, which is located at Ras Laffan and has boosted Qatar’s position as the world’s leading gas-to-liquids location. The partnerships also include Qatargas 4, an integrated liquefied natural gas asset; in addition to joint downstream and upstream investments in Singapore and Brazil.


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