According to Business Monitor International (BMI), Qatar’s shift from condensates exports to naphtha will offer limited benefits, due to a softening in global demand and continuing price weakness.
Qatar’s state run oil marketing firm Tasweeq plans to cut condensates exports by 150 000 bpd over the next two years. According to Tasweeq’s marketing director, Ibrahim Al-Sulaiti, Qatar will look to process larger volumes domestically, displacing condensates exports with exports of naphtha and other higher value added, light end products.
Qatar is among the largest exports of condensates globally, and its decision to cut exports reflects a growing saturation of the condensates market. One factor is the rising competition from within the Middle East; the US is also a major prospective competitor.
With crude exports under sanction, Iran has been maximizing the production and export of condensates, which are exempted from the ban. According to data from its Custom Administration, the country exported 525 000 bpd in the first quarter of the 2014 Iranian calendar year (March 21 – June 22), a 2.4 fold year on year increase. The bulk of these volumes have flowed to Asia – Qatar’s main export destination – bringing significant downward price pressure, selling at a heavy discount to Qatari grades.
Other key Gulf states, including Saudi Arabia, are set to see substantial growth in crude oil and condensates production, according to BMI. Rising domestic demand will see a large part of this consumed within the region itself, and BMI forecasts the growth in exports to significantly lag the growth in output. Nevertheless, the steady increase in volumes targeting Asian markets will further squeeze Qatari exports.
BMI reports that growth in US shale production is perhaps the largest game changer. Shale oil is due to add over 1 million bpd to liquids production in 2014 and growth looks set to continue, albeit at a reduce rate. Business Monitor forecast output to increase by an average annual rate of 4.2% over the next five years, with shale the main driver of growth.
With the continued ban on crude exports and limited upside to domestic demand, condensates exports offer a critical relief valve for rapidly rising US supply. In 2014, the US Department of Commerce gave two companies – Enterprise Products and Pioneer Natural Resources – legal backing to export stabilized crude condensates. Stabilization is a more basic form of processing than had previously been allowed, and the ruling represents a modest but significant loosening of the export ban.
Under US law, any company can now export crude condensates, providing they satisfy the same basic requirements as Enterprise and Pioneer. In practice, this is complicated by the fact that the Commerce ruling has not been publicly disclosed. However, several companies have been working alongside the two companies, to gain understanding of the requirements. In November, BHP Billiton announced they would export 650 000 bbls of stabilized crude condensate; they will be the first company to do so without direct backing from Commerce.
Although the immediate impact may be comparatively limited, BMI expects a substantial increase in US condensates exports over the coming years. The majority of these exports are expected to target Asia.
Increasing looseness in the Asian condensates market threatens both the high price and dominant market position of Qatari exports. However, BMI sees the planned reorientation towards naphtha facing similar headwinds.
In response to rising condensates output in the US, key Asian consumers such as China and South Korea are heavily ramping up condensate splitter capacity. The additional capacity, forecast to increase by approximately 500 000 bpd over the next three years, will substantially increase the volumes of naphtha produced domestically.
Several other countries in the Middle East, including Saudi Arabia and the UAE, are also looking to diversify exports away from crude and condensates and towards various light end products, including naphtha. Asia is also their key target export market, pointing towards a more ample supply picture emerging in the region.
BMI also questions the strength of demand growth going forward. Naphtha is widely used as feedstock in petrochemical operations to produce ethylene and other olefins. However, it is coming under increased pressure from alternative feedstock, in particular ethane and LPGs (butane and propane). One issue is the yield. Naphtha offers a significantly lower ethylene yield, approximately 30% by weight, as opposed to 37 – 80% for ethane and LPGs.
In response to the shift in price dynamics, major petrochemicals firms in the US, Europe and the Middle East are increasingly switching to ethane and LPG feedstock. Recent examples include Ineos in the UK and Saudi Arabia’s Sabic, the largest producer of ethylene globally. The US has completed four ethane crack capacity expansions in 2014, with another eight targeted by 2017.
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