Retaining value locally: Diversifying the economy through petrochemicals and manufacturing

With an ambitious expansion plan in its petrochemicals and chemicals sector, Abu Dhabi is most notably pushing ahead in plastics and fertilisers. The several new petrochemicals projects due to come on-line in 2013-17 should make a substantial contribution to Abu Dhabi’s Economic Vision 2030 by creating a more diversified economy in which a larger part of the hydrocarbons value chain is retained locally, as well as by providing extra inputs for what the emirate hopes will be an expanded manufacturing sector. In the coming years, however, most of Abu Dhabi’s petrochemicals will be for export, with Asian countries set to account for a growing share of the output.

PLASTICS: Plastics are one of the key focus areas for industrial growth in Abu Dhabi, whose western city of Ruwais is witnessing the development of two multi-billion-dollar complexes. The first is an aromatics facility to be located in the Madeenat ChemaWEyaat Al Gharbia (MCAG), a chemicals industrial city under development on 70 sq km of land. With the master plan for the city now finalised, ChemaWEyaat, the joint-stock government developer of the site, has begun to develop the aromatics complex as the first phase of the initial chemical complex, called tacaamol (“integration” in Arabic).

A contract for project management of the complex was awarded to Foster Wheeler in April 2012, and it is scheduled to be up and running by 2017. Naphtha and liquefied petroleum gas raw materials feedstock will be piped from the nearby Abu Dhabi National Oil Company (ADNOC) industrial area – itself currently undergoing large-scale expansion – and will be used to produce benzene, paraxylene and mixed xylenes. These are eventually used to make materials such as phenol, polystyrene, polyester fibres and polyethylene terephthalate (PET). While this plant will initially export its output, it is possible that further facilities could be built for additional processing on-site.

The decision to use naphtha rather than ethane as feedstock for the new project makes long-term sense for Abu Dhabi. Plastics producers have normally used ethane, derived from natural gas, a feedstock which the emirate may find itself in short supply of until new developments are brought on-line (see Energy chapter). While the use of naphtha is likely to result in lower profit margins – especially at a time when oil prices remain high – it also enables ChemaWEyaat to branch out into a wider range of specialised chemicals for use in agriculture, pharmaceuticals, electronics and other areas. In this way, ChemaWEyaat’s aromatics plant should serve to complement several already existing gas-fed operations, such as Borouge.

Abu Dhabi’s second major plastics development is being led by Borouge, which was formed in 1998 between ADNOC and Austria’s Borealis. This venture has been manufacturing polyethylene and polypropylene since 2001, and is currently moving ahead with a massive expansion project, the latest phase of which will see the creation of the largest integrated poly-olefins complex in the world. Produced from ethane feedstock, polyolefins comprise polypropylene and polyethylene, which are generally used in the manufacturing of products such as data cables, piping systems, automotive components and packaging.

Also based at Ruwais, this Borouge 3 expansion will boost output capacity at the plant from 2m tonnes per year to 4.5m tonnes and is due to be completed by the end of 2013. The expansion continues to create work in engineering, procurement and construction: in 2011, Alpine Deutschland snapped up a $111m infrastructure contract, while Hyundai was awarded the work on a $169m polyethylene unit.

BOOSTING DEMAND: In view of such grand projects, the question many will be asking is whether demand will be there to absorb this new capacity. The onset of the global economic downturn in 2008-09 created doubt over the outlook for the petrochemicals market, with demand and prices being hit negatively. The industry has become more cautiously optimistic in recent months, although many still predict an oversupply in the global polyolefins market. According to a May 2012 study by the Kuwait-based Global Investment House, the huge expansion of petrochemicals production capacity in the GCC region over the next five years is likely to threaten the profit margins of less competitive companies. Furthermore, while Asian powerhouses such as China and India are accounting for a growing share of international demand, their rapid economic growth of the past decade looks set to slow.

FUTURE POTENTIAL: Still, Abu Dhabi’s petrochemicals industry has several good reasons to be optimistic in 2012. For example, the Gulf Petrochemicals and Chemicals Association (GPCA) notes that 2011 saw a resurgence in demand in both regional and global markets, supporting a year-on-year growth in production rates of 4.8%. A Reuters survey conducted in mid-2012 found that plastics imports by China – Asia’s largest importer and a major market for Abu Dhabi – are likely to grow by 5-7% in 2012, significantly more than in 2011, albeit not up to pre-2009 levels.

Furthermore, relatively cheap feedstock in Abu Dhabi and other Middle Eastern petrochemicals producers is helping them to secure a competitive edge in the global marketplace. According to Contax Partners, an oil-and-gas consultancy, the Middle East will supply 20% of the world’s petrochemicals output by 2015, up from 16% in 2009. In 2011 alone, said the GPCA, output capacity for petrochemicals in the GCC region increased by 13.5%.

In the longer term, population growth and urbanisation look set to drive demand for plastics and other petrochemicals in emerging economies. “Global demand for petrochemicals looks set to increase, as living standards rise in places like India and China,” Mohamed Abdulla Al Azdi, the CEO of ChemaWEyaat, told OBG, adding that he did not think there was a threat of overcapacity in the GCC region. Furthermore, Abu Dhabi not only has very strong political relations with Asia’s largest economies but has also increased its presence on the ground in the continent. Since 2009 Borouge has opened a compounding facility in Shanghai, announced plans to build its second factory in China, and opened a marketing and sales branch based in Beijing.

But while Abu Dhabi’s new petrochemicals capacity will undoubtedly have China, India and South-east Asia predominantly in their sights, African and Middle Eastern markets are also likely to play an important role. In the Gulf, new infrastructure projects and expansions in the upstream and downstream energy sector are likely to create demand for plastics. In fact, Borouge announced in May 2012 that approximately a third of its production would be used in Abu Dhabi and the rest of the Middle East.

FERTILISERS: Ruwais is also witnessing an expansion of one of Abu Dhabi’s major fertiliser producers, Ruwais Fertiliser Industries (FERTIL), a joint venture between state-owned ADNOC and French Total, which began operations in 1980. Korea’s Samsung Engineering was contracted in 2009 to carry out the $1.2bn FERTIL-II expansion project, which involves the construction of two large new plants – one producing 2000 tonnes of urea per day, the other 3500 tonnes of ammonia – as well as a bulk storage facility and a reclaimer unit. The project is due for completion in 2013. This expansion comes just after a project aimed at removing bottlenecks, in which FERTIL began to produce larger granulated urea instead of pearled urea – an improvement allowing FERTIL to increase exports to the US, where demand for pearled urea is limited.

The emirate’s other fertiliser producer, Abu Dhabi Fertiliser Industries (ADFERT), was established in 1995 as a joint venture with Chile’s SQM. A smaller operation than that of FERTIL, it still claims to be one of the world’s three biggest producers of water-soluble NPK fertilisers, of which it can churn out 50,000 tonnes annually. In addition, a newer granular production line can produce 60,000 tonnes every year.

The expansion work on FERTIL began in a year when fertiliser demand took a serious knock from the global financial crisis, sending prices down from $1000 per tonne for ammonia and urea to some $300 per tonne. But as with other petrochemicals products, the outlook for fertilisers in 2011 and 2012 seems to be more optimistic. In 2011 a growing demand for agricultural produce throughout the world put pressure on grain supplies; this increased grain prices and profits for farmers, who were in turn able to spend more money on fertilisers. “Urea is growing in importance in order to increase crop yields as well as meat production,” Mohamed R Al Rashid, CEO of FERTIL, told OBG. “Approximately 10% of cattle feed is comprised of urea, so demand will continue to grow as global incomes and population increase.” As for 2012 global urea sales may grow by 5%, while seaborne ammonia trade is also projected to rise by 5.5%, according to the International Fertiliser Industry Association. The study cautioned, however, these projections are subject to several factors, such as ongoing uncertainties in the global economy and volatility in crop prices.