You’re an oil refinery manager, somewhere in Europe. You can sell diesel for $570/t, or ethylene for $1,120/t. Even given higher costs for ethylene, petrochemical margins are looking a lot stronger than refining margins. So, which are you going to produce?
The allure of high petrochemical prices is, of course, nothing new. But as fears over electric cars and more fuel efficient engines grow, many European refiners are casting around for a new business model. As one of the few markets for oil with significant long-term demand growth projections, petrochemical expansion is the obvious next step for some. Under the IEA’s main scenario in its latest World Energy Outlook, demand for ethylene, propylene and aromatics increase by 60pc by 2040.
Refiner-petrochemical integration was the hot topic at an industry technology conference in Athens last week. One by one, engineering firms took to the stage, explaining how refiners could maximise petrochemical output. Off stage, the conference was abuzz with rumours over who was building new petrochemical production units.
The appeal of petrochemicals extends beyond today’s higher prices and demand projections — they also provide a natural hedge for integrated refiners. Lower crude prices mean cheap petrochemical feedstocks in the form of naphtha and LPG, leading to attractive margins. Expensive crude means the opposite, but integrated refiners then make money elsewhere, selling crude and transport fuels at higher values.
For refiners that already have steam cracking units — the starting point for much of the petrochemical production line — feedstock output can be ramped up relatively easily. Crude slate adjustment can bump up naphtha and LPG yields. And more ambitious refiners can install conversion units to help upgrade heavy residues into steam cracker feedstocks. Debottlenecking processes, such as installing larger heating furnaces, can also increase steam cracker throughputs.
Most investment in new petrochemical capacity is outside Europe, mainly in the US and Asia-Pacific. But there is still some activity here. European petrochemical giant Ineos — co-owner of the 205,000 b/d Grangemouth refinery in Scotland — will “massively” boost its olefins capacity in Europe, including the construction of a new propane dehydrogenation (PDH) plant, it says. Plans include expanding ethylene capacity at crackers at the petrochemical plant in Grangemouth and at Rafnes in Norway to 1mn t/yr each from 740,000 t/yr and 600,000 t/yr, respectively.
In Poland, Azoty is planning a 400,000 t/yr PDH plant, while Lotos is mulling a new olefins complex. Hungary’s Mol is investing around $1.9bn in 2017-21 to increase its propylene output and introduce new products, such as polyols, as part of a long-term strategy to focus more on high-yield petrochemicals. Austria’s OMV has closely tied its petrochemical, refining and utility facilities, and the Czech Republic’s Unipetrol is targeting growth in its petrochemical business.
Others in Europe are still considering the best way to invest. Of course, if too many refiners rush towards petrochemicals, future demand growth faces the threat of being swamped by excess supply.
For those seriously considering investment, being able to switch between production of petrochemical feedstocks and transport fuels, depending on market conditions, is the Holy Grail. Hydrocrackers, which can switch between maximising petrochemical feedstock naphtha and diesel relatively easily are an attractive, but expensive, option.
Many European refiners are also weighing up how best to deal with the International Maritime Organisation’s (IMO) global 0.5pc sulphur cap on marine bunker fuels, which will enter into force in January 2020. They have the option of killing two birds with one stone — investing in residue upgrading units, and using the output as steam cracker feedstock for petrochemical production, as engineering firms at the conference repeatedly pointed out. But investment in such units is pricey. And refiners will be wary of spending money now on projects that will not be up and running by the 2020 IMO deadline.