According to Business Monitor International (BMI), Saudi Arabia LPG consumption will see strong growth over the next five years, driven by new capacity demand in the domestic petrochemicals sector and the growing shortage of alternative ethane feedstock.
For 2014, BMI estimates Saudi Arabia’s LPG consumption stood at 604 400 bpd. Business Monitor forecasts a rapid increase in domestic demand, reaching 751 000 bpd by 2018. After 2018, the pace of growth is predicted to begin to slow, putting total LPG consumption at 831 900 bpd by 2023.
Small volumes of LPG are consumed in the residential and industrial sectors, but the bulk of demand stems from the petrochemicals industry, which is set to remain the main source of consumption growth throughout BMI’s forecast period. In part, this is due to the forecast increase in petrochemicals capacity, in particular the Sadara complex and the second phase of PetroRabigh, both slated to come online in 2016.
Rising demand is also due to growing displacement of ethane by LPG in the domestic feedstock mix. Traditionally, thane has provided the dominant petrochemicals feedstock. Ethane prices are kept artificially low, at US$ 0.75/million Btu, bolstering profit margins and offering a strong competitive advantage against regional and global competitors. However, the ethane supply has become increasingly strained in recent years.
Saudi Arabia has substantial gas reserves, at approximately 8.5 trillion m3 according to national oil company (NOC) Saudi Aramco. However, monetization of these resources has been heavily constrained by the domestic gas price cap.
Saudi Arabia’s gas reserves are predominantly sour, raising the cost of both processing and production. The bulk of its more prospective resources also lie in deepwater offshore and in tight gas onshore, and Aramco has limited experience in either deepwater or unconventional production. The company has attempted to increase foreign participation, to speed development but the poor domestic pricing dynamic has largely undercut this attempt.
As such. BMI sees domestic ethane production failing to keep pace with the forecast increase in petrochemicals capacity, over the coming years.
In addition to the country’s gas shortage, BMI anticipates a longer term commercial driver behind the switch to LPG. Ethane feedstock produces a less diversified product slate, with methanol and ethylene accounting for the majority of output. Liquid feedstocks produce a wider yield including a greater share of higher value added products.
The increase in US shale gas production and the strong forecast growth in export driven ethane cracker capacity will support the rising saturation of global ethane derivatives markets, putting downward pressure on prices. A more diversified export portfolio will help Saudi Arabia maintain market share in the face of increased competition.
In part, the increase in consumption will be supported by the increase in the domestic LPG supply (both produced and refined). However, BMI expects the growth in LPG demand to outstrip the growth in supply, putting significant downward pressure on Saudi Arabia LPG exports.
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