KUWAIT REFINERIES SEEN KEY TO NAPHTHA MARKET

Restarting Kuwait's two biggest refineries in the second half of this year should rebalance world naphtha supply/demand. The loss of Kuwaiti refining capacity stemming from Iraq's takeover of Kuwait squeezed naphtha supplies sharply and sent naphtha prices soaring in third quarter 1990. Longer term, increased demand for naphtha caused by a surge in added Far East ethylene capacity coming on stream in 1991-92 won't lead to another shortfall in naphtha supplies.

April 8, 1991

4 min read

Restarting Kuwait's two biggest refineries in the second half of this year should rebalance world naphtha supply/demand.

The loss of Kuwaiti refining capacity stemming from Iraq's takeover of Kuwait squeezed naphtha supplies sharply and sent naphtha prices soaring in third quarter 1990.

Longer term, increased demand for naphtha caused by a surge in added Far East ethylene capacity coming on stream in 1991-92 won't lead to another shortfall in naphtha supplies.

That incremental demand is likely to be met by increased supplies from refining capacity restored in Kuwait and expanded in Saudi Arabia and the Far East. Thus, naphtha markets are likely to be in balance by 1992.

Those are the key findings of a study by Bonner & Moore Associates Inc. (BMAI), Houston.

NAPHTHA SHORTFALL

Iraq's blitzkrieg of Kuwait and the resulting embargo of products from both countries took about 150,000 b/d of Kuwaiti naphtha exports off the market.

That in turn spiked the price of naphtha about $50/metric ton from its typical spread with crude oil prices.

BMAI notes the Far East and Europe were especially hard hit by the price jump because about 80% of petrochemical production in those areas is fed by naphtha. More than half of Kuwait's naphtha exports had gone to Japan and the remainder to the Mediterranean and Northwest European markets.

This situation in turn boosted demand sharply for basic chemicals and derivatives in the Far East as Japan and others tried to replace lost naphtha supplies with downstream products, notably increased imports from the U.S. The increased demand weakened as added naphtha supplies surfaced in late 1990.

An extra 60,000 b/d of naphtha supplies came from Japan, where refineries boosted refinery crude utilization rates to 90% from 77%, BMAI said. Other incremental naphtha supplies came from increased refinery runs in Saudi Arabia, Singapore, and the Mediterranean. The jump in supplies helped temper big price premiums seen for naphtha in September-October 1990.

"However," BMAI said, "there is still a $10-15/metric ton premium due to the lost efficiency from producing much of this naphtha from hydroskimming operations rather than from full conversion refineries in Kuwait."

KUWAITI REFINING STATUS

BMAI expects much of Kuwait's damaged refining capacity to be back on stream in the second half.

"Kuwait's two largest refineries-Mina al-Ahmadi and Mina Abdulla-are the primary focus of efforts to get refinery production running after the war," the consultants said. "These two sophisticated refineries represent almost 70% of Kuwait's 820,000 b/d of refining capacity."

BMAI expects the two refineries to recapture about 75% of lost market share in second half 1991. They will use Saudi light crude for feedstock, which in turn boosts naphtha supplies because Saudi light has a higher naphtha yield than Kuwaiti crudes.

Incremental Kuwaiti naphtha production is likely to back out most extra naphtha produced in Japan, Singapore, and the Mediterranean, allowing refinery utilization rates in those areas to return to normal and sharply cutting the naphtha price premium by late this year, BMAI said.

There remains a possibility the two major Kuwaiti refineries won't be back to full utilization by late this year. In that event, BMAI contends, the downside would be that only half of the incremental naphtha would enter the market. Some continuation of Mediterranean naphtha exports to the Far East would be needed, with some shrinkage-but not elimination-likely in the price premium.

NEXT HURDLE

BMAI expects the next main hurdle for world naphtha markets to come with start-up of several new olefins cracking units in the Far East. Eight new naphtha based crackers are to start up in late 1991 and 1992, reaching a total 1.69 million metric tons/year of added ethylene capacity.

BMAI estimates these units will create an added demand for naphtha of about 125,000 b/d if they run full out.

Meeting that incremental demand will be:

Added supplies from refinery expansions in South Korea, Thailand, and Philippines due on stream in 1991-92. The South Korean expansion will supply the domestic market. The Thai and Philippine expansions will back out naphtha and light products imports.
Completion of Kuwaiti refinery repairs and full restoration of refining capacity by midyear 1992, thus restoring 150,000 b/d of naphtha exports to the market.
Saudi Arabia completing restoration of full conversion operations at its Ras Tanura refinery.

As a result, despite the large number of olefin crackers due on stream in the next 18 months, BMAI expects the naphtha market to be fully balanced by 1992. This should remove any remaining naphtha price premium from the markets, BMAI said.