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Why
refinery-petrochemical integration makes eminent sense for India
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Energy
demand is slowing across the world – reflecting both improvements in the
usage efficiency of energy; steps taken by several countries to lower the
carbon intensity of fuels used, to combat global warming; and the increasing
role for non-fossil energy sources, particularly wind and solar, as part of
efforts to shift towards renewable energy. This trend in energy demand will
impact investments in refining capacity and hence availability of feedstock
that are key to making several petrochemicals.
Slowing pace of energy growth
According
to estimates by the International Energy Agency, global demand for energy is
expected to increase by a modest 1.3% CAGR between 2015-2025, with natural
gas and non-fossil energy sources (including solar, wind, nuclear and
bio-energy) growing faster than the average, at 1.9% and 2.2% CAGR
respectively. In contrast, demands for coal and oil – which currently have a
roughly equal share of 30% in global primary energy demand – will show CAGR
of just 0.7% and 0.9% respectively.
There
has been a perceptible shift to usage of natural gas for power generation,
and for making petrochemicals and fertilisers, which has been driven by the
discovery and exploitation of large gas finds – mostly unconventional gas,
such as shale gas. The additional supply that has quickly come onto the
markets has swung gas markets into oversupply, and prompted the US, which was
preparing terminals to import gas in the form of liquefied natural gas (LNG)
to meet rising demand, to a net exporter of the fuel. Globally, there is now
a substantial trade in LNG, but it is now a buyers’ market with lots of
supply – old and new – chasing customers.
Peak demand before peak supply?
Grim
forecasts of the world running out of oil have been proved wrong and
discussions on ‘peak oil’ no longer refer to the peaking of oil production,
but something unthinkable a few years ago: the peaking of oil demand.
Between
2020 and 2025, while coal demand is actually expected to shrink, incremental
oil demand will nearly halve to that between 2015 and 2020. Much of this has
to do with developments in China, where the blistering pace of growth seen in
the past two decades will settle to a more sustainable and sedate pace.
Growing demand for petrochemicals
Demand
for petrochemicals is expected to outpace growth in oil demand, growing by a
CAGR of about 4% between 2015 and 2025. All segments of the plastics
industry, including polyolefins, polyesters and even speciality polymers such
as polyurethanes, will clock more or less similar growth. This, in turn, will
create additional demand for a variety of feedstock including olefins and
aromatics. Nearly 70% of the incremental growth will take place in Asia, with
China continuing as growth driver, ahead of South & South East Asia.
While
China will continue to see investments in several value chains to meet rising
domestic demand, and even modestly serve export markets (particularly for
some petrochemical intermediates), it will remain a net importer of
petrochemicals as a whole. The investments will also happen through
unconventional routes – such as by exploiting coal, or imported methanol (in
turn derived from natural gas).
Middle East: eyeing downstream opportunities
The
low oil price environment has brought a sense of urgency amongst energy
players in the Middle East to diversify and venture downstream into
petrochemicals and even further into speciality products. While this trend is
most visible in Saudi Arabia, Iran too could go down this route in the longer
term. The lifting of economic sanctions on Iran will accelerate several
projects outlined by the government but stymied due lack of access to finance
and technology.
In
the US, a significant build-up in ethylene and derivatives capacity is well
underway; when completed in three to four years it will add about 8-mtpa of
new ethylene capacity. The products manufactured here will need to access
global markets, and Europe and adjacent Latin America could be the preferred
destinations.
Crude to chemicals
The
expectations of a drop in demand for conventional fuels produced at
refineries is one of the reasons prompting a renewed interest in technologies
that directly convert crude oil to olefins and aromatics, bypassing the
refinery. The fact that the technologies have been developed and are being
put to practice by ExxonMobil and Saudi Aramco – two of the world’s biggest
oil producers – is significant and a pointer to the way things are headed. ExxonMobil
has been operating the world’s only such plant at Singapore since 2014, and
produces around 1-mtpa of ethylene directly from crude oil. Just about a
month ago, Saudi Aramco announced that it too is moving ahead with a similar
project in the Kingdom, in partnership with the petrochemical giant, SABIC,
and a final decision would be taken by the end of 2019.
The
savings from directly converting crude oil to ethylene (and co-products) are
expected to be significant, even though capital expenditure on these plants
will still be significant. IHS Markit, a consultancy, expects that the
savings could be as much as $200 per tonne of ethylene produced, coming
largely from the price spread between naphtha and crude oil.
Indian refiners too eyeing petrochemicals
In
India, almost all refiners are now eyeing opportunities in petrochemicals,
and for several reasons. The economic benefits of integration, such as
improved operating margins, savings in energy and utilities etc. have at last
driven home, and the obsession with fuels has thankfully gone. The success of
players such as Reliance Industries Ltd. has provided proof that the benefits
of integration are to be had in an Indian context. A desire to get out of the
constraints posed on pricing of fuels has also been a strong motivator of the
shift in thinking. Even though prices of automotive fuels such as diesel and
petrol have been freed of government controls, prices of several other
products including LPG and kerosene continue to be set by government diktats.
The
uncertainty in the demand outlook for fuels should also be a matter of
concern. Demand for diesel, for example, has been driven historically by
keeping prices low (with respect to gasoline), and prompting even buyers of
premium cars to opt for the subsidised fuel. That has now changed and there
is now near-parity in the price of both petrol and diesel.
The
stated intent to migrate quickly to all-electric vehicles (EVs) by 2030 will
for sure have implications for demand for both diesel and petrol. While the
timeframe in which this is to happen seems ambitious –considering little has
happened so far – there is every reason to believe that whenever EVs come
they will be a major disruption for the automotive industry and by extension
fuel producers. The growing acceptance of the ‘shared economy’ – the likes of
Uber – could further reduce demand for personal vehicles.
Crackers and FCC plants
Almost
every major refinery in India today is now looking to augment production of
olefins such as ethylene and propylene, either by adding naphtha crackers or
fluidised catalytic cracking (FCC) units to their operations.
FCC
propylene capacities are upcoming at HMEL, the joint venture between
state-run HPCL and the Lakshmi Mittal Group, in Punjab; the Essar Oil
refinery (now owned by Russia’s Rosneft) at Vadinar; BPCL’s Mumbai &
Kochi refineries; the MRPL refinery at Mangalore; the CPCL refinery at
Manali, in the outskirts of Chennai; HPCL’s Vishakhapatnam refinery; and
IOC’s Paradip refinery. While a considerable chunk of the propylene will
likely be converted onsite to polypropylene, smaller plants will eye
opportunities in chemicals such as the acrylic, oxo-alcohol or phenol value
chains, either on their own or offer propylene to the merchant market.
Naphtha
crackers, which call for larger investments, are expected to be set up by
HMEL and by IOC in Paradip and these will make available a broader range of
feedstock including olefins and aromatics.
Value adding on higher olefins
The
competitiveness of naphtha cracking relative to gas cracking has improved,
thanks to the fall in crude oil prices, but these projects will need to widen
the slate of olefins and aromatics produced and put to good use to stay
competitive in a downturn.
This
is a lacuna in existing naphtha crackers in India, wherein higher fractions
go virtually unutilised, largely because of lack of scale and focus. At
world-scale refineries – with a minimum threshold of 15-mtpa – the
opportunities to tap into side-streams increases significantly and
configurations planned for new projects must be broad enough to capture this.
If this is done it will open up opportunities for value addition in several
speciality polymers and chemicals.
For
example, butadiene, isolated from the C4 fractions, is the most important raw
material for making a range of synthetic rubbers.
A
liquid cracker complex capable of producing 1-mtpa of ethylene can co-produce
around 120-ktpa of raw C5 stream, containing around 18% isoprene, 22%
cyclopentadiene and 15% of piperylene. These can be very gainfully employed
to make several speciality products. For example, isoprene can be used to
make polyisoprene – a synthetic version of natural rubber. Cyclopentadiene
can be used for making dicyclopentadiene and thereafter hydrocarbon resins
that find use for making adhesives. Isoamylene can be used for making high
value perfumery chemicals such as Galaxolide (and its equivalents) – a
fragrance with a musky wood odour – or converted into TAME (tertiary amyl
methyl ether), an excellent additive for gasoline blending.
Given
India’s low levels of consumption, petrochemicals will remain a growth
opportunity for oil refineries for a long time!
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- Ravi Raghavan
CHWKLY 26DEC17
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