PE, EG Especially Vulnerable to Saudi Crude Oil Outage
2019-09-17    []
Shutdown of the Abqaiq and Khurais crude oil processing facilities in Saudi Arabia has not only taken 5.7 MMb/d of crude oil production offline—about 7% of global production—but has also cut deeply into the country's supply of petrochemical feedstocks. The ethylene chain, particularly polyethylene (PE) and ethylene glycol (EG), will be most affected, according to analysts at IHS Markit.
The two facilities, owned by Saudi Aramco, were attacked by drones or missiles early on 14 September and subsequently shutdown to limit damage.
“Shale has created a sense that there is security—we have too much supply, that there’s abundance, and so on," says Roger Diwan, vice president/financial services at IHS Markit. "We have lost that. It’s back to risk. We need to think of oil in the age of drones and missiles, and that any facility can be hit in the Middle East …. We have basically no facilities in the Middle East that are safe now. Abqaiq was a very well-defended piece of infrastructure, and it’s gone.”
Multiple Saudi chemical producers have already reported sharp cutbacks in feedstock supply, including Sadara (16%), Yansab (30%), Saudi Kayan (50%), Tasnee (41%), and Sipchem (40%).
"It's a little uncertain on the prioritization of where the feedstocks will go, in terms of how much to chemicals versus meeting other domestic needs," says Dewey Johnson, vice president/base chemicals market research at IHS Markit. “If you pro-rate the production outage at 50%, and said at the moment that 50% of Saudi capacity is hampered, the largest impacts would be in ethylene, polyethylene, and ethylene glycol."
Saudi Arabia has 18 million metric tons/year (MMt/y) of ethylene production capacity, or about 10% of the global total, Johnson noted. "Ethylene is only a few percentage points away from being balanced to tight," notes Johnson. "So how much of that capacity is available or taken off line is critically important."
Saudi Arabia is likewise a major producer of ethylene derivatives, with about 6% of the world's capacity to produce PE, and 16% of the world's capacity to produce EG, key feedstock for polyethylene terephthalate, used to make polyester and PET resin. The country's influence on the global market for these derivatives is further amplified by its export position. In 2018, Saudi Arabia supplied nearly 8% of the world's PE requirements and a whopping 23% of its EG requirements.
The country holds 5% of global propylene production capacity and, downstream, about 9% of the world's polypropylene (PP) capacity. It also accounts for about 5% of global methanol capacity.
"The Saudi's are going through a very difficult triage," Diwan says. "They need to decide if they can keep the oil they have in refineries or export it. The same on the gas side, do they put it into the electricity system? Do they put it into the chemical system?"
Saudi Arabia's supply of feedstock liquefied petroleum gases (LPG) is heavily dependent on crude oil production. The vast majority of the approximately 22 million metric tons/year (MMt/y) of LPG produced each year is associated gas, notes Kurt Barrow, vice president/downstream at IHS Markit. He estimates that a 50% reduction in the country's crude production would cut LPG supply by up to 9 million metric tons/year.
“Much of that LPG goes into the domestic chemicals industry as a feedstock into the petchem industry," says Barrow. "There are also substantial exports, so if there is a sustained reduction in crude production, there will be a knock-on in LPG production and then decisions on where that LPG curtailment happens, either in exports or whether some of the domestic petchem industry will need to turn down.”
Saudi ethane production, which totals about 12.5 million metric tons/year, could be reduced by up to 5 million metric tons, Barrow says.
“We’ve actually seen in the marketplace, on price data in the market [Monday morning], that the LPG markets are reacting on a percentage basis a little more severely even than the crude oil markets,” he says.
How to price these risks will be a major issue going forward, Diwan says. “How do you think about an oil market which doesn’t have a safety net anymore? Abqaiq was the spare capacity of the system, and we lost it. When we talk about spare capacity, we were effectively saying ‘we have Abqaiq’, and we don’t have it any more.”
Muted impact so far
Market impact has been relatively muted apart from aromatics markets. US benzene prices were up significantly on Monday, but gains were mild in olefins and polymers markets have not yet shown much of a reaction to the weekend drone attacks.
October benzene was discussed in a range of 267–275 cents/gal on Monday, up from 258 cents/gal on Friday. NYMEX WTI settled at $62.90/bbl, up $8.05/bbl or the equivalent of 19 cents/gal; benzene prices were up only about 13 cents/gal. Other aromatics, such as methylene diphenyl diisocyanate (MDI) and toluene diisocyanate (TDI), are reliant on production sent to China from Sadara, and global prices were expected to increase.
Tracking the small rise in US ethane prices Monday, ethylene prices in Texas were up slightly. September ethylene at the NOVA hub in Mont Belvieu traded at 25.25 cents/lb.; it closed at 23 cents/lb. on Friday. Ethylene prices in Louisiana were also somewhat stronger, with an October trade at the Choctaw hub done at 26.25 cents/lb. this morning, but this strength was attributed more to local supply concerns than anything else. Propylene prices were also slightly higher. September polymer grade propylene was bid at 36 cents/lb. and offered at 38 cents/lb.; it closed at 34.75 cents/lb. on Friday.
Downstream plastic markets were slow to react as well, but effects could be seen if supply out of the Middle East is curtailed for an extended period.
Current spot pricing on an FOB Houston bulk railcar basis was 32.5 cents/lb. for high density blow mold grade polyethylene and 44 cents/lb. for homopolymer injection grade polypropylene.
"Saudi Arabia represents about 9% of global PE production capacity and about 6% of global PP capacity—most of which is exported primarily to Asia. Any prolonged disruption to that capacity or any prolonged spike in crude oil prices is likely to support higher resin prices," Nick Vafiadis, IHS Markit's vice president of global plastics & chemicals noted Monday morning.

Compounding the issue for certain grades of US plastics is the developing situation between the US and China, which could limit opportunities to replace resin from the Middle East into Asia. As recorded by the US Commerce Department, overall US PE exports to China through the first seven months of 2019 are at 381,680 metric tons (mt), down 92,724 mt, or 20%, from the same period in 2018.



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