Middle East Economic Survey

VOL. XLVIII

No 10

7-March-2005

Naphtha Prognosis, 2002-2012

The following article summarizes basic conclusions from the new edition of a global petrochemical feedstock study recently published by Poten & Partners, Inc, the international tanker brokerage and energy consultant (www.poten.com). It is published in MEES with permission. 

The Arabian Peninsula sent 2mn tons of its naphtha to the US, Europe, and Brazil in 2004.  Asia did not need it or want it. For the first time since the East rushed to prominence in petrochemicals manufacturing during the 1990s, the Middle East produced more naphtha than Asia could consume. A new era began. For the foreseeable future, a portion of the Middle East’s naphtha will go West.

Exporters along the Arabian Peninsula, led by Saudi Arabia, Kuwait, and Abu Dhabi, head toward 30mn tons/year of sales – almost 40% of global naphtha commerce. Asia simply does not need to import that much. The Far East remains dependent on naphtha for basic petrochemicals manufacture, over 80% dependent in the case of its 30mn t/y ethylene industry.  But five years of slow investment in steam crackers spells slowly rising feedstock demand despite exceptionally strong margins since late 2003. Growth in Asia’s own refining industry, and lightening crude slates, also limits demand for imports from other regions.

In the past, naphtha buyers worried that they could not get enough supply. Leading-edge thinkers now concentrate more and more on the direction of trade flows – in other words, on how the market will clear. The volume of demand for naphtha will grow impressively, not excessively. Several structural limitations mean an ever-larger petrochemical industry can no longer grow at the percentage rates of the past. Accelerated gas development means certain exporting regions will rely on cost-advantaged light feeds to supply a growing global polymer trade. The Middle East looks set to install 12mn t/y of mostly ethane-based ethylene capacity between 2003 and 2010, an amount equal to 13% of 2003’s world production. Growth in naphtha-importing areas will moderate as capacity expands carefully in line with specific new sources of supply. Naphtha demand hardly looks flat.  It should rise some 67mn t/y between 2003 and 2012. But old-fashioned, local, motor-fuel-driven expansion of refineries should cover the bulk of that requirement. International trade will account for just one of every five new barrels.

But if oil refineries had to make that one in five, they would fail. Incremental merchant naphtha will come overwhelmingly from the natural gas industry. Natural gasoline streams recovered from new LNG plants and gas liquids fractionators play some part. But bigger gains come from new condensate splitting and, after 2007, gas-to-liquids investments. The Middle East could add more than 10mn t/y more naphtha to international trade from these developments even if volumes from today’s leaders, Kuwait and Saudi Arabia, actually export less due to rising local consumption. UAE’s rise to prominence in the naphtha business is incomplete while Qatar’s currently modest rank is about to shoot upwards.

Mideast Surplus To Increase

Thanks to those two countries, the Middle East’s naphtha surplus will increase.  Even though Asia does not need all the barrels, they’ll have somewhere to go. Much of the recent westbound traffic reflects inadequate outlets in Asia. Traders – and even producers, by applying destination restrictions to cargoes – shove oil to the West. They would face real trouble if customers in the Atlantic basin didn’t increasingly want that long-haul supply. They took it gladly in 2004. They will welcome it even more eagerly in years to come. Asia’s call on Middle East naphtha will expand again, though largely dictated by the gradual pace of Chinese imports. But the main story of the global naphtha trade will shift from Asia to Europe. That region flirted with a genuine requirement for naphtha from distant places in 2004. In 2005 and beyond, the need for Middle East supply should become regular. East-West competition for Middle East cargoes hasn’t appeared yet. But it will as Europe and Asia want more and more naphtha and nowhere but the Arabian Peninsula has much to offer.

Note:     

Japan paraffinic naphtha converted at 9.0 bbl/mt.

NW Europe paraffinic naphtha converted at 8.9 bbl/mt.

US Gulf paraffinic naphtha converted at 9.45 bbl/mt.

Use 2.5% per year inflation to obtain current dollar figures.

¹  Natural gasoline.

The world of 2004 has enough factories, refineries, gas works, coal mines, smelters, mills, and petrochemicals plants for a population of 0.8bn haves and 5.5bn have-nots. The basic materials supply capabilities of today cannot support a significant change in that demographic imbalance. Yet social stability depends on giving the have-nots a life more like that of the haves. Many industrial analysts concentrate on the amount of raw material – oil, gas, metal ore, timber, cement, and so forth required to provide a better standard of living to an unimaginably large number of people. Actually, that fretting misses the point. Long before we reach the limit of natural commodities production, we will hit restrictions in the processing facilities to turn minerals and vegetation into the refined materials used by factories to make merchandise. Building installations which transform raw substances into steel, copper, paper, glass, gasoline, diesel, plastics, and fibers costs enormous amounts of money and requires large amounts of scarce talent. It also takes courage and time. At least in the oil and chemicals business, those intangibles, money, talent, courage, and time, will restrict plant construction between now and 2012.

Because naphtha leaks from two vast industries, refining and gas processing, driven by widespread clamoring for motor and industrial fuels, supply will increase substantially between 2003 and 2012. Petrochemical companies should find a sufficient quantity at reasonable prices to feed the amount of new ethylene cracking capacity they can build. The organizations which make aromatics by extracting them from reformate will have a more difficult time. Refiners dominate that business. They’ll need to choose between devoting their heavy naphtha to mogas manufacturing and sparing some for producing benzene and xylenes. A few of the independent companies in aromatics will become refiners in a restricted way – by distilling field condensate or purchased full-range naphtha – to stay in the game.  Overall, access to naphtha will not limit petrochemicals production during the next eight years.

Driven by demand but restrained by limited ability to execute construction projects, petrochemicals production will increase an enormous amount this decade. The slope of the growth curves looks modest, 3.7% CAAG (“compound average annual growth”) for ethylene and 5.0% CAAG for aromatics made from reformate. But over nine years, 2003–12, those rates add 39mn tons to the annual output of ethylene and 22.3mn tons to the yearly production of reformer BTX. Naphtha cracking will yield 12.3mn tons of the additional ethylene. That kind of activity requires a lot of feedstock.

World Petrochemicals Production

¹  Benzene and xylenes production by naphtha reforming, including LVN and natural gasoline Aromax.

Between 2003 and 2012, the petrochemical industry will need to find new naphtha supply totaling 67.5mn t/y –32% of the amount consumed at the beginning of the period. Even though almost one-half of that increase in demand, 31.4mn t/y, will appear between 2003 and 2007, the world’s paraffinic naphtha market will feel comfortable. Naphtha production will increase sufficiently – thanks mainly to gas-related activities, particularly field condensate splitting – to meet demand. The naphthenic market, primarily present in Asia and North America, will feel a bit different. Buyers will struggle to cover their requirements, often resorting to making do with only modestly naphthenic full-range grades. But with that accommodation, Eastern supply should cover demand at moderate prices. The Western Hemisphere reformer feed trade will show strain in the form of high prices because refiners will need to justify using naphtha for making petrochemicals instead of high-margin motor gasoline.

2003 Inter-regional Trade In Naphtha

(mmt/y)

 The market balance won’t change much after 2007.  But it shows a greater chance of slackening than tightening, particularly by 2010 and in the early years of next decade. A new source of naphtha, large gas-to-liquids (GTL) projects, will add substantial volume to the international supply by then. They will offer highly paraffinic product best suited for steam cracking. Reformer feedstock will remain difficult to buy. But the Asian companies needing it for aromatics production will implement projects to ease their reliance on a market with no future. In the Western Hemisphere, traded supply won’t improve. But refiners engaged in aromatics production should find it a little easier to spare reformate for BTX extraction as years of high mogas prices begin to curb demand.

Naphtha Geography

Naphtha geography changed in the early years of this decade. Until early 2002, Asia ran a deficit which surplus cargoes from the Middle East could not fully cover. Western sources, particularly in the Mediterranean, regularly provided the balancing supply. By 2003, increasing Gulf availabilities, largely due to new production from field condensate splitters, eliminated the need for Western cargoes to meet some of the Eastern requirement. In fact, during Spring of that year, surplus Mideast naphtha went to Europe and the US for the first time in quite a while. In 2004, a new trading pattern took hold. Eastern suppliers offered significantly more volume than their regions’ customers required. Between May and October they regularly sold that surplus to buyers in the West. 

This pattern of excess Eastern naphtha going West at least part of the year should continue for the foreseeable future. In 2004, the cargoes sent through Suez to the Atlantic market went to the US more often than anywhere else. That disposition should change, probably as soon as 2005. Europe cannot supply other regions regularly any longer. During the second and third quarters, when its petrochemical plants run hard and its refineries emphasize motor gasoline production for their local markets and for export to the US, it needs more imported naphtha than customary suppliers – North Africa and Russia – can provide. It needs cargoes from other places. Only the Middle East has them to offer. As this deficit becomes more pronounced, the flow of naphtha from east of Suez will go more and more to Europe and less and less to the US.

By 2007, the international naphtha trade will show signs of separating into two hemispheres.  Europe, Africa, the Mideast, and Asia will form an integrated region. North and South America will form a second one. They will maintain some contact with one another thanks to peculiarities of geography, like the proximity of west Africa to the Americas and the great distance between the US’s Pacific coast sellers and its Gulf coast buyers. But trade between the hemispheres will dwindle toward nothing but those exceptions.

2007 Inter-regional Trade In Naphtha

(mmt/y)

 Between 2007 and 2012, Asia and Europe will share the Middle East paraffinic naphtha supply without competing aggressively for it. Asia will always get most of the availabilities. But the Mideast exporters will offer more supply than their Eastern customers need. Perhaps the surplus will appear seasonally and coincide with the Spring and Summer period when Europe runs its greatest deficit. On the other hand, it might become a small, but essentially year-round excess. In either case, the East will gladly release some supply to a welcome in the West. Surely, some friction will occur from time to time. But, for the most part, the needs of Europe, Asia, and the Mideast appear remarkably compatible.

2012 Inter-regional Trade In Naphtha

(mmt/y)

The Americas’ disengagement from the Eastern Hemisphere depends on the US importing less naphtha for gasoline blending than it did in the past. Tightening US mogas specifications make that almost unavoidable.  Very little of the naphtha in seaborne trade contains less than 30 ppm sulfur. None of the large-cargo availabilities in the Mideast do. A couple of West African grades meet that requirement. So does one stream from Norway.  One from Venezuela does, too. But it does not compromise separation of the hemispheres. 

The US will continue to want cargoes of reformer feedstock. But the Eastern Hemisphere has very little to spare.  Europe might offer a cargo which will cross the Atlantic divide from time to time. But an increasingly short European ethylene feed market may not give even naphthenic supply a chance to leave very often.

North American ethylene producers like the supply from Europe, North Africa, and the Mideast when they can get it. When they cannot, which means when it costs too much compared to their alternatives, they rely on field condensate, light feedstocks, Latin American naphtha including naphthenic FRN’s which refiners would rather avoid, and local product such as Belvieu and River natural gasolines. Those look like their options going forward. Tightening mogas specifications give them a hand. Petrochemicals companies do not face the sulfur restrictions which render some local gas plant naphtha and some Caribbean supply unfit for the gasoline pool. They will miss the Eastern Hemisphere cargoes.  But they won’t starve without them. They have the most flexible crackers in the world. That flexibility pays off when rivals in other places support the seaborne paraffinic naphtha price above its alternate feedstock value. 

The following table summarizes how naphtha supply and demand will look in the international market.

Regional Naphtha Imbalances

(Mn T/Y)

Note:    +  =  long,   -  =  short                                            

World balance may not add to zero due to rounding.                              

Petrochemicals producers will need a lot of naphtha to fill new olefins and aromatics capacity between now and 2012. But refineries, gas drying facilities, condensate splitters, and GTL plants will add a lot to the global supply, especially east of Suez. Global supply and demand will balance without buyers paying extortionate prices for the marginal ton and without sellers taking discounts against crude to clear the market. Supply always equals demand in the naphtha business. Price tells who gave ground to reach the equilibrium. Excess production can disappear into gasoline or some other fuel use if it weighs too heavily on prices. Demand can attract additional production it if pushes prices high enough. Through 2012, neither of those extremes appears likely. At least, calamities and other unforeseeable circumstances notwithstanding, they will not last for long or extend to very many places if they do occasionally arise.