Crude oil to chemicals - an emerging challenge for the chemical industry - Ravi

Slowing demand growth for automotive fuels

The first dynamic is the on-going transformation in the automotive industry. Electric vehicles (EVs) in different avatars such as hybrids and all-electric are now a reality in some countries, albeit not in large numbers. There is some disagreement over the pace at which EVs will scale up to become mainstream, with sceptics believing the lack of battery charging infrastructure will be a bottleneck to quick adoption. Battery costs have already fallen significantly in recent years, thanks to steady innovation, but there is more to come, both in improving the amount of energy batteries can hold and hence driving range, and how fast it can be delivered to give the needed acceleration. Several chemical companies are active in these efforts, usually in partnerships, and see EVs as a sustainable transportation option for the future. Several countries – India included – have announced plans to electrify their automotive fleet, but as of now China is most ahead in terms of number of cars on the road. There are some issues related to the availability of some precious metals such as cobalt, lithium etc. that go into making batteries, and fears that scale-up could lead to shortages.

When (not if) they come, EVs will eat into the market for automotive fuels, though it is premature to gauge their impact and when it will pinch refiners.

Biofuels – small dent in nearer term

Biofuels could also make a dent in markets for automotive fuels – gasoline (petrol), in particular. In India, the US, Brazil, China and several other countries, there are plans to incorporate up to 20% of bio-ethanol (now mainly produced from sugarcane or corn) in gasoline sold at retail pumps. India’s national blending levels are now 3-4%, but there is a stated policy to take it to 20% within a decade or so. The merits of the exercise – be it environmental, social or economic – varies from country to country – and, at times, is questionable, but that has not deterred governments from using biofuels as an option in a broad energy self-sufficiency strategy.

Incorporation of biodiesel into petroleum-derived diesel is more complicated and likely to be limited. The use of edible oils & fats for making biodiesel raises uncomfortable issues, and in any case, biodiesel is not much of an option for India, which is starved of both vegetable oils and crude oil. There has been some excitement here recently stemming from a single flight of a plane fuelled by bio-ATF, made by hydrotreating jatropha oil, but scaling this up to make a dent in markets for ATF is a long journey that few countries have had any success in.

In summary, biofuels could have a small impact on markets for transportation fuels, but this could be sooner than from EVs.

Brisk chemical demand

On the demand side, energy markets are expected to see modest growth of the order of 2-3% on a global basis, driven largely by emerging markets wherein growth rates could be twice as high. Markets for chemicals – admittedly an order of magnitude smaller – are likely to see global demand growth of 5-6%, with emerging markets again posting nearly double of that. Just as importantly, chemicals represent a business area that is less volatile in terms of pricing, and usually free from government interference. Petrochemicals are a significant value-add to petroleum fractions and thus a logical forward diversification strategy for oil refiners – more so in a world where there are strict quality specifications on the fuels produced.

Refinery-petrochemical integration is widely practiced today for several operational reasons: savings in utilities & energy bills; valorisation of low value refinery streams; and tight hydrogen integration – to name a few. Several national oil companies (NOCs) and international oil companies (IOCs) have taken this logical step. In India, for instance, nearly every refiner is eyeing investments in petrochemicals, either by going the whole hog and setting up a naphtha cracker and a downstream derivatives complex, or in a more focussed foray by investing in advanced processing units, such as fluidised catalytic crackers, to produce propylene (along with small quantities of other olefins). While the latter approach most likely will not lead to olefin availability at a scale needed to support polyolefin plants (unless the refinery is mammoth like the Reliance refinery at Jamnagar or the one planned for Ratnagiri), it can support plants for several propylene-derived chemicals such as phenol & acetone, acrylic acid & acrylate esters, oxo-alcohols, propylene oxide & glycol etc. This is the approach BPCL, for instance, has taken at its Kochi refinery.

COTC: taking integration to the next step

The idea of integration is now being taken forward to a whole new dimension with what are being called as crude oil-to-chemicals (COTC) approaches. While tightly integrated refinery-petrochemical units have 15-20% conversion of crude to chemicals, the COTC units are aiming to transform 40-60%, by using advances in catalytic technologies and innovative refinery configurations.

The idea was pioneered at the ExxonMobil refinery in Singapore, which processes light crude oil, but is now being taken to a whole new level at three Chinese sites and one in Brunei (also with Chinese investments) where aromatic crude is being directly converted to produce para-xylene (PX) – a key raw material for polyesters – along with significant quantities of benzene. With the conversion to aromatics expected to be 40-45%, these plants are expected to quickly close the demand-supply gap in China for PX, and so eliminate export opportunities for producers from several countries that counted on China as a permanent large sink for their output.

In Saudi Arabia, the oil giant Saudi Aramco and the petrochemical flagship, Sabic, are planning on a COTC project, in a bid to diversify the kingdom’s industrial base and reduce reliance on crude oil exports. The complex planned is expected to process 400,000-bpd (barrels per day) of Arabian Light crude oil, to produce 9-mtpa each of chemicals and fuels. EPCs, process licensors and technology developers like CB&I, Axens, UOP/Honeywell, etc. are also pursuing technology programmes in these direct conversion routes.

Challenges to chemical producers

For chemical producers the entry of large NOCs/IOCs into the chemicals business will bring many challenges. Since refinery capacity is approximately 10 times higher than current world-scale petrochemical plants, COTC in effect raises petrochemical production to an unprecedented refinery scale. For example, the global demand for ethylene and propylene are about 160-mt and 111-mt, respectively, and at 4% annual growth, the required global annual capacity additions would be 6.4-mtpa and 4.4-mtpa of ethylene and propylene, respectively. These volumes could nearly be supplied from two large-scale 200,000-bpd COTC complexes, instead of four conventional state-of-the-art naphtha-cracking light olefins plants.

Importantly, refiners have traditionally been used to running businesses on low returns compared to the chemical industry, and their muscling into chemicals markets could change the competitive landscape very significantly. Watch this space!