EY Price Point: Global Oil and Gas Market Outlook - Q3
Shale gas
1. 1Shale Gas: Threat or Opportunity for the GCC?
Shale Gas: Threat or
Opportunity for the GCC?
Shale gas has upended the North American
natural gas and chemical markets, and its effects
are propagating. Profiting from the new opportunities
will require flexibility and swift action.
2. 2Shale Gas: Threat or Opportunity for the GCC?
North America’s development of shale gas has triggered a revolution in the gas market that could
have a major impact on other energy sources and on the petrochemical footprint. The effects are
spreading to the rest of the world and are even affecting the hydrocarbon-rich countries in the
Gulf Cooperation Council (GCC).1
A full appreciation of the potential threats and opportunities
that shale gas brings to the GCC’s oil and gas and petrochemical industries requires an
understanding of the impact of shale gas in North America and other international markets.
Shale gas is bringing the United States
close to self-sufficiency and could turn
the country into a net exporter of gas.
We look at the impact of shale gas from two angles. First, we focus on gas markets, and then we
examine the impact on the global chemical and petrochemical markets.
Impact of Shale Gas on Natural Gas Markets
The natural gas market comprises regional markets, connected through liquefied natural gas
(LNG). Regional natural gas markets have traditionally been rather stable and predictable;
shale gas has caused a fundamental shock to the North American natural gas market. We first
provide an overview of the shale gas revolution in North America. Then we analyze its potential
to propagate to other regional natural gas markets and impact the global LNG market. Finally,
we explore the implications for the GCC’s oil and gas industry.
The shale gas revolution in North America
High gas prices in the 2000s prompted the development of shale gas, which is now emerging
as a main source of natural gas in North America. Shale gas is bringing the United States close
to self-sufficiency and could turn the country into a net exporter of gas in the near future. U.S.
production of shale gas grew from two trillion cubic feet (Tcf) in 2008 to more than eight Tcf in
2012, accounting for more than a third of total domestic natural gas production. Shale gas is
projected to grow to 14 Tcf by 2030, representing almost half of U.S. natural gas production.
Shale gas has triggered a sharp drop in natural gas prices and decoupling from oil prices.
Shale gas has upended the natural gas market. In 2012, natural gas prices dropped to between
$1.82 and $3.77 per million British thermal units (MMBtu), down from between $5.82 and $13.31 per
MMBtu in 2008, and natural gas and oil prices decoupled, having traditionally been strongly
correlated (see figure 1 on page 3).2
In the past, significant global demand shocks and natural
disasters have caused temporary divergence from the oil and gas energy equivalent ratio, but
this time it looks as if the split is here to stay.
There is consensus on the upward trajectory of North America’s natural gas prices, which will
be required to make dry shale gas developments economically viable. A.T. Kearney’s scenarios
predict equilibrium in the range of $4 to $8 per MMBtu by 2020, with the reference case in the
1
The Gulf Cooperation Council is comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
2
Source: Henry Hub Gulf Coast Natural Gas Spot Price from the U.S. Energy Information Administration
3. 3Shale Gas: Threat or Opportunity for the GCC?
$6 to $7 per MMBtu range.3
However, there are no signs that natural gas prices will go back to
the pre-shale correlation with oil prices.
ShalegashasthepotentialtoturntheUnitedStatesintoanLNGexporterinthenearfuture.
Abundant domestic resources and low prices are displacing natural gas imports to the United
States and creating the potential for the country to become a net exporter of natural gas by
2020 and a net exporter of LNG by 2016. LNG import terminals in the United States, built on the
expectation of substantial future LNG demand, are all suffering from low capacity utilization
and are looking for export opportunities.
At the same time, LNG importers are trying to secure supplies of North American shale gas
linked to the Henry Hub price. Japan, the largest LNG importer, has already signed agreements
with the United States and is working to secure shale gas from Canada. By 2020, North American
shale gas could represent 30 percent of Japan’s demand, with 17 million tons per annum (MTPA)
coming from the United States and nine MTPA from Canada. GAIL (India) recently signed a
20-year contract with the U.S. Sabine Pass terminal linked to the Henry Hub price.
Shale gas is turning North America into an important LPG exporter. The exploitation of wet
shale gas plays, which give producers higher returns, is not only fueling the renaissance of the
North American chemical industry but also lifting liquefied petroleum gas (LPG) production
for domestic and export markets. The increasing production of LPG has already turned the
United States into a net exporter with the potential to capture a growing share of the market
currently dominated by the GCC.
Note: MMBtu is million British thermal units.
Sources: U.S. Energy Information Administration, Chicago Mercantile Exchange; A.T Kearney analysis
Figure 1
Natural gas prices have decoupled from oil prices
Spot and future prices for oil and gas
$ per MMBtu
Henry Hub natural gas price
1/1/01
1/1/02
1/1/03
1/1/04
1/1/05
1/1/06
1/1/07
1/1/08
1/1/09
1/1/10
1/1/11
1/1/12
1/1/13
1/1/14
1/1/15
1/1/16
1/1/17
1/1/18
$ per barrel
Cold winter,
decrease in
hydroelectric
power due
to drought
Cold winter,
unanticipated
drop in
production
Hurricane
Katrina
West Texas Intermediate crude oil price
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
3
See With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing? at www.atkearney.com.
4. 4Shale Gas: Threat or Opportunity for the GCC?
Shale gas impact on international markets
NorthAmericanshalegashascreateduncertaintiesinnaturalgasmarkets. Despite the fact
that shale gas production is still confined to North America, its impact is being felt around the
world. Shale gas has created more uncertainties in natural gas markets and has added a new
dimension to the already complex and fluctuating global flows of natural gas, making it even
more difficult to forecast the evolution of the natural gas markets, the supply-and-demand
balance for each regional market (domestic conventional and unconventional resources versus
pipeline gas versus LNG), and the international flows of natural gas. This amplified uncertainty
is at the heart of the mounting pressure on natural gas producers to move away from long-term
contracts and gas prices indexed to crude oil.
Shale gas is creating mounting pressure
on natural gas exporters.
The price of natural gas in Europe and Asia remains substantially higher than in the United
States, but some signs of decoupling are emerging in the European market (see figure 2).
The duration of new gas contracts signed over the past five years has become significantly
shorter, and the LNG spot market has grown to represent 30 percent of all LNG trade in 2012,
favored by the need to reallocate LNG flows originally directed to the U.S. market and by new
uncertainties in the natural gas market.
Note: MMBtu is million British thermal units. NBP is the national balancing point. LNG is liquefied natural gas.
Sources: U.S. Energy Information Administration, Bloomberg; A.T. Kearney analysis
Figure 2
Signs indicate natural gas and oil prices are decoupling in Europe
Spot prices for oil and gas
$ per MMBtu
UK NBP for natural gas
1/1/00
1/1/01
1/1/02
1/1/03
1/1/04
1/1/05
1/1/06
1/1/07
1/1/08
1/1/09
1/1/10
1/1/11
1/1/12
1/1/13
1/1/14
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
20
15
10
5
0
$ per barrel
R2
(UK NBP − Brent) = 0.59
Brent price for crude oil Japan’s price for LNG
R2
(Japan LNG − Brent) = 0.79
5. 5Shale Gas: Threat or Opportunity for the GCC?
The development of shale gas resources could reshape the global natural gas market.
Large developments of shale gas and aggressive expansions of LNG capacity have the potential
to fundamentally reshape regional and global gas markets. Most of the unconventional technically
recoverable resources are outside of the United States (see figure 3).
Development of the vast unconventional resources in China and Latin America will take at least
another five to 10 years because of the need to better understand shale formations, adapt
technology, build the midstream infrastructure, and create a supporting political and
regulatory environment. But it’s just a matter of time—and when it happens, it could have a
major impact on the regional market balance and on regional and global natural gas prices.
China has vast unconventional gas resources, and their exploitation could cause another major
shock that reshapes the entire natural gas market. China recently started assessing and exploring
its shale reserves in cooperation with more experienced international players. The government
has set ambitious targets for the production of shale gas and is releasing several policies to
encourage the development of indigenous unconventional gas. However, we believe more time
and effort will be required to meet the government shale gas targets because of the concentration
of shale gas reserves in mountainous or densely populated areas with technical challenges
and insufficient infrastructure, a lack of capabilities, and an unfavorable political and economic
system. By 2020, shale gas is expected to account for 3 to 9 percent of China’s domestic demand
and further grow thereafter. Whether domestic unconventional gas displaces rapid natural gas
import growth or coal used for power generation, it will have a huge impact on the regional and
global gas market. This will largely depend on environmental considerations and regulations.
1
Annual estimate based on daily U.S. production
Sources: U.S. Energy Information Administration study of 42 countries; A.T. Kearney analysis
Figure 3
Shale gas resources are present around the world
Shale gas production
and resources
Selection
Unproven, technically recoverable shale gas resources
2012
production
(billion
cubic feet)
2013
resources
(trillion
cubic feet)
9,405 7,201
567
United
States
Rest of
the world
Countries with significant potential for shale gas recovery
North
America
1,685
South
America
1,430
Middle East
and Africa
1,393
Pacific
437
Asia
1,170
South
Asia
201
Former
Soviet Union
415Europe
470
Brazil
245
Argentina
802
South Africa
390
Australia
437
China
1,115
Canada
573
United States
567
Mexico
545
Poland
148France
137
Algeria
707
Libya
122
6. 6Shale Gas: Threat or Opportunity for the GCC?
Large projects under development to build natural gas import capacity (pipeline infrastructure
to connect Central Asia, Russia, and Myanmar gas to China and relevant LNG capacity creation)
suggest a strong expectation that China’s demand for natural gas will grow.
Europe has about 6 percent of the world’s technically recoverable shale gas reserves.4
However,
European shale gas developments will likely require more time because land resources and
the political and regulatory environment are not expected to favor any significant shale gas
production before 2020. Based on A.T. Kearney scenarios, European shale gas production in 2035
could account for 2 to 10 percent of total domestic consumption.Europe is therefore expected to
continue to rely on imports of both piped gas and LNG to meet its internal demand.
Shale gas impact on the GCC
The impact of U.S. shale gas on the GCC has been rather limited so far, but shale gas could
represent both an opportunity and a threat for the GCC countries in the future. The effects vary
widely across the region. The challenges faced by gas-rich Qatar are substantially different
than those faced by the other gas-short GCC countries. We expect shale gas will cause no major
disruption to the GCC before 2020, but the scenario could be fundamentally different in the
longer term.
The biggest threat for Qatar is major
unconventional gas developments
and overinvestments in LNG capacity,
potentially resulting in pressures on the
price of natural gas in all major markets.
Qatar faces potential threats. Qatar, the world’s largest exporter of LNG with a capacity of 77
MTPA, enjoys long-term gas contracts linked to the price of oil. However, the contract structure
is coming under pressure as customers, encouraged by new natural gas supplies, are looking
to end the indexation to oil prices and seek shorter, more flexible agreements. For example,
Asian customers, currently representing almost half of Qatar’s LNG exports and paying a price
premium of $5 to $7 per MMbtu, are trying to secure natural gas supplies from North America.
As mentioned above, Japan and India have already signed agreements with North America
linked to the Henry Hub price. In Europe, where the gas supply is more diversified and prices
more competitive, Qatar is facing the same issues. For instance, the United Kingdom recently
signed a contract with Qatar for only five years.
The biggest threat for Qatar in the medium to long term is major unconventional gas develop-
ments and overinvestments in LNG capacity, potentially resulting in overcapacity and pressures
on the price of natural gas in all major markets. Future shale gas exports from North America,
and shale gas developments in China and other markets, are still uncertain and are not likely
to have any relevant effect on Qatar until after 2020. The realization of all the announced LNG
projects could result in an oversupply in 2015-2020, creating favorable demand-side economics.
4
Source: U.S. Energy Information Administration
7. 7Shale Gas: Threat or Opportunity for the GCC?
However, project delays and cancellations are likely because the uncertainty in the natural
gas market is making buyers increasingly reluctant to sign the long-term contracts that have
traditionally underpinned large LNG projects and is resulting in more difficulties in achieving
the final investment decision.
The Qatar National Development Strategy is based on an LNG price (cost, insurance, and
freight) of $9.60 per MMBtu. In 2012, the average price of Qatari LNG was about 40 percent
higher, with substantial differences across markets. (For example, Japanese LNG prices
averaged $17 per MMBtu while European prices have been more restrained at $11 per MMBtu.)
A drop in the price of LNG would directly impact Qatari GDP and net government savings. For
example, a price drop of 30 percent to $6.90 per MMBtu would cause a reduction of Qatar’s
GDP by about $100 billion over a five-year time frame and a decrease in net government
savings from 5.7 to 2 percent of GDP.
Saudi Arabia—which accounts for more
than 600 Tcf of unconventional gas
resources—is highly committed to
exploiting its large shale gas potential
to meet its increasing gas demand.
The other GCC countries could benefit from shale gas but also face threats of natural gas
substitution for oil. GCC countries other than Qatar face natural gas shortages as a result of
sustained growth in domestic energy consumption. The UAE and Kuwait have recently turned
into net importers of natural gas, and Saudi Arabia is burning an increasing amount of oil to
meet its growing domestic demand. Both the UAE and Kuwait already import LNG to cover
their summer peaks but are planning more investments in LNG facilities to cover growing
domestic demand. For example, in the UAE, Mubadala Petroleum and International Petroleum
Investment Company recently established a joint venture, Emirates LNG, to develop a new
LNG regasification facility on the UAE’s east coast to supply 1.2 billion cubic feet of natural gas
per day from the international market. In parallel, GCC countries are aggressively pursuing
exploration and development of new non-associated gas fields, in addition to other sources
of energy such as nuclear and solar. The costs of all new energy sources are substantially higher
than those of domestic conventional gas.
Gas-short GCC countries could benefit from shale gas in two ways: exploiting the domestic
unconventional gas potential and profiting from better demand-side economics on natural
gas imports. All GCC countries except Qatar are assessing their indigenous shale gas
potential. Preliminary estimates indicate that unconventional gas resources in the GCC
could amount to more than 700 Tcf, with Saudi Arabia accounting for more than 600 Tcf.
Saudi Arabia is highly committed to exploring its large shale gas potential because of the
unsustainability of the growing domestic consumption of oil that could affect its export
capacity and the country’s wealthfare in the longer term. It is still too early to predict the
role of unconventional gas in the energy mix of the GCC countries, but this should become
clearer within the next three to five years.
8. 8Shale Gas: Threat or Opportunity for the GCC?
Impact of Shale Gas on the Chemical
and Petrochemical Markets
We now turn to a review of the impact of shale gas on the global chemical and petrochemical
industries and then zoom in on the implications for global polymer producers. Finally, we
conclude with the implications for GCC players.
How shale gas will affect the global chemical and petrochemical industries
The renaissance of the North American chemical industry, driven by shale gas, will affect the
global market in the short to medium term. The U.S. chemical industry is taking advantage of
liquid-rich shale gas, shifting from naphtha to lighter natural gas liquids feedstock, and planning
to increase its capacity substantially. If all announced expansion plans are realized, more than
10 MTPA of ethylene production will be added in the United States by 2020, an increase of
40 percent over current capacity. Part of the increase in North American production will most likely
foster some reshoring of manufacturing activities, while the rest will be directed to the export
market, creating challenges for the less cost-effective producers. If announced capacity is
realized, North America will become a major exporter of chemicals alongside the GCC by 2020.
Aggressive plans to expand ethane crackers in the United States are likely to determine
overcapacity in the market by 2020 and lead to the potential shutdown of less competitive
production in Europe and Asia. This situation would deteriorate significantly if China drives for
self-sufficiency. In the longer term, new shale gas developments outside North America could
further affect the chemical industry.
The U.S. ethane-cracking expansions benefit from cheap feedstock availability, similar to the
Middle East in the past few decades. The Middle East will remain the most competitive on a
global scale, thanks to the advantageously priced feedstock, supported by world-scale assets
(see figure 4).
Note: MT is million tons. MMBtu is million British thermal units.
Source: A.T. Kearney analysis
Figure 4
The Middle East is the most competitive for ethane-cracking expansions
Ethylene cash cost—regional feedstock platforms
($ per MT of ethylene produced)
Brazil:
ethanol
European Union:
naphtha
China:
coal
–50
Ethylene cash
cost range based
on past three
years of feed-
stock fluctuation
(maximum,
average, and
minimum value)
Middle East:
ethane
Ethane:
$0.75-$2.50
per MMBtu
Ethane:
$3.50-$13.10
per MMBtu
Coal:
$500-$800
per MT
Ethanol:
$1-$2
per gallon
Naphtha:
$730-$1,070
per MT
United States:
ethane
1,400
1,200
1,000
800
600
400
200
0
9. 9Shale Gas: Threat or Opportunity for the GCC?
Source: A.T. Kearney analysis
Figure 5
The world’s ethylene capacity is expected to rise well above demand
Global ethylene capacity vs. demand
(in million metric tons)
2012 2018e
(unconstrained planned
capacity build-out)
149
131
209
159
Capacity
Demand
However, this will impact profitability when supply outpaces demand as a result of increasing
global ethylene overcapacity by 2018. Assuming all announced ethane-cracking capacities will
be fully built out, capacities will far exceed demand, putting tremendous pressure on operating
rates and profitability (see figure 5).
Implications for global polymer producers
Expected polymer capacity expansions will drive a global battle for polyethylene demand.
The North American investments in ethane-cracking capacity will likely result in subsequent
ethylene derivative investments, in line with the current North American ethylene derivative
profile. Ethylene producers will want to capture the value further downstream with a more
integrated asset base. These downstream investments are a low-risk approach for an ethane-
cracking player to secure off-take while protecting revenue streams from downstream
conversion steps. Polymer investments are likely, as the resins can be much more easily exported
globally as containerized products, as opposed to many other derivative options. In addition,
logistic costs associated with exporting ethylene are high when compared to distribution costs
for polymer resins, making downstream conversion of ethylene at the cracking site even more
likely. Although most North American ethane cracking investors have not yet finalized or
announced their downstream plans, we believe several polyethylene capacity projects will
emerge from the planned ethane-cracking investments.
North America is already a net exporter of polyethylene resins. Assuming a full build-out of the
announced cracking capacity, polyethylene exports from North America are going to explode
(see figure 6 on page 10). Even in a conservative 50 percent build-out scenario, North America
will still become a much stronger exporter of polyethylene resins and will compete head to
head with the Middle East for market share (see figure 7 on page 10).
10. 10Shale Gas: Threat or Opportunity for the GCC?
Source: A.T. Kearney analysis
Figure 6
Armed with a supply of ethylene, North America is poised for explosive polyethylene
export growth
North American ethylene derivative supply
(% of installed capacity)
North American polyethylene exports
(million metric tons)
4%
5%
6%
12%
16%
Polyethylene
57%
Ethylene
oxide
Ethylene
dichloride
Alpha olefins
Ethylbenzene
Others
2012 2018e
(50 percent
build-out)
2018e
(unconstrained
build-out)
3.2
7.4
12.1
Sources: GlobalData; A.T. Kearney analysis
Figure 7
North America is expected to rise among the ranks of polyethylene resin exporters
Global demand and supply for polyethylene
(unconstrained capacity build-out scenario, million metric tons)
Demand Supply
2012 2018e
4 4 5 6
2012 2018e
13 11
15 15
2012 2018e
2
11
3
15
2012 2018e
30
27
40
35
2012 2018e
15
19 17
28
South America
North America
Europe (including Russia)
Middle East and Africa
Asia Pacific
11. 11Shale Gas: Threat or Opportunity for the GCC?
Implications for GCC players
The U.S. shale gas revolution provides both risks and opportunities for the GCC’s petro-
chemical sector:
• The U.S. ethane cracking expansion will result in increased polyethylene overcapacity and
shortages of propylene, butadiene, and aromatics. Opportunities are emerging in liquid
cracking and its derivatives.
• Opportunities will emerge for GCC players to convert propane exports to propylene.
• GCC players will face fierce competition in the traditional polymer export markets and will
need to reassess their sales and supply chain strategies.
• Many international players’ high debt and low margins create attractive potential for
mergers and acquisitions, provided vertical integration and complementarity of assets,
intellectual property, and skills are high.
Let’s take a deeper look at each.
Increasedpolyethyleneovercapacityandshortagesofpropylene,butadiene,andaromatics
Europe’s ethylene supply is largely naphtha-based, which also results in a good supply of
propylene, butadiene, and aromatics (see figure 8). The planned U.S. petrochemical invest-
ments are driven by the availability of shale gas, and thus ethylene capacity expansions are
fully ethane-based, which results in very limited secondary yields.
The cheap ethylene supply from strong expansion of U.S. ethane cracking will put severe
pressure on European and Asian naphtha cracking capacities, pushing for accelerated closure
of older, less integrated assets. As a result, a significant shortage of propylene, butadiene, and
aromatics will emerge, the size of which is difficult to predict. Even if liquid cracking on its own
were not to take a significant hit, still-older and smaller-scale naphtha-based infrastructure is
likely to be impacted by new, world-scale, and possibly more flexible, assets.
Note: Percentages may not resolve due to rounding.
Source: A.T. Kearney analysis
Figure 8
Ethane crackers yield much more ethylene than naphtha crackers
Steam cracker yields by type of feedstock
(in weight %)
Naphtha cracker Ethane cracker
Ethylene (C2)
Propylene (C3)
Butadiene (C4)
Aromatics
Other82%
13%
3%1%
1%
15%
30%
38%
13% 5%
12. 12Shale Gas: Threat or Opportunity for the GCC?
This opens opportunities for GCC players because liquid cracking will become more attractive
for several reasons. First, the global shortage will drive up prices for butadiene and aromatics.
Second, U.S. competition will be low because of a lack of heavier yields from the ethane-cracking
capacity additions. Third, liquid cracking opens opportunities in higher-value specialty chemicals,
currently less available in the Middle East region. Fourth, technology improvements and larger
scale of new assets allow greater economic returns for new investments compared to older
petrochemical capacities in Europe or Asia. And last but not least, the potential for creating jobs
increases, which fits well with local government agendas.
However, liquid cracking comes with two main risks that potential investors should carefully
assess. First, feedstock competition is continuously increasing from internal demand for fuels in
the GCC. Public policies that are geared to reduce fuel-based electricity generation and stimulate
fuel efficiency in transport and process and manufacturing industries will still surely benefit the
GCC petrochemical industry in that respect. Second, liquid cracking yields substantial additional
ethylene, for which margins will be low and finding demand will be difficult. Vertical integration of
assets, flexibility of feedstock, and selective use of on-purpose technologies, especially to find
alternatives for ethylene output, will be a must for any solid business case.
Opportunities to convert propane exports to propylene
U.S. shale gas is wet as dry plays are uneconomical at current prices. This has resulted in sub-
stantial propane capacity expansion plans that will help the United States become a net exporter
of propane (see figure 9). The GCC has been a major exporter of propane, driven by Saudi Arabia
and, more recently, Qatar and the UAE. A global surplus of propane will emerge that can only
be absorbed by the petrochemical sector, as other demand for propane is much less elastic.
Note: GCC is the Gulf Cooperation Council.
Source: A.T. Kearney analysis
Figure 9
Middle East propane exports will face strong competition from North American suppliers
GCC propane exports
('000 barrels per day)
Estimated U.S. propane export
capacity
('000 barrels per day)CAGR
United Arab
Emirates
Kuwait
Qatar
Saudi
Arabia
2,000
1,500
1,000
500
0
2007 2008 2009 2010 2011 2012
2,000
1,500
1,000
500
0
2013 2014 2015 2016 2017 2018
5%
20%
8%
−12%
13. 13Shale Gas: Threat or Opportunity for the GCC?
As global propane prices will come under pressure and propylene will likely be short from
reduced output from naphtha cracking, an opportunity emerges to convert propane to
propylene. GCC players could create significant value through this conversion and further
reduce their dependency on less attractive propane exports.
Fierce competition in the traditional polymer export markets
The biggest impact for polyethylene producers can be expected in European and Chinese
markets, the traditional export markets for many GCC players. Polyethylene exports from
the Middle East to Europe will likely see strong competition from U.S. exports, particularly in
light of the ongoing free trade agreement discussions between the United States and the
European Union. China, on the other hand, is driving for self-sufficiency and is unlikely to
regain previous manufacturing double-digit growth thanks to rapidly increasing labor costs.
In the next few years, there will still be substantial exports to China, but in the longer term,
GCC petrochemical exports will likely require some redirection of volumes to other markets.
A strong sales and distribution presence in emerging markets such as Southeast Asia, the
India subcontinent, or Africa will help absorb the impact of a reduced market share in
China and Europe.
A need to shift the sales footprint of many GCC polyethylene players can be expected as
competition becomes fiercer. New trade patterns will emerge eventually, but a period of higher
uncertainty and variability is likely to set in. Sales and associated supply-chain strategies will
need to be reassessed. Players with a specialty portfolio are more protected in the battle for
lower costs and better service levels, but in a commoditizing market, these advantages could
be more short-lived than anticipated. A strong, flexible, and cost-conscious sales and marketing
organization is a must for any serious polymer player aiming to sell out its assets.
Attractive potential for mergers and acquisitions
The U.S. shale gas investments in petrochemical conversion are resulting in much higher debt
on the balance sheets. When such investments are not 100 percent backed by downstream
off-take, these debts are open and put investors at high risk. There are definite opportunities
for cash-rich GCC players to support these investments and acquire a complementary asset
base from international players that need debt restructuring or fresh cash injections for
capacity expansions.
Capacity expansions are also putting tremendous pressure on players with older, less efficient
asset bases, particularly when feedstock is secured from liquid cracking. This can result in some
players offering good intellectual property at discounted value.
These opportunities will not last long, and now is the time to move. Waiting a few more years
will increase the equity value of potential targets, especially if they have a strong U.S. base,
while debts will have been refinanced or old assets discontinued to clean up the balance
sheets. To capitalize on these opportunities, vertical integration of the asset base can secure
high asset utilization both upstream and downstream. This would be particularly attractive
when assets, intellectual property, and skillsets are complementary. A downstream player with
established global sales and marketing presence could be the perfect catalyst for an upstream
player looking to substantially expand its petrochemical activities. When the strategic planning
function is strong and centrally steered, the impact on the top and bottom line can be
especially positive.
14. 14Shale Gas: Threat or Opportunity for the GCC?
Authors
Gaël Rouilloux, partner, Paris
gael.rouilloux@atkearney.com
Wim Van Asch, principal, Middle East
wim.vanasch@atkearney.com
Ada Perniceni, principal, Middle East
ada.perniceni@atkearney.com
Preparing for the Future
GCC countries and organizations operating in the region would be wise to prepare for the major
challenges that lie ahead.
Forward-thinking national oil companies and petrochemical players should make four moves:
• Improve their cost positions and competitiveness of domestic productions
• Strengthen sales and marketing capabilities and the ability to quickly react to demand shifts
and changes in buyers’ behavior
• Reassess the downstream integration strategy in light of possible future scenarios and the
priorities for increasing economic development and employment opportunities
• Rethink the international strategy to secure market access, benefit from cheap hydrocarbon
resources, and build a balanced portfolio
All GCC countries should become less energy-intensive, freeing resources to fuel further
industrial development. Those that are short on natural gas should focus on gas exploration
and development of economic conventional and unconventional gas resources while fostering
the development of a regional natural gas market.
As the shale gas revolution continues, addressing the risks and capitalizing on the emerging
opportunities will require a global mindset and timely action.
Additional contacts, Middle East
For further information, please contact the authors or any of the following: Jose Alberich, Kurt Oswald,
Dan Starta, Gaël Rouilloux, Saji Sam, Ubaldo Tripoli, Ojas Wadivkar, or Bartek Znojek.
