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Natural-Gas Squeeze Means Mideast Fuel Switch: Energy Markets

Persian Gulf petrochemical producers are turning to naphtha as a feedstock for the first time amid growing power-plant demand for natural gas.

Abu Dhabi plans to build the Middle East’s first plant that will only use naphtha to make plastics. Saudi Arabia may develop similar units as part of two refinery ventures, according to state-run Saudi Aramco, France’s Total SA and Sumitomo Chemical Co. of Japan, the partners in the projects.

While naphtha, a product of refining crude oil, is used to make petrochemicals around the world, countries in the Middle East have traditionally preferred cheaper home-produced natural gas. Now, new power plants are competing for those gas supplies, stoking demand for alternatives. That’s being exacerbated as the United Arab Emirates and Saudi Arabia expand petrochemicals production to cut dependence on crude exports.

“They are running short of gas, especially in the U.A.E and in Saudi Arabia, where they require gas for power generation as well,” said Siamak Adibi, head of the Middle East gas team at Facts Global Energy Inc. in Singapore. “The more available alternative would be naphtha for future projects.”

Rising demand for naphtha may end a slump in refining profits. The difference in price between naphtha and Dubai crude oil, or crack spread, may rise to $2 a barrel by 2013 from an average of $1.03 this year, according to Jit-Yang Lim, the Singapore-based head of price analysis at Facts Global.

Market Glut

The spread, a measure of returns from naphtha production relative to Dubai crude, dropped to minus $5.32 a barrel July 15, the biggest deficit since Oct. 15, according to data compiled by Bloomberg. The profit was as high as $13.87 a barrel on May 15, 2007. It was at minus $2.33 today.

Petrochemical producers are taking advantage of a glut of naphtha on global markets, according to Sriharsha Pappu, a petrochemicals analyst at HSBC Holdings Plc in Dubai.

India’s net exports rose 12 percent to 8.18 million metric tons in the year ended March 2010, according to the government’s Petroleum Planning and Analysis Cell.

Naphtha, distilled from crude or gas condensate, can be blended with gasoline for auto fuel or used to make chemicals for plastic bags to toys and washing-machine casings. It’s fed into a cracker, which breaks it down to create the chemicals. The Middle East already has some mixed-feed crackers that can use naphtha along with other products.

Excess supply has allowed buyers in Japan and Korea to cut the costs of obtaining cargoes. Abu Dhabi National Oil Co. is currently offering to sell naphtha for a year starting October at premiums of between $11.50 and $12.50 a ton over benchmark prices, two traders with knowledge of the talks said yesterday. It set premiums for its July term contract at $22 to $24 a ton during negotiations in May.

‘Naphtha Necessity’

Middle East energy use may rise 60 percent in the next 20 years, according to the Paris-based International Energy Agency. Kuwait began importing LNG from suppliers such as Royal Dutch Shell Plc in 2009. State-run Qatar Petroleum sells gas to the U.A.E. and Oman through the Dolphin Energy Ltd. pipeline, which Abu Dhabi built with Total and Occidental Petroleum Corp.

Naphtha supply will increase this decade as the Middle East, India and China expand refineries, said Utpal Sheth, a Dubai-based analyst at Chemical Market Associates Inc.

Abu Dhabi is more than doubling capacity at its 400,000 barrel-a-day Ruwais plant to 9.6 million tons a year in 2015, according to company data. State-run Abu Dhabi National Oil Co. is offering naphtha to Asian buyers in October for the first time, three traders with knowledge of discussions said July 21.

Raising the use of naphtha is “a necessity if you want to grow in petrochemicals,” Sheth said.

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