Oil supply cuts could curtail 15% of ethylene supply in Middle East

Approximately 15% of ethane-based ethylene supply in the Middle East could be lost this year due to oil supply dynamics, according to new analysis from Wood Mackenzie. This equates to around 1.5 million tons of ethylene.

The largest direct impact as a result of oil supply cuts is likely to be seen in OPEC producing countries, such as Saudi Arabia, the UAE and Kuwait. Combined ethane-based ethylene production in Saudi Arabia, the UAE and Kuwait was approximately 10% of global ethylene supply last year.

“These three OPEC producing countries have strong connectivity between oil supply and ethane feedstock. This has previously been a key enabler for the development of ethylene capacity in these locations.

Most of the ethylene capacity in Saudi Arabia, Kuwait and the UAE has limited to no flexibility to adjust to alternative feedstocks, such as propane, under economic or supply constraint scenarios. For example, the drone attacks that took place in Saudi Arabia during September 2019 had a considerable and rapid impact on oil supply and, consequently, ethane supply in the region.

“Ethylene capacity in this geographical cluster has developed as a means of forward integration of ethane associated with oil production. In general, ethane production allocations have been fully committed to existing ethylene assets and there is limited feedstock flexibility should ethane supply decrease,” said Patrick Kirby, Wood Mackenzie Principal Analyst.

While Wood Mackenzie expects global ethylene operating rates to decline between now and the middle of the decade, the cost advantaged large-scale supply in these Middle Eastern countries should, without any interruption to feedstock supply, run at close to maximum operating rates. 

Beyond the Middle East region, if US industry dynamics were to evolve differently to Wood Mackenzie’s base case scenario, the global domino effect from this oil-ethane-ethylene connectivity could be more pronounced.

“The US ethylene industry is one of the largest in the world, with its primary feedstock being ethane. Should oil production declines impact ethane availability in the US more significantly than currently forecast in our base case assessment, other major ethylene producing regions could be impacted,” added Kirby.