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Saudi Arabia and Abu Dhabi bet on crude-to-chemicals

Saudi Aramco's Ras Tanura oil refinery. The kingdom's main chemicals producer Sabic intends to build a new facility in Ras Al Khair Reuters/Ahmed Jadallah
Saudi Aramco's Ras Tanura oil refinery. The kingdom's main chemicals producer Sabic intends to build a new facility in Ras Al Khair
  • Saudi pushes shift to chemicals to secure oil demand
  • Adnoc makes petrochem moves in Brazil and Germany
  • Oil-to-chemicals technology needs to improve

Saudi Arabia and Abu Dhabi’s state-run oil companies both want to expand their chemicals production capacity in a strategic shift that will have huge implications for a petrochemicals industry already suffering from its lowest margins in two decades.

Saudi Aramco and Abu Dhabi National Oil Co (Adnoc) together provide around almost half of Opec’s crude output.

Aramco produced 10 million barrels of oil per day (bpd) in June, while its refinery capacity is 3.3 million bpd.

It owns 70 percent of Saudi Basic Industries Corp (Sabic), the kingdom’s top petrochemicals company, and wants both to expand oil production and place more oil within its own network of businesses.

“Saudi Arabia, supported by Sabic, is massively shifting towards chemical products rather than refined products,” said Oliver Connor, vice-president of energy equity research at Citi in London.

Adnoc is pursuing a similar strategy as part of a target to raise its crude production to 5 million bpd by 2030. The company launched a 37.5 billion reais ($7.5 billion) takeover bid for Brazil’s largest petrochemicals producer, Braskem, and has offered 11 billion euros to buy Germany’s Covestro, Reuters reported.

Adnoc will also merge petrochemicals producers Borealis and Borouge, in which it owns 25 and 54 percent stakes respectively.

“There’s a clear step up in terms of Adnoc’s appetite to do chemical M&A. Why? It comes back to crude placement,” said an analyst who spoke on condition of anonymity.

“Rather than building refinery capacity, it’s buying chemical businesses. It’s build versus buy. Build would take five years, but it can buy these plants now. That’s the cost of placing the product.”

Gasoline and diesel demand could decline as consumers adopt electric and other greener vehicles, whereas demand for plastics can be reliably expected to expand at around 1 to 1.5 times annual global GDP growth.

This is a major factor in both Aramco and Adnoc’s expansion of their chemicals capabilities. Aramco has a longstanding aim to put an additional 3 million bpd of oil into petrochemicals production.

“The focus is on monetising additional oil supply, both in the UAE and Saudi Arabia – by upping chemicals manufacturing they’re de-risking demand for their oil,” said Connor.

Yet questions remain over suitable off-takers to whom the duo can sell additional chemicals volumes.

“The historical growth model was we build and we’ll ship to China. Now maybe China doesn’t need this additional product,” said the analyst.

Aramco and Adnoc’s petrochemicals production expansion could worsen supply-demand imbalances, weighing on prices and pressuring margins further.  

“But because they will be making money upstream on oil, they won’t care so much about downstream returns,” said the analyst.

According to Aramco, only 8-12 percent of oil consumed at a typical integrated refining complex will be made into chemicals.

The most advanced refineries produce around 50-55 percent chemicals and 45-50 percent fuels, said Yousef Husseini, director of chemical equity research at EFG Hermes in Cairo.

“The technology doesn’t fully exist yet to push this towards 70 percent and make oil-to-chemicals a practical reality,” said Husseini.  

Adnoc intends to merge petrochemicals producers Borealis and BorougeWam
Adnoc intends to merge petrochemicals producers Borealis and Borouge

Saudi petrochemicals producers’ two main products are polyethylene and polypropylene plastics. The former is primarily made from ethane gas and is a compound with two carbon atoms, while the latter is usually made from propane and has three carbon atoms.

“The heavier the chemical, the more expensive it is to use as feedstock, but also the more products you can produce,” said Husseini.  

Making polyethylene from ethane is cheap, partially because it only requires breaking the hydrogen bonds and not the carbon bonds, which are stronger and need more energy to dismantle.

Crude oil, in contrast, is a mixture of various hydrocarbons. Through the distillation process, refineries separate crude into its constituent compounds but do not necessarily alter their chemical composition.

In crude-to-chemicals, hydrocarbons are broken down, changing their chemical composition, which requires greater energy.

“The big problem is how to do this in a way that makes sense economically – to achieve that requires better technology,” said Husseini.  

Sabic intends to build a new facility in Ras Al Khair that will directly convert 400,000 bpd of crude into chemicals.

“That’s a huge shift away from the current refining setup,” he added.

Husseini also highlighted long-term uncertainties over the impact of recycling on plastics demand. Currently, plastics recycling is mechanical, so, in many cases, does not produce resins that are of high enough quality.

Yet over the past few years, advances have been made in chemical recycling of plastics, which breaks down plastic molecules and reforms them. This would enable the recycling of plastic food packaging and its re-use in the food industry, for example.

“My best guess is we’re probably still 10 to 15 years away from this technology being commercial but given the long-term plan for oil-to-chemicals, it’s something to consider,” added Husseini.

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