PROCESS ECONOMICS PROGRAM - · PDF filea a PROCESS ECONOMICS PROGRAM SRI INTERNATIONAL Abstract Process Economics Program Report No. 172 ECONOMICS OF PETROCHEMICALS PRODUCTION IN

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PROCESS ECONOMICS

PROGRAM SRI INTERNATIONAL

Abstract

Process Economics Program Report No. 172

ECONOMICS OF PETROCHEMICALS PRODUCTION IN SAUDI ARABIA AND WESTERN CANADA

Menlo Park, California

94025

(September 1985)

The report examines in depth the key elements that affect the eco-

nomics of petrochemicals production in Saudi Arabia and Western Canada.

Emphasis is placed on developing a sound basis for estimating and

projecting plant construction cost location factors, and on providing a

perspective on feedstock prices and their likely trends.

Component cost data are developed and applied to estimate illustra-

tive production costs for methanol, ethylene and LLDPE. For methanol

and LLDPE, estimates are also made of the delivered costs and profit-

ability as a function of product price in the established producers'

markets.

The study quantifies the effects that typical differences in

financing in the various locations have on the DCF rate-of-return on

equity. It also examines the effects that changes in crude oil prices

and changes in exchange rates can have on the costs of the various

producers.

PEP'83 WS

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Report No. 172

ECONOMICS OF

PETROCHEMICALS PRODUCTION IN SAUDI ARABIA AND

WESTERN CANADA

by WALTER SEDRIKS

September 1995

A private report by the

PROCESS ECONOMICS PROGRAM

Menlo Park, California 94025

For detailed marketing data and information, the reader is

referred to one of the SRI programs specializing in marketing

research. The CHEMICAL ECONOMICS HANDBOOK Program covers

most major chemicals and chemical products produced in the

United States and the WORLD PETROCHEMICALS Program covers

major hydrocarbons and their derivatives on a worldwide basis.

In addition, the SRI DIRECTORY OF CHEMICAL PRODUCERS services

provide detailed lists of chemical producers by company, prod-

uct, and plant for the United States and Western Europe.

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CONTENTS

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1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . 1

2 SUMMARY......... . . . . . . . . . . . . . . . . . . 3

Background ......................... 3 Scope of Study ....................... 4 Location Factors ...................... 6 Western Canada ...................... 7 Saudi Arabia ....................... 9

Feedstock Prices and Availability .............. 12 Saudi Arabia ....................... 12 Western Canada ...................... 13 The United States and Western Europe ........... 15

Utilities Costs ....................... 15 Production Cost Bases .................... 15 Transportation Costs .................... 18 Tariffs ........................... 19 Relationships Between ROI and DCFRR ............. 20 Conclusions ......................... 22

3 INDUSTRYSTATUS....................... 29

Saudi Arabia ........................ 29 Feedstocks ........................ 33

World Perspective ...................... 36 Further Developments ................... 36

Western Canada ....................... 38 Feedstocks ........................ 43

Eastern Canada ....................... 45

4 PLANT CONSTRUCTION COST LOCATION FACTORS .......... 47

Introduction ........................ 47 Effects of Scope ...................... 48 Approach and Data Sources .................. 51

Cost Components ...................... 51 Direct Materials ..................... 54 Construction ....................... 55 Technical Services .................... 56 Modular Construction ................... 56

Location Factors for Canada ................. 58 Mid-l970s ......................... 59 Early 1980s ........................ 61

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CONTENTS

4 PLANT CONSTRUCTION COST LOCATION FACTORS (continued)

Variation in Location Factors with Time ........... 63 Location Factors for Saudi Arabia .............. Conventional Construction ................. :s Modular Construction ................... 79 Level 3 and 4 Location Factors .............. 83

Variation of the Location Factor with Time ......... 84 Conclusions ......................... 91

5 FEEDSTOCK PRICES ...................... 93

Saudi Arabia ........................ 96 Background ........................ 96 Feedstock Prices ..................... 97 Feedstock Supply ..................... 101

Western Canada ....................... 102 General .......................... 103 Natural Gas and Ethane Prices in Alberta ......... 105 Gas Prices at Toronto ................... 108 Export Gas Prices. .................... 109 Oil Pricing ........................ 110 Future Trends ....................... 112

The United States and Europe ................ 113 Crude Oil and Feedstock Prices .............. 113

6 MISCELLANEOUS PRODUCTION COSTS AND COST FACTORS ....... 119

Utilities Costs ....................... 119 Cooling Water ....................... 122 Process Water ....................... 122 Electricity ........................ 123 Fuel Oil ......................... 123 Inert Gas ......................... 123 Natural Gas.. ...................... 123 Steam ........................... 124

Production Cost Bases .................... 124 Operating Labor ...................... 124 Maintenance Costs ..................... 128 Taxes and Insurance .................... 129 Royalties ......................... 129 Plant Overhead ...................... 129 GM, Sales, Research ................... 129

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CONTENTS

6 MISCELLANEOUS PRODUCTION COSTS AND COST FACTORS (continued)

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Working Capital ........... ........... 130 Return on Investment ........ ........... 130

Transportation Costs ......... ........... 131 Ocean Shipping ........... ........... 131

Tariffs ................ ........... 138 United States ............ ........... 139 Japan ................ ........... 139 European Community ......... ........... 140

Exchange Rate Impacts ......... ........... 142 Interaction with Crude Oil Pricing . ........... 143 Future Trends ............ ........... 146

METHANOL .......................... 149 Cost Comparisons ...................... 149 Netback and Profitability .................. 154 ROI-Price Relationships ................... 157 United States/Saudi Arabia ................ 157 United States/Canada ................... 165 The European Market .................... 165

The Effect of Currency Exchange Rate ............ 171

8 ETHYLENE .......................... 173

General Comparisons ..................... 173 Transfer Prices/Profitability ................ 183 Alberta ........................... 186 Saudi Arabia ........................ 188 Established Petrochemical Centers .............. 189

9 LLDPE ............................ 191

General Comparisons ..................... 192 The U.S. Market ....................... 207 Western Europe ....................... 210 Future Trends ........................ 214 Effect of Oil Price Changes ................ 214 Effect of Exchange Rate Movements ............. 216

Postscript ......................... 218

APPENDIX A LOCATION FACTORS AND PARITY RATES . . . . . . . . 221

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CONTENTS

APPENDIX B CANADIAN PLANT COST INDICES . . . . . . . . . . . 235

APPENDIX C BACKGROUND ON OIL AND GAS PRICING IN CANADA . . . 241

APPENDIX D TAXATION AND DEPRECIATION . . . . . . . . . . . . 261

APPBNDIX E RETURN ON INVESTMENT............... 267

APPENDIX F RELATIONSHIP BETWEEN CASH FLOW AND INVESTMENT . . 287

CITED REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . 289

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a ILLUSTRATIONS

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2.1

2.2

2.3

2.4

3.1

3.2

3.3

4.1

4.2

4.3

4.4

4.5

4.6

4.7

5.1

5.2

6.1

7.1

7.2

Alberta/U.% Gulf Coast - Chemical Plant Parity Rates and Location Factors . . . . 8

Chemical Plant Location Factors for Saudi Arabia . . . . 10

Relationships between DCFRR and ROI . . . . . . . . . . 21

LLDPE: ROI Relationships for the European Market - Integrated Production, Mid-1984 . . . . . . . . . . . . 24

Saudi Arabia and the Gulf States . . . . . . . . . . . . 34

Location of Principal Facilities at Jubail Industrial City . . . . . . . . . . . . . . . . . . . . 35

Canadian Provinces Main Plant Sites in Alberta . . . . . . . . . . . . . . 41

Comparison of Chemical Plant Construction Cost Indices . . . . . . . . . . . . . . . . . . . . . 65

Yearly Changes in Plant Cost Indices - PEP Cost (United States) Versus CPPP (Canada) . . . . . 66

Alberta/U-S. Gulf Coast - Chemical Plant Parity Rates and Location Factors . . . . 68

Comparison of Chemical Plant and GDP Parity Rates . . . 70

Canada/United States - GDP Parity Rates and Location Factors . . . . . . . . . 71

Variation of the Saudi Riyal/U.S. Dollar Exchange Rate with Time. . . . . . . . . . . . . . . . 85

Saudi Arabian Plant Cost Location Factors (Level 2) - Estimates Based on Primary Source Country Assumption . . 89

Methanol Prices in Various Markets . . . . . . . . . . . 95

Estimated Trend Line Prices as a Function of Crude Oil Costs . . . . . . . . . . . . . . . . . . . . 116

Increase in Dollar Cost of Foreign Products as a Function of Dollar Depreciation . . . . . . . . . 145

Price and Capacity Utilization Histories for Methanol in the United States . . . . . . . . . . . 158

ROI as a Function of Methanol Price for Saudi Arabian and U.S. Gulf Coast Production . . . . . 159

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7.3 Comparison of Methanol Prices on the U.S. Gulf Coast and Delivered Costs for Production in the United States and Saudi Arabia . . . . . . . . . . . . . . . . . . . 161

7.4 ROI as a Function of Methanol Price - 1990 Scenarios . . . . . . . . . . . . . . . . . . . . . 163

7.5 Sensitivity of U.S. Gulf Coast Methanol Production Costs to Oil Price . . . . . . . . . 164

7.6 ROI as a Function of Methanol Price for Canadian and U.S. Gulf Coast Production . . . . . . 166

7.7 Rice History for Methanol in West Germany . . . . . . . 167

7.8 ROI as a Function of Methanol Price for Saudi Arabian and European Production . . . . . . . 168

7.9 ROI as a Function of Methanol Rice for Albertan and European Production . . . . . . . . . . . 170

7.10 Effect of Currency Exchange Rates on Methanol Costs . . 172

8.1 Ethylene Production: ROI as a Function of Transfer Rice . . . . . . . . . . . . . . . . . . . . 184

8.2 Contract Ethylene Prices . . . . . . . . . . . . . . . . 185

9.1 LLDPE: ROI as a Function of Netback . . . . . . . . . . 199

9.2 LLDPE: ROI Relationships for the U.S. Gulf Coast Market Nonintegrated Production . . . . . . . . . . . . . . . . 208

9.3 LLDPE: ROI Relationships for the U.S. Gulf Coast Market - Integrated Production . . . . 209

9.4(a) LLDPE: ROI Relationships for the European Market - Integrated Production . . . . . . . . . . . . . . . . . 211

9.4(b) LLDPE: ROI Relationships for the European Market - Integrated Production, Mid-1984 . . . . . . . . . . . . 212

9.5 Variation of Integrated U.S. Gulf Coast LLDPE Production Costs with Crude Oil Rice . . . . . . . . . 215

A.1 Western Germany/United States Chemical Plant Parity Rates and Location Factors . . . . . . . . . . . 227

A.2 Japan/United States Chemical Plant Parity Rates and Location Factors . . . . . . . . . . . . . . . . . 228

A.3 Western Germany/United States - GDP Parity Rates and Location Factors . . . . . . . . . . . . . . . . . 230

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ILLUSTRATIONS

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Alberta Border Rice for Natural Gas . . . . . . . . . . 245

Wellhead Oil Prices . . . . . . . . . . . . . . . . . . 246

Schematic for Setting Alberta Border Price . . . . . . . 249

Petroleum Compensation Charge (PCC) . . . . . . . . . . 254

Relationship of DCFRR to Pretax Return on Fixed Capital (ROI) . . . . . . . . . . . . . . . . 272

Relationship of DCFRR to Pretax Return on Fixed Capital (ROI) - Leveraged Cases.................... 283

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TABLES

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2.2

3.1

3.2

3.3

3.4

3.5

4.1

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4.3

4.4

4.5

4.6

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Utilities and Labor Costs . . . . . . . . . . . . . . . 16

Return on Investment in Various Markets for Saudi LLDPE/Ethylene . . . . . . . . . . . . . . .

Principal Joint Ventures of SABIC for Petrochemicals Production . . . . . . . . . . . . .

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Major Petrochemicals Plants in Saudi Arabia . . . . . .

World Capacities and Capacity Utilization for Selected Products . . . . . . . . . . . . . . . . .

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Ethylene and Major Derivatives Plants in Alberta . . . .

Major Natural Gas Based Plants in W. Canada . . . . . .

Levels for Location Factors . . . . . . . . . . . . . .

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United States Beference Weights: Cost Breakdown for Typical Plant Erected on the U.S. Gulf Coast . . . . . . . . . . . . . . . .

Ranges of Component Weights for Erected Plant . . . . .

Location Factors for Chemical Plant Construction - Taylor Study. . . . . . . . . . . . . . . . . . . . . .

Breakdown of Chemical Plant Location Factor for Alberta 1975-1977 Basis Taylor Study . . . . . . . . . . . . . . . . . .

Breakdown of Chemical Plant Location Factor Alberta 1983. . . . . . . . . . . . . . . . . . . . . .

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Estimated Location Factors for Saudi Arabia - Conventional Construction . . . . . . . . . . . . . . .

Illustrative Freight Costs for Machinery and Equipment, SaudiArabia......................

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Estimated Location Factors for Saudi Arabia (About 1980) - Comparison of Modular and Conventional Construction Basis : 35% Saving in Field Costs . . . . . . . . . . . 81

Estimated Location Factors for Saudi Arabia (About 1980) - Comparison of Modular and Conventional Construction Basis : 50% Saving In Field Costs . . . . . . . . . . . 82

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TABLES

4.11 Instantaneous Plant Location Factors .......... 88

5.1 Feed and Fuel Component of the Cost of Selected Petrochemicals, Mid-1982 U.S. Gulf Coast ................ 94

5.2 Saudi Arabian Light Crude Marker Price Spot, f.o.b. Saudi Arabia .................. 114

6.1 Utilities Costs, Mid-1984 ............... 120

6.2 Production Cost Bases ................. 125

6.3 Operating Labor Cost Comparisons ............ 127

6.4 Typical Trade Route Distances ............. 134

6.5 Container Shipping Costs for Resin Pellets ....... 135

6.6 Parcel Tanker Shipping Costs .............. 136

7.1 Comparison of Methanol Production Costs: U.S. Gulf Coast, West Germany, Western Canada, and Saudi Arabia ................... 150

7.2 Transport Costs and Tariffs on Imports ......... 152

7.3 Comparison of Local and Delivered Methanol Costs .... 153

7.4 Return on Investment In Various Markets In Mid-1984 for Saudi Methanol ............ 155

7.5 Return on Investment in Various Markets in Mid-1984 for Canadian Methanol ........... 156

8.1(a) Illustrative Costs for Ethylene Production: U.S. Gulf Coast, West Germany, Western Canada, and Saudi Arabia (English Units) ........... 174

8.1(b) Illustrative Costs for Ethylene Production: U.S. Gulf Coast, Western Germany, Western Canada, and Saudi Arabia (Metric Units) ............ 175

8.2 Effect of Capacity Utilization on Production Costs ... 178

8.3 Ethylene from ethane Variable Costs ..................... 180

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8.4 Unit Cost for Raw Materials, Prices of Coproducts, and Utilities for Ethylene Production from Ethane . . . 181

8.5 Ethylene from Wide Range Naphtha Variable Costs . . . . . . . . . . . . . . . . . . . . . 182

9.1(a) Illustrative Costs for LLDPE Production: U.S. Gulf Coast, West Germany, Western Canada, and Saudi Arabia (English Units) . . . . . . . . . . . 193

9.1(b) Illustrative Costs for LLDPF, Production: U.S. Gulf Coast, West Germany, Western Canada, and Saudi Arabia (Metric Units) . . . . . . . . . . . . 194

9.2 LLDPE (Pellets) Variable Costs . . . . . . . . . . . . . . . . . . . . . 196

9.3 Illustrative Costs for LLDPR Production: U.S. Gulf Coast, Western Europe, Western Canada, and Saudi Arabia Integrated Production . . . . . . . . . . . . . . . . . 198

9.4(a) LLDPE Transport Costs and Tariffs . . . . . . . . . . . . . . 201

9.4(b) LLDPE Transportation and Tariff Costs . . . . . . . . . . . . 202

9.5 Comparison of Local and Delivered LLDPE Costs Nonintegrated Production . . . . . . . . . . . . . . . . 203

9.6 ROI in Various Markets for Saudi LLDPE Nonintegrated Production . . . . . . . . . . . . . . . . 204

9.7 ROI in Various markets for Saudi LLDPE/Ethylene Integrated Production . . . . . . . . . . . . . . . . . 205

9.8 ROI in Various Markets for Western Canadian LLDPE Nonintegrated Production . . . . . . . . . . . . . . . . 206

A.1 West Germany/Unlted States-Chemical Plant Parity Rates and Location Factors . . . . . . . . . . . . . . . . . 225

A.2 Japan/United States--Chemical Plant Parity Rates and Location Factors . . . . . . . . . . . . . . . . . 226

A.3 Alberta/United States-Chemical Plant Parity Rates and Location Factors . . . . . . . . . . . . . . . . . 233

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TABLES

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c.3

c.4

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E.3

E.4

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E.5B

E.5C

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Structure of the Statistics Canada CMPP and CPPP Indices ................. 236

Statistics Canada Plant Cost Index Values ....... 238

Schedules for the ABP of Natural Gas .......... 243

Legislated Schedules for Wellhead Oil Prices ...... 244

Toronto City Gate Prices for Natural Gas ........ 250

Illustrative Values of Recent Oil and Gas Costs, Transport, Tariffs, Taxes and Parities ........ 256

Natural Gas Export Prices ............... 259

Methanol Production Costs ............... 270

Cash Flow Table for Methanol Production U.S. Gulf Coast, Mid-1984 ............... 271

Methanol Production Costs: U.S. Gulf Coast and Saudi Arabia ................... 277

Assumptions for Base Case DCFRR Calculation for Saudi Methanol Production ............. 278

Capital Expenditure and Loan Repayment Schedules for a Hypothetical Methanol Plant In Saudi Arabia ... 279

Hypothetical Saudi Methanol Plant Tax Calculation .................... 280

Hypothetical Saudi Methanol Plant CashFlows ........................ 281

DCFRR Calculations - Saudi Arabian Conditions ..... 285

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