The main challenges facing the GCC’s petrochemicals industry are looming natural gas shortages, the shale boom in North America, slowing Chinese demand alongside increased Eastern production.
Whatever the reasons, it has become increasingly clear that this region’s downstream players must rethink their long-term strategies in order to maximise the value of their hydrocarbon wealth while holding on to their global market share.
Of the six GCC countries, Kuwait is arguably in the most precarious position as growing demand for power, particularly for air conditioning, has forced it to increase the volume of liquefied natural gas imports from in recent years.
This has made it increasingly more difficult for regulators to justify sending natural gas allotments to the downstream sector. For an industry built on the assumption that cheap associated gas would remain forever, such a development has created a whole set of new challenges.
In fact, Petrochemical Industries Company, (PIC) the petrochemicals arm of the national Kuwait Petroleum Corporation (KPC), is going through a period of rapid and drastic change, one that Assad Al Saad, chief executive officer of the company, believes will keep Kuwait at the forefront of the global petrochemicals industry.
Over the last 50 years, the company has pursued its vision to be a ‘global petrochemical player leveraging Kuwait’s natural resources in value-added partnerships to drive growth.’ Much of this has been accomplished through a series of joint ventures.
The company is currently engaged in nine JVs, including Equate, The Kuwait Olefins Company (TKOC), The Kuwait Aromatics Company (TKAC), The Kuwait Styrene Company (TKSC), Al-Qurain Petrochemical Industries Company (QPIC), Gulf Petrochemicals Industries Company (GPIC), PIC-Canada, MEGlobal and MEGlobal BV.
“Our joint venture strategy has been to seek partners with strengths that complement our own and that create a synergy that results in a successful operation,” says Al Saad. The company’s wide range of subsidiary companies has enabled it to take a sizeable share of global petrochemical markets.
The company reported net profits of over $1.2 billion for the financial year ended March 31, 2014, a result that was due much in part to the successes of its joint ventures.
While the majority of its existing partnerships have been based primarily in Kuwait, it is evident that PIC is going global. With the shale boom and ensuing fall in American petrochemical production costs, the GCC’s downstream industry has been forced to recognise that its feedstock advantage is shrinking.
But the shale boom has also presented this region’s producers with a new set of opportunities to expand their revenue streams by investing west and creating partnerships with companies engaged in shale production.
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“Although the Middle East petrochemical producers are still at the bottom of the cost curve with highly subsidised natural gas prices, relatively low US natural gas prices, compared to those in Europe and Asia, would still offer a somewhat attractive feedstock alternative when compared to the limited indigenous growth potential in the Middle East,” explains Jens Zimmerman, senior analyst for energy markets at Wood Mackenzie.
Engaging in North America’s shale boom is a strategy that PIC is heavily considering. “We are really looking at opportunities in the USA because of the availability of shale gas,” Al Saad revealed in an exclusive interview with Refining & Petrochemicals Middle East magazine.
“We are looking for a partner who has the technology and infrastructure to get the feedstock for petrochemicals.
This would be a really a big advantage, if the potential partner has the necessary infrastructure to get the feedstock as gas, and already has the technical knowledge at its disposal.”
Establishing a foothold in North America’s shale boom could be an effective move for PIC, but it is only part of the company’s strategy. Enhancing the company’s profitability at a time when natural gas shortages put more pressure on operating costs will necessitate some tough decisions.
Among them is the potential closure of the company’s Urea production plant. While regional competitors such as those in Qatar may benefit from secure and low-priced natural gas feedstock, PIC may have to look the other way, and exit the sectors that are no longer deemed profitable.
“There is greater profitability in petrochemicals than fertilisers, especially in the olefins and aromatics,” Al Saad explains.
At the time of writing, PIC had conducted a study to exit the fertilisers business, whether through privatisation or through the closure of existing plants. The case was under consideration by KPC and the governmental agency in charge of developing and setting energy policy in Kuwait, the Supreme Petroleum Council.
But not all moves to build a globally competitive petrochemical company need to be so difficult. PIC is adapting the Six Sigma programme, which has enabled the company to decrease costs, raise profits and improve customer satisfaction. “We have successfully implemented over 420 projects and saved more than $140 million,” says Al Saad.
“In 2013 alone, PIC saved $31 million using the Six Sigma methodology.” One example of the company’s successful utilisation of the Six Sigma model was in the improvements to cargo loading turnarounds.
“We found there were a lot of stoppages and delays in loading cargo and this is usually associated with a lot of costs because you’re holding the ship from going to its next destination,” he explains.
“So we conducted a Six Sigma project, collected all the data, figured out all the reasons why these ships were being delayed and then our team proposed and analysed a corrective action, and now we are at a point where we almost have no loading delays.”
The Six Sigma model made a significant impact on the company’s operations, but the most valuable transformation that the company is undergoing is also the most subtle.
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Throughout the refining and petrochemicals industry, there has been a massive push towards vertical integration. Bequeathed with vast amounts of capital that is capable of supporting the mega projects that have sprouted up across the region, GCC petrochemical players have moved to maximise the hydrocarbon chain by bringing the industry closer together.
“Today, you will not see refineries being built alone; instead they will be integrated with petrochemical projects in order to raise profit margins,” says Al Saad.
There are multiple benefits to vertical integration throughout the value chain: feedstock security, project scale and supply chain optimisation, just to name a few. According to Vishnu Sankaran, industry manager of Chemicals & Materials at Frost & Sullivan MENA, “there is a feedstock advantage that refining companies have, so by going further into the downstream you can bring that value into the petrochemicals sector.”
Then there is the element of scale. “For these companies to integrate into petrochemicals, they can bring scale into the picture, as opposed to stand-alone petrochemical companies,” adds Sankaran.
Kuwait’s petrochemicals sector certainly has not been shy about going big. PIC is in the early planning stages of developing a third olefin cracker in Kuwait that will be integrated with the Al Zour refinery.
The plant will produce about 800,000 tones of polyethylene, 400,000-600,000 tones of polypropylene, 1.2 million tones of paraxylene and 550,000 tones of ethylene glycol annually.
Not only does vertical integration offer the opportunity to go big, but it has allowed PIC to better utilise liquid feedstocks and diversify its product portfolio.
“Integration with refineries always has an added value to the whole value chain of the business, because there is more limited access to gas in this part of the world,” explains Al Saad. “So integration has become something that is a must, because petrochemicals must use naphtha instead of gas, but naphtha tends to be more costly. Further integration along with new technologies can help to offset the high costs and high risks.”
Factbox:
– 10% PIC’s earnings from its fertilisers business.
– 90% PIC’s earnings from other sectors including olefins and aromatics.
– $140 million Amount saved by PIC through implementation of Six Sigma programme.
