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Regional Report: Europe and North America

Hydrocarbon Engineering,

The refining and petrochemical industries have been cornerstones of the economies of Western Europe and the South Eastern USA for over 50 years. For example, chemical production makes up 20% of the total industrial volume in the Netherlands. It is industries like these that are the foundation on which a wide range of other economic activities have been built, such as transportation, technical services, manpower supply services, research and development, and technical and vocational education.

Now, the weather conditions of global economies are truly bad and there are strong indications that the ground is not as solid as many believed it to be. Following the dramatic events in global finance, trade and economy, the global demand for refined and chemical products dropped steeply.

Movement to the east
Considering this, it might be concluded that all major investments in these sectors must have been halted, however nothing could be further from the truth: newbuild and extension projects are still ongoing at a pace that is not much different from what was seen in the past. The difference is that now they are even more concentrated in Asia and the Middle East. As can be expected, this means that there is an ongoing rapid buildup of production capacity at the new refining and petrochemical production centres in ‘the east’. Moreover, the size of those new plants is at least at par with the largest of the ‘old’ plants in ‘the west’.

The speed of this ‘movement to the east’ has further been accelerated due to a number of factors. First of all, the power to decide how much production takes place at which locations. By 2015, it is anticipated that eight out of the top 10 chemical companies will be from the Middle East and Asia. Furthermore, it can be seen that investments in the upgrading and/or extension of older facilities in Europe and the US are getting a lower priority than investments in plants in the Middle East and Asia.

The need for flexibility
In the author’s opinion, when much of the new capacity comes onstream in the Middle East and Asia between now and 2014, the opportunity to create significant cost advantages from these modern, large scale plants combined with the direct access to cheap feedstock (Middle East) or to growing consumer markets (Asia) will make it economically attractive to move a significant portion of the bulk volumes ‘to the east’. This will hold true even when not taken into account any push from governments and national development programmes. What are the possible consequences for many of the older plants in Europe? It is likely that these plants will increasingly need to take up the role of ‘swing producers’ who can quickly ramp up production to take advantage of periods of high demand but who can also survive when running at (very) low utilisation during times of falling demand. Because of the tendency for the long term, ‘secured’ supply of feedstock to move to the new plants in the Middle East and Asia, as well as the increasingly fluctuating production levels of plants in ‘the west’, the latter might have to rely more and more on the oil and commodity traders for their feedstock.

In summary, in order to survive, the ‘traditional’ European and North American operators will have to demonstrate to a higher level of flexibility in their operations than ever before.

Adapting to the change of landscape
As has been demonstrated in this article, the petrochemical landscape has fundamentally changed with the focus of bulk refining and chemical production moving to the east. If the refining and petrochemical operators in Europe and North America accept this new reality and want to stabilise the ‘ground’ on which they found their future operations, the author believes it is time to move quickly by building the flexibility and capability to become ‘swing producers’.

Author: Wijnand AJ Moonen, Lloyd's Register

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