In terms of improving profitability, when we talk about the integration of oil refining and petrochemicals, we mean the extension of the production chain through the construction of new process units that ensure the output of products with higher additional value. A classic example of this approach is the construction of a complex of steam cracker and the subsequent light olefins polymerization units, operating on light hydrocarbons coming from refineries (LPG and naphtha). This approach is also traditional for Russian integrated enterprises
The criterion for the success of such model can be the ratio of the price of production to the price of feed, and in recent years we have witnessed principal changes of this index. If we analyze how the ratio of prices of petrochemical products (the price index IPEX, determined by ICIS based on the price of 12 key petrochemical products in the markets of the USA, Western Europe and Northeast Asia) to the price of Brent crude has changed in international markets, it is easy to see that in the past decade there are two periods - before the price downturn in mid-2014 and after it
Not the last factor determining the growth in the price potential of the petrochemical business is the growth in demand for its products
Since 2010, the growth rate of demand for petrochemical products in the world has significantly exceeded the growth rate of world GDP - the average annual growth rate of 3.9% against 2.7%. On the other hand, world demand for petroleum products grew at a significantly slower pace, at an average annual rate of 1.4%.
Kuwait industry overview
Kuwait is amongst the largest energy consumers in the GCC region (around 10 TOE per head, 2.5 times more than the world average) with over 100 bbl of oil reserves (2nd largest in the region after Saudi Arabia) and 65 Tcf of gas reserves. Kuwait has managed to maintain prices for energy products, at around 30 US cents for gasoline and diesel per litre and $1.5 per mln. BTU of gas, a much lower level compared to other countries. Kuwait’s fiscal breakeven oil price is under $50/barrel – the lowest among GCC members, making the O&G industry attractive for investment although this was marginal during the 2016 crisis and revival period.
Out of 20+ major projects in the GCC downstream sector, at least four are located in Kuwait and feature the National Oil Company – KNPC. The largest capacity additions are in Delayed Coking and ARDS. Petcoke production in Kuwait has been growing, as well as its export. Kuwait is the 3rd largest exporter to India for petroleum coke, however, the recently announced limitations on coke imports by India and changes in fuel mix and refinery capacities will have an impact on this export market, and also on sales margins.
Kuwait, along with Saudi Arabia, signed Kyoto protocol, Basel Convention, UNCLOS and now MARPOL Annex VI, and are now the most advanced countries in the GCC in terms of environmental protection initiatives.
KNPC plans to increase the capacity of Mina Abdullah (MAB) and Mina Al-Ahmadi (MAA) Refineries to 800,000 bpd and to merge into an Integrated Refining Complex. This expansion is part of the Clean Fuels Project (CFP) 2020 and Kuwait is investing over $30 bln. in order to become the region’s clean fuels leader. This will come on line in time for the IMO regulation for Bunker fuels.
Once completed, the complex will help decrease the levels of benzene, aromatics and sulphur in gasoline from 500 ppm to less than 10 ppm. Bunker fuel sulphur content will decrease to 1 ppm – whilst this is still not fully-compliant, it is easier to process or blend to get the required specification and the maximum sulphur content of naphtha will be substantially reduced.
Kuwait Integrated Petroleum Industries Co. (KIPIC), a KNPC Subsidiary, will build a grassroot Al-Zour Refinery Project (ZOR)/Kuwait New Refinery Project (NRP) with 615,000 BPSD capacity of local light crude or 535,000 BPSD of heavy mix crude oil to produce low-sulphur fuel (250,000 BPSD) to support the energy sector, water desalination, and growing petrochemical production. KIPIC have awarded $11.5 billion worth of EPC contracts for this project. The budget for the refinery, targeted for completion in 2019, has increased to $16 billion.
Petrochemical Industries Company K.S.C., a subsidiary of the Kuwait Petroleum Company (KPC), is also developing the project named Olefins-3 with a capacity of 1.4 mtpy (450,000 tpy Propylene plant, 940,000 tpy Polyethylene plant, and 550,000 tpy Polypropylene plant). The new petrochemical facility will be integrated with the Al-Zour Complex.
Integration Case Studies:
A very illustrative example of the integration of oil refining and petrochemicals is the joint project of Saudi Arabia's largest companies - oil Saudi Aramco and petrochemical SABIC.
The project got the name Crude-Oil-to-Chemicals (COTC). The project concept involves the construction of an integrated refinery and petrochemical complex in Yanbu, Saudi Arabia, which will process 20 million tons of Arabian Light and Arabian Extra Light crude annually, with the maximum production of petrochemical products - polyolefins, aromatic hydrocarbons and butadiene. The project process configuration will include an integrated primary and vacuum distillation unit, distillates hydrotreatment, vacuum gas oil hydrocracker and residue catalytic cracker. The petrochemical part of the project will be represented by a steam cracker operating on mixed feed, as well as polyethylene and polypropylene production units, butadiene and aromatic hydrocarbons extraction.
In September 2017, a tender for engineering services was opened under the OTC project, further milestones of the project have been already announced: by the end of 2018, Saudi Aramco and SABIC expect to receive a preliminary FEED, by the end of 2019 - the final FEED, and in mid-2020 year to open a tender for construction and assembly works, and by the end of 2024 the complex will be put into operation. The total project investment is more than $ 20 billion.
Another interesting example of integration is the project of Hengli Petrochemical Refinery Co. Ltd., which constructs refining and petrochemical complex in Dalian, Liaoning Province, China.
The complex's configuration includes a refinery that provides processing of 20 million tons of oil per year, and a number of petrochemical units: propane dehydrogenation, isobutane dehydrogenation, polypropylene production, etc. However, the greatest interest is the production of aromatic hydrocarbons - the "core" of the project petrochemical part is the complex, which got the ambitious name "Oil to Paraxylene". This complex includes 3 reformers with the catalyst continuous regeneration, 2 extraction lines, xylenes isomerization and paraxylene purification. The capacity of the complex is 3 million tons of paraxylene per year, commissioning is expected in 2019.
In addition to the phenomenal output of paraxylene, this project is an interesting example, when integration goes in the opposite direction - from petrochemical production to refining. Hengli Petrochemical Refinery Co. Ltd. is part of Hengli Group - one of the world leaders in the production of terephthalic acid (PTA), polyethylene terephthalate (PET) and polyester fibers and films. Implementation of the Dalian project will allow the company to extend the value chain up to the oil refining and thereby ensure independence from third-party suppliers of paraxylene, guarantee stable supplies of feed and strengthen control over operating costs.
Of course, two above examples are implemented in regions where the topic of integration is the most relevant: in the Middle East - a region that has suffered significantly from the oil prices downturn in 2014, and where the need for integration, avoidance from the feed economy model has become almost a mantra, and in Asia - a region that has become a world "petrochemical factory". Nevertheless, there are precedents when "conservative" European oil companies choose this vector of development.
A prime example of such approach is the Hungary’s MOL Group, one of the largest vertically integrated oil and gas companies in Eastern Europe. The structure of the company's business is quite traditional and covers the whole value chain of oil and gas business from exploration and production of hydrocarbons to its own petrol stations.
Integration into petrochemical production for MOL Group is not something fundamentally new - the company has its own petrochemical facilities based on steam cracker of light hydrocarbon feed in Hungary and Slovakia. However, the most interesting is the approach, which in late 2016 was announced in company’s development strategy until 2030. The main goal - MOL Group plans to increase the share of non-fuel products from the existing less than 30% to 50%. For the company, whose main oil product market is Eastern Europe - a region still far from saturation of the vehicle fleet, such a statement is equivalent to recognizing that further motorization of the region will not result in increased demand for motor fuel.
The path chosen by MOL Group to achieve the goal is also interesting. Realizing that the chances of success in competing with large European producers of basic petrochemical products (polyolefins, elastomers, aromatic hydrocarbons, etc.), the company relied on special chemical products.
As the first stage of the strategy implementation, the execution of the Polyol Project is indicated. The project process configuration includes the following productions: hydrogen peroxide, propylene oxide and propylene polyols. Polyols are the most valuable product in the project; they are used as feed for the production of polyurethanes - petrochemical synthesis products, which are increasingly used in such industries as automobile, construction, packaging and furniture production. In addition, polyurethanes lead in terms of the predicted growth rate of demand - it is expected that it will be 4.4% per year by 2025. Until 2021 MOL Group plans to invest in this project about $ 1.9 billion.
There’s also a project to combine refining and petrochemical capacities in Kuwait that will process 2,515 KTPA of Petrochemical Naphtha. The key goals of the upgraded enterprise are: to enhance local hydrocarbon value by diversification of product slate, to maximize resource utilization through integration of assets and services between companies, create direct/indirect job opportunities and promote support industries. The effect is achieved through shared services of the assets:
- LT Naphtha disposal
- Utilizing existing IRT lines
- Control room, Fire protection system
- Workshop, Warehouse, IT & Security
- Plant operations, maintenance and administration
- Laboratory, offsite & Marine
With this opportunity come a range of economic benefits, including extra annual profit, CAPEX & OPEX savings (resulting in extra ~$30 mln. profitability), over $100 mln. income to the State of Kuwait. This model is estimated to be is successful due to integration with existing plants, common Shared services & facilities resulting in lower operating cost. The only challenges are slight manpower cost increase, complex maintenance planning, service & product pricing.
Conclusion
Recent events such as oil and petroleum products prices downturn, a slowdown in the growth in demand for petroleum products together with an increase in the profitability of the petrochemical business and the expectation of continued rapid growth in petrochemical consumption make integration ideas more and more attractive to the refiners. Nevertheless, increased competition and increased availability of technologies create situations in which traditional approaches may not work, and companies have to look for non-standard approaches that take into account the internal situation and the external environment.
According to KIPIC research, key success factors for refiners could be:
- To improve ability to manage capital projects - Achieving excellence in capital projects, improving project & vendor management systems, reducing costs
- Optimize the asset portfolio – pursue integration, pursue full potential for each refinery without compromising reliability, yield, safety or environmental compliance.
- Achieve operational excellence - Focusing on plant reliability for highest OSF, energy efficiency, labor and asset productivity, cost optimization and operating costs are key to achieving excellence.
- Expand access to markets —understand each potential market & key threats
These areas require the following enablers like having the right organization, managing external stakeholders, and digital concept.
Euro Petroleum Consultants is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. Euro Petroleum Consultants also organises leading conferences and training courses worldwide. For further details please visit www.europetro.com.
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