September 2019

Trends & Resources

Business Trends: Crude-to-chemicals—An opportunity or threat?

For most oil refiners and chemical producers, the need to improve margins and remain competitive has never been greater.

Gupta, S., Xu, D., Wood Mackenzie

For most oil refiners and chemical producers, the need to improve margins and remain competitive has never been greater. Refining overcapacity, International Maritime Organization (IMO) regulation changes, the threat of peak oil demand in the transportation sector, the rising appetite for petrochemical feedstock and a shift in product demand patterns will drive refiners to rethink their businesses. The integration of refineries with chemicals is becoming an important growth strategy for many companies, but it is not without risk.

Saudi Aramco is actively investing in the chemical sector, and several integrated refinery-petrochemical projects are being planned in China on a scale yet unseen by the industry. Will integration create value in the long term? Market mega-trends are driving chemical integration strategies. Growing pressure on refiners from the energy transition and strong demand growth in both the olefins and aromatics markets, supported by continued global demand for plastic products and synthetic fibers, are key factors in the drive for integration.

US tight oil revolutionizing global oil market

US tight oil production continues to grow faster than expected, leading to the globalization of US crude exports and ultimately putting pressure on oil producers elsewhere. The lighter crude slate also leads to higher light distillate yields for LPG, naphtha and gasoline, resulting in higher light products relevant for chemical integration. The rise in US tight oil has also impacted the price of Brent crude. OPEC+ is balancing the global crude market by reducing supplies of medium and heavy crude.

Transportation oil demand to peak in mid-2030s

Demand for petrochemicals continues to grow, supported by increasing urbanization and improving standards of living. Faced with the prospect of declining use of oil in transportation, the oil industry is turning to petrochemicals as a key target area for future long-term crude oil demand growth.

IMO bunker fuel regs to disrupt oil value chain

From 2020, the IMO’s new regulatory changes and environmental requirements will have a material impact on the economics of almost all major refineries. Refiners that are flexible and able to adapt without huge capital investment will be in the best position to take advantage of these changes.

Robust market for olefins

In contrast to the slow growth in oil demand, petrochemicals demand has historically grown above global GDP growth rates. The end-use markets for olefins are robust. Strong growth rates for polyethylene and polypropylene—which form the essential building blocks of products like film bags, plastic bottles and car parts—are mainly driven by consumer demand for everyday products as living standards improve.

China is an important growth engine. For at least the next decade, China is set to maintain its dominant position in the industry as both the largest producer and consumer of most chemicals, supported by growth in the consuming power of the country’s middle class.

Shale boom creates competitive advantage

The availability of cheap shale base feedstocks has allowed the US to build chemicals capacity, with major investments made in areas such as ethylene, propylene, methanol and ammonia.

The backlash against single-use plastics presents a significant risk but is not expected to materially impact demand in the near term. While clearly good intentions are behind efforts to curb the use of single-use plastics, quick-fix replacements are unavailable. Strong growth for petrochemicals, polymers and synthetic fibers are expected to continue in the long term, particularly since single-use plastics represent a minority of the demand for most petrochemicals.

Aromatics market

Continued robust growth in polyester demand drives investment in aromatics. The world continues to need more paraxylene (PX) supply to feed the growing demand for both fiber and packaging applications in the polyester value chain. A hugely cost-effective product, it is not easy to find alternatives that match polyester’s economies of scale. By far the most recycled plastic, polyester has key attributes that brand owners will continue to value as they seek to realize ambitious recycling targets. PX is closely linked to the refining industry, which supplies feedstocks for aromatics production.

A new wave of aromatics investments in China

Several new mega-sites across China are being planned for refinery-to-petrochemicals integration. The sheer scale of these investments will result in acute overcapacity in PX markets once they begin operations toward the end of 2019. Despite these headwinds in the short term, the longer-term demand outlook remains positive for the polyester value chain, and more investments are likely needed in aromatics.

Changing market dynamics clearly indicate that integration between refining and chemicals is becoming more of a necessity than a choice. How are oil and refining companies adapting? How does the process add value?

The process of converting oil refineries that produce mostly transportation fuels into oil refineries that produce more petrochemical feedstocks adds value in several ways. These include:

  1. Reduced cost through shared process streams and operational activities. Integration provides the opportunity to maximize the many different process streams that can be shared and exchanged between a refinery and a chemical unit, creating cost synergies.
  2. Product revenues. Product revenues can be improved through the exchange of intermediate streams. For example, hydrogen, which is a byproduct of the steam cracker, is very valuable for a refinery.
  3. Optimizing feedstocks. Integrated sites will have the flexibility to switch product yields between refining and chemicals, depending on where they find better value. Non-integrated refiners and petrochemical producers will have less flexibility, making them more vulnerable to downside market risks.

Integration adds value but can fluctuate

The benefits of integration vary by site, technology choice, scale and a host of other factors. Integration also increases the complexity of an operation. To fully understand the value that is created, consider the competitiveness of the integrated site.

FIG. 1. Refinery projects in China. Source: Wood Mackenzie.
FIG. 1. Refinery projects in China. Source: Wood Mackenzie.

For example, many new large-scale aromatics plants that are integrated with refineries in Asia are very competitive when looking only at the cost of PX production. However, some of these assets are integrated with refineries that are not competitive. The risk is that post-2020, when both refining and PX margins are weak, the economics of these sites could become marginal or even negative.

Turning challenges into opportunities

A new wave of refining capacity in China is expected to begin operations in 2020 (FIG. 1). Two large crude-to-chemicals projects—Hengli and Zhejiang PC—are due to start up in the next 12 mos.

Will these mega-projects add value? Once built and operational, these crude-to-chemicals complexes in China will be very competitive on an operating cost basis. Although margins are likely to be challenged in the next 5 yr, sites like Hengli will still generate a positive margin.

Saudi Aramco bets on chemicals

Saudi Aramco plans to invest more than $100 B in chemicals over the next decade. The company will convert 3 MMbpd of oil—nearly one-third of its production—to chemicals in the next 15 yr. Their recent announcement to acquire SABIC for $69 B will transform Saudi Aramco into one of the largest chemical companies in the world and provide opportunities for further upstream integration of SABIC’s assets. Their potential investment in patented crude-oil-to-chemicals technology will allow the company to take full advantage of the benefits of refining-to-chemicals integration. More than $20 B is earmarked to build a massive crude-to-chemicals complex that will process Arabian light crude. The capital-intensive investment will target chemical feedstock yields of more than 50% and potentially up to 70%.

The case for refining-to-chemicals integration is clear

The next few years will not be business-as-usual for refiners. While integration presents numerous opportunities, no one-size-fits-all option exists. The right strategy must be tailored to each facility, considering specifics including product opportunities, configurations and targeted return on capital.

Investments in integration is not without risk. A massive shift from refining to petrochemicals could result in over-investment into petrochemicals, with the risk that this would erode petrochemicals margins in the future.

With investments that are planned for the next 5 yr, new olefins and aromatic capacities are coming online faster than demand growth.

Is it possible that the world will reach “peak plastic?” The backlash against single-use plastics could reduce or cause peak petrochemical demand growth at some point in the future, although this is a longer-term headwind. HP

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