Plant closures, revival of select key assets in Europe, shale gas discoveries in USA and feedstock shortages in the Middle East are subtly rebalancing the competitive landscape in the global petrochemicals industry. According to Gulf projects tracker MEED Projects, over US$9 bln worth of engineering, procurement and construction (EPC) contracts were awarded in the petrochemicals sector in 2008. This is about half the US$18.2 bln worth awarded in 2007, and lower than the US$22.2 bln awarded in 2006. A combination of rising EPC costs and shortage of ethane feedstock allocations has caused the Middle Eastern industry to slow down and regional producers to re-evaluate their positions. The issues likely to hit Middle East petrochemicals projects are funding uncertainty, supply/ demand uncertainty and feedstock shortages. Supply of low-cost feedstock ethane is limited. Projects are for the first time being planned on heavier feeds to increase competitiveness, as well as for feedstock integration. Shortage of ethane feedstock has been most intense in Saudi Arabia, where stricter allocations of ethane have resulted in the kingdom coming close to running out of feedstock resulting in short-term implications like disruptions to existing production. As per ICIS, there is a risk of drawing hasty conclusions about the long-term consequences of this shift of competitive advantage, particularly as the ethane shortage has taken place in parallel with the shale-gas boom. OPEC has reduced Saudi Arabia's oil-production quota in order to help manage weaker global demand for crude, resulting in the country's output being pegged at around 8.4 mln bpd. However, it needs to produce 10 mln bpd (it is capable of going up to 12 mln bpd) to provide enough ethane for crackers to run at 100%. Petrochemical producers can seek a top-up from non-associated gas-field operators, but the cost of extraction from non-associated fields may be as much as US$2/MBTU with the price for ethane fixed at around 75 cents/MBTU. Crackers are, therefore, being forced to run below their final capacity capabilities. This shortage of ethane feedstock in several Middle East countries is forcing a strategic rethink. In the past few years, the US has moved from natural gas shortage, to an estimated 100 years of supply of the key petrochemical feedstock, mainly from shale gas discoveries and the ability to exploit these reserves. Abundant gas supplies and the resulting lower prices could change the scenario in the global petrochemical industry. Cheap natural gas will make US chemicals companies cost competitive. The emergence of shale gas has helped reduce US gas prices to the point where the country's ethane-based cracker operators have become a great deal more competitive. Currently, US ethylene costs are around US$400-450/ton, down from US$700/ton a few years ago. Saudi ethylene costs are US$150/ton, but could rise to US$300-350/ton on the limited gas availability. Several shale-gas projects are being pursued throughout the world, including in China and Eastern Europe and China has enormous further potential in coal-to-olefins. In late 2008, Europe's petrochemical producers had to react quickly to the unprecedented slump in volumes, as per ICIS. Many plants were idled into early 2009, but by end of 2009, demand started to see a strong recovery and operators began to bring plants back on stream. H1-2010 has proved more buoyant than expected, specific materials have been in tight supply as operators experienced difficulties restarting units. All this has kept prices firm and margins high. In Q2-10, contract ethylene cracker margins in Europe reached their highest level since Q4-08, and most unusually, propylene contracts rose above ethylene for the first time. Many players are convinced the year will bring solid financial results, and are fairly optimistic for 2011, in view of a sustained pickup in demand. The downturn has accelerated Europe's rationalization efforts-around 7 mln tpa of capacity closure has been recorded since 2008 in Europe's petrochemicals base. Much of this capacity has been in commodity polymers, such as polyethylene (PE), polypropylene (PP), polystyrene (PS) and polyethylene terephthalate (PET). But closures have also been seen in polyamide and its intermediates, a range of solvents, methylmethacrylate (MMA) and acrylic resins and acetic acid and acetate derivatives. Plant closures have been accompanied in several instances by bringing replacement capacity on stream, as producers seek to rejuvenate their asset base and tap into higher-growth market segments with higher-value-added products. This is regarded as essential if Europe is to retain its competitiveness against material potentially coming to the region from the new wave of plant start-ups in the Middle East. Not only are the new units larger and more efficient, the product slate is oriented to higher-technology products such as wire and cable grades, pipe and automotive applications. A focus on innovation and high technical content, together with an improved infrastructure and asset base in Europe, is expected to secure a sustainable future for Europe's petrochemical players. All these factors will move the Middle East region away from being a huge exporter of commodity materials to Asia and involve more sophisticated planning, marketing and supply-chain management. How this will affect Europe is just one question that needs to be answered. For many years, the region has lived in the shadow of a potential wave of exports from the Middle East, which has been staved off year after year by rapid demand growth in Asia, and especially China.