New investments in petrochemicals are aimed at markets in East Asia

As part of Kuwait’s effort to diversify and grow its economy, authorities are launching two initiatives that are set to expand trade with East Asia. First, Kuwait is looking to increase its oil production from around 2.9m barrels per day (bpd) currently to 4m bpd by 2020. This will also boost production of associated gas, which can be used as feedstock for the petrochemicals sector. Second, because the petrochemicals industry globally has been growing faster than GDP since the 1990s, Kuwait has been developing the sector as a way to deliver more added value. As ongoing projects materialise, production of petrochemicals and their contribution to the country’s economy look set to grow.

Background

Kuwait took full control of its hydrocarbons industry in 1975, when it nationalised all oil companies operating within its borders. In 1980, it formed the Kuwait Petroleum Company (KPC), integrating the processes of production, refining and transport and later beginning to develop a domestic petrochemicals industry as a way to add more value within the country rather than simply exporting raw materials. To this end, the government brought the Petrochemical Industries Corporation (PIC) – founded in 1963 as the region’s first integrated fertiliser complex – under its ambit as a KPC subsidiary, allowing PIC to draw synergies from integration with Kuwait’s hydrocarbons base and low energy costs. Today, Kuwait is looking to boost these synergies by further developing its petrochemicals sector.

The PIC Family

PIC is divided into six business units, three of them internal in nature (such as the legal department) and three dedicated to specific sub-segments of petrochemicals – namely fertilisers, aromatics and olefins. Some 70% of the company’s production takes place in Kuwait, the rest being produced in other Gulf countries or, to a lesser extent, in Europe and North America.

Production is carried out by a number of PIC’s subsidiaries, many of which are joint ventures with other global and regional players. One such venture is Equate Petrochemicals Company, which was founded in 1995, began producing in 1997, and now puts out more than 5m tonnes of petrochemicals a year. In 2013, it made profits of $1.2bn on sales of $2.8bn, and it is owned by PIC (42.5%) the Dow Chemical Company (42.5%), Boubyan Petrochemical Company (BPC, 9%) and Al Qurain Petrochemicals Company (QPIC, 6%). A second such joint venture, The Kuwait Olefins Company, is split in the same proportions as Equate, and a third, The Kuwait Aromatics Company (TKAC), is owned by PIC (40%), Kuwait National Petroleum Company (KNPC, 40%), and QPIC (20%). TKAC, in turn, owns 57.5% of a joint venture with Dow called The Kuwait Styrene Company. A fourth joint venture, Gulf Petrochemical Industries, produces ammonia, methanol and urea in Bahrain, with ownership split in equal parts between PIC, the government of Bahrain and Saudi Arabian Basic Industries Corporation. Last, PIC has stakes in two joint ventures abroad as part of a 50:50 partnership with Dow: ME Global, which produces mono-ethylene glycol and di-ethylene glycol in Canada, and Equipolymers Company, which produces polyester in Germany.

Equate produces ethylene, polyethylene and ethylene glycol in its own facilities, and operates plants producing polypropylene, benzene, paraxylene, aromatics, styrene and monomers on behalf of other companies that fall under the PIC family. As of early 2014, capacities at these plants were: ethylene, 1.8m tonnes a year; polyethylene, 800,000 tonnes a year; ethylene glycol, 1.2m tonnes a year; styrene, 450,000 tonnes a year; heavy aromatics, 80,000 tonnes a year; benzene, 393,000 tonnes a year; paraxylene, 829,000 tonnes a year; and polypropylene, 140,000 tonnes a year.

Other Players

Two other significant petrochemicals groups with a presence in Kuwait are QPIC and BPC. The first of these, a subsidiary of KIPCO Group, the Kuwaiti holding company, reported net profits of KD22.6m ($79m) in fiscal year 2012/13, down from KD33m ($116m) in 2011/12, whereas total assets were KD291m ($1bn) in fiscal year 2012/13, up from KD256m ($900m) in 2011/12.

BPC, founded in 1995, was the first private firm to enter the petrochemicals business in Kuwait, and is now listed on the Kuwaiti bourse. Its assets, besides the stakes in the PIC subsidiaries mentioned above, include factories in Kuwait that produce plastic bags, packaging and films for the agricultural sector; two others in Oman that make plastic pipes; plants in Saudi Arabia that make packaging and waterproofing materials; a 24% stake in Al Kout Industrial Company, a Kuwaiti producer of chlorine, caustic soda and hydrochloric acid; and a 12.5% stake in Bahrain National Gas, which runs liquefied petroleum gas facilities producing butane, propane and naphtha. BPC reported profits of KD26.3m ($92.5m) in 2013, up from KD24.7m ($86.8m) in 2012.

East Asian Market

Much of Kuwait’s hydrocarbons and petrochemicals go to East Asia, and the trend looks likely to intensify. As Kuwait seeks to increase oil production, it is likely to encounter increasing levels of “sour” crude (i.e. with a high sulphur content). At the same time, as populations grow more prosperous and pollution worsens in major cities, many Asian countries are looking to tighten their environmental standards on petroleum products, such as fuels. To meet these new specifications, KNPC, the state refineries operator, is investing $30bn in its Clean Fuels Project. Of this, half will go to upgrading existing refineries at Mina Al Ahmadi and Mina Abdullah to produce with reduced CO2 emissions and sulphur, and half will go to building a new refinery at Al Zour, which is to have a capacity of 615,000 bpd.

Kuwait is also looking to increase production of the more profitable chemicals. PIC, for its part, is looking to build a new plant, dubbed Olefins III, with regional investments of $7bn-10bn. When it starts production in 2018, Olefins III is meant to boost polyethylene capacity to 1.6m tonnes a year and raise ethylene capacity to 3.1m tonnes a year. Olefins, which are used to make polymers and artificial fibres, are generally more profitable than products such as fertilisers, which have a relatively low added value.

In late 2013, PIC was reportedly considering moving its Olefins II plant from Shuaiba, at a port near Kuwait City, to Al Zour. If carried out, this could be a significant opportunity to further integrate its refinery and petrochemical complexes, increase synergies and derive more added value for the country. At the time of writing, however, no decision had been announced. Equate is similarly considering a project to reduce bottlenecks at its polyethylene plant, a plan which is to be finalised in 2015.

Refining Ventures In Asia

At the same time as Kuwait is investing at home to secure a stake in the lucrative Asian petrochemicals sector, it is also investing in Asia itself to forge bonds with customers and cement the trading relationship. One of the largest such projects is PIC’s deal with China Petroleum and Chemical Corporation, also known as Sinopec, to build a $9bn refinery near the city of Zhanjiang, in the province of Guangdong. The project, which is due for completion by 2015, features a 300,000-bpd refinery and a 1m-tonnes-a-year ethylene cracking unit to produce feedstock for petrochemicals.

KPC, for its part, signed agreements in 2013 to build a $7bn refinery in Indonesia and a $9bn refinery in Vietnam. The Indonesian venture is being carried out in cooperation with Pertamina, Indonesia’s state oil firm, and would have a capacity of 300,000 bpd. In Vietnam, the refinery project is a joint venture with Idemitsu Kosan, Matsui Chemicals and PetroVietnam to develop what will be Vietnam’s largest refining and petrochemicals complex, with a capacity of 200,000 bpd of crude oil.

In January 2014, KPC was reportedly considering a 26% stake in two petrochemical projects in India – in Mangalore and Dahej – currently held by India’s state-owned Oil and Natural Gas Corporation. Should the acquisition go ahead, the deal’s value would be in the region of $300m, though as of June 2014 no final decision had yet been reached. Such investments abroad, combined with moves to increase capacity at home, look set to diversify Kuwait’s sales markets and ensure the sector’s growth for years to come.