The cancellation of the $6.4 billion Al Karaana olefins complex planned in Qatar as an 80:20 joint venture of Qatar Petroleum and Shell will "significantly change" the global supply/demand balance for monoethylene glycol (MEG) in 2018-2025, Thomas Keel, director global EO & Derivatives at IHS Chemical, says in the consultants' IHS Chemical 2015 World Analysis - Ethylene Oxide/Ethylene Glycol report.

On the whole, the cancellation offers a more optimistic profit environment for the EO-MEG industry, Keel adds.

The Al-Karaana complex, as he points out, was to include two MEG units, due to go on stream in 2018 with a total capacity of 1.5 million t/y. Prior to the cancellation, it appeared that the combination of the Qatari jv, along with several new low-cost shale gas-fed EO-MEG units in North America and a rapid build-up of coal-to-MEG (CTM) capacity in China would have the potential to create a "very large oversupply of MEG relative to demand, leading to lower prices."

Thus, even if the outlook for the upstream portion of the complex was positive, anticipation of lower margins for MEG was almost certainly a contributor to the companies' conclusion that the project was "commercially unfeasible."

Keel notes that Shell is the number two global producer of both EO and MEG and also enjoys a leading position as a vendor of technology licenses in the business. As a result, the company's leadership was compelled to consider the impact on its business overall, which would have keenly felt the impact of a multi-year margin "trough" caused by oversupply.

Considering all available information, IHS expects at least three new, world-scale EO-MEG units to be built in the US by 2019. Including in the equation CTM capacity from China, along with other miscellaneous investments and the previously assumed Al-Karaana project, the market would have added approximately 12 million t/y of MEG capacity by 2020, even though demand is projected to grow by only 8-9 million t in the same timeframe.

The net result, Keel says, would have been a sharp reduction of around 80% in global capacity utilization. Historically, he adds, "such a low rate has correlated with very poor margins for MEG producers, especially those based on naphtha."

Removal of the Shell-Qatari project from the mix, the analysis concludes, would bring global MEG supply nearer to balance with the projected 2020 demand, and result in a more reasonable industry operating rate closer to 84-85%.