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Taking an holistic view

Hydrocarbon Engineering,

The global chemicals sector is in the midst of a major disruption. The shale gas driven boom is expected to bring significant North American supply at a highly competitive cost of US$ 500 – 600/t of ethylene. The shortage of gas in the Middle East is forcing companies in that region to use mixed feedstock (propane, butane and light naphtha) for new projects that is putting the traditional cost advantage of the Middle East under pressure, moving them from approximately US$300/t to US$600 – 950/t of ethylene for new projects. Under these circumstances, the naphtha based European and Asian producers find themselves under increasing threat as they have become the marginal suppliers with their cost position between US$1250 – 1450/t of ethylene. In addition, countries in the ASEAN region, such as Thailand, which have traditionally relied on gas based petrochemical crackers, are challenged with the decreasing natural gas production that is expected to decline at -4.1%/y to 2030.

Against this backdrop, countries in the ASEAN bloc1 are in the process of setting up a number of new megaprojects within the region to cater to the increasing local demand. For example, Vietnam is embarking on potentially two major integrated refinery and petrochemicals complexes. Malaysia recently took the final investment decision (FID) to proceed with a refinery and petrochemical integrated development project (RAPID). Indonesia is also moving forward to revamp its existing refineries and add petrochemicals complexes. Together, the cumulative investments in the ASEAN petrochemicals megaprojects are expected to total more than US$ 50 billion by 2020.

The national oil companies (NOCs) in the ASEAN region are often the main project developers of these megasites. The primary drivers for developing these sites are to achieve greater self sufficiency for petroleum fuel products and the basic petrochemicals/polymers, create an export hub, create local employment opportunities and develop the local workforce. These NOCs will need to address a number of critical questions to ensure the long term attractiveness and stability of returns on these megasites in a context of increasing competitive pressure from Middle East and North American regions.

An increasingly over supplied ASEAN market

Petrochemicals demand in ASEAN countries has been growing rapidly over the last decade and is expected to continue at a similar pace over the next decade driven by strong macroeconomic fundamentals, a growing middle class and increasing urbanisation in the region. Average GDP growth for the ASEAN bloc of countries has been averaging approximately 5% since 2007 and the GDP is expected to increase by approximately 1.5 times by 2020. In addition, approximately 96 million people are expected to have joined the middle class between 2010 and 2015 and the number is expected to grow further in the coming years.

As such, demand for basic petrochemicals has been growing rapidly across most of the countries. For example, polypropylene (PP) and polyethylene (PE) demand have been growing at approximately 4.5 - 6.1% between 2008 and 2014 across the key consuming nations of Indonesia, Thailand, Malaysia and Vietnam. However, supply has also been increasing rapidly especially in Singapore, Thailand and Philippines which have seen more than double digit growth in PE and PP production between 2008 and 2014. As such, the ASEAN countries currently face a structural oversupply within the region with increasing supply/demand imbalances between countries where Indonesia, Malaysia and Vietnam have seen growing imports while Singapore and Thailand continue to be major exporters of PE and PP (Figure 1). The same is also true for the aromatics products such as benzene and styrene.

‘Middle of the pack’ cost positioning

Asian petrochemical producers and ASEAN players in particular have traditionally had a low share of cost competitive ethane based steam crackers. Regions such as the Middle East have traditionally enjoyed the lion’s share of ethane (or ethane/propane) crackers due to the availability of cheap gas feedstock but with the shortage of gas in the region, new megaprojects in the Middle East are moving to more mixed feedstock. Nonetheless, by 2018 the Middle East region will still have approximately 74% of its 33 million t cracker capacity run on either ethane or ethane/propane steam crackers. With the rise of the shale gas revolution in North America and setting up of new projects based on the availability of cheap gas, North America is expected to have almost 50% of its 43 million t cracker capacity based on ethane or ethane/propane steam crackers by 2018. By contrast, that number is only 9% in Asia with its projected 70 million t cracker capacity with a further 7% of capacity run on coal based olefins plants mainly driven in China. In contrast to these three regions, Europe only has 3% of its 24 million t cracker capacity run on ethane/propane feedstock.

Given this competitive landscape, the ASEAN producers are currently disadvantaged compared to North American, Middle Eastern and other Asian producers (Figure 2). Seen as part of the ethylene cost curve, the ethylene margin of ASEAN producers is expected to reduce from approximately US$110/t to
US$10 – 50/t by 2020 as the new projects planned in Asia come online. This decrease in margins comes despite the fact that ASEAN producers are closer in proximity to the demand centres in north east Asia and have lower product logistics costs compared to other regions.

The dynamically evolving competitive landscape places significant challenges on the long term competitiveness of the megasites currently being set up in ASEAN countries. The key question confronting the ASEAN producers is their viability as a export hub and whether their feedstock disadvantage can be over compensated by the world class logistics and geostrategic positioning and proximity to north east Asia.

Maximising value from ASEAN megaproject investments

ASEAN producers are currently setting their megasites through significant brown field expansions of existing sites or green field investments in new locations. For example, Vietnam has made the FID to build one refinery and is planning another integrated refinery and petrochemicals project. These projects in Vietnam have a projected capital investment budget of US$ 28 billion. In addition, neighbouring Malaysia, Indonesia and Brunei are also planning their own independent refinery and petrochemicals complex to fulfill similar needs.

Taken together, these integrated refinery and petrochemical sites represent more than US$ 50 billion investments over the next few years till 2020. In addition to these megasites, a number of individual chemicals projects are being planned or developed across the region. This is a massive investment plan in the coming years and needs to be very well thought through by the project sponsors and developers in terms of risks and returns.

Written by Jaime Ruiz-Cabrero, Udo Jung and Asheesh Sastry, Boston Consulting Group.

Adapted for the web by Emma McAleavey.

The full article can be viewed in the December issue of Hydrocarbon Engineering.

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