Crude oil price outlook
There was high interest in Wood Mackenzie’s oil price outlook for the near- and long-term, particularly on our view that average oil prices will trend lower in 2019, before entering a structural higher oil price world (the lower pricing in 2019 is expected as market fundamentals weaken, with United States production growth continuing against a backdrop of slowing global demand). The translation of oil prices into global petrochemical prices and cost competitiveness/profitability of the region in the global context was the key focus area. It was appreciated that for project developments, a long-term and through-the-cycles assessment was needed.
Increasing petrochemicals focus
The CIS region is increasingly focusing on petrochemicals as a long-term prospect in two main ways. Firstly, there is an increasing acceptance of petrochemicals as a growth area from integrated oil majors linked to “peak oil demand”. Secondly, several projects are under development and in planning stages that would utilise the region’s vast NGL feedstocks – such as ethane and LPG. Our view is optimistic on long-term global petrochemical demand growth prospects, particularly for products like polyolefins. In this arena, the CIS region has the potential to be a much larger player on the global stage.
Feedstock selection for olefins projects
Is it better to export feedstocks, integrate with a refinery or build a gas-based olefins production platform? This common question indicates the importance of economic returns on projects due to overall higher capital costs in the region, relative to other parts of the world. Several 2020+ projects are under study across the region, including SIBUR Amur GCC (Russia), FEPCO (Russia), Borealis/UCC JV (Kazakhstan) and SOCAR GPC project (Azerbaijan). If developed, these projects will utilise a range of feedstocks. Extension down both gas- and liquids-based feedstocks routes remain viable options, due to Russia’s export tax system on refined products.
Import substitution and export strategy
New production currently under construction (particularly SIBUR, Tobolsk) is expected to allow the region to continue growth as a structural net exporter of polyolefins. Beyond this, what is the best derivative to produce? The general view was that the long-term direction of the olefins-polyolefins chain particularly represents a strong prospect to support new facilities being studied for the next investment cycle and beyond. Potential diversification into other olefin derivatives is also being considered, especially where the product and location work to support local market needs and as a diversified strategy from pure export-economics.
Black swan events
Several topical events discussed which could have a major impact on the olefins chain industry, including:
- Potential for reducing investment attractiveness in USA
- Heightening tensions around trade wars and sanctions
- Ethane exports from the United States
- Long-term recycling trends in polyolefins
- Chinese demand growth at lower level than expectations