KUWAIT - Petrochemical Industry.

The petrochemical sector in Kuwait is making good profit and is expanding. It was losing money from November 1997, when the $1.93 billion Equate olefins complex came on full stream, until end-1999. Since then, Equate has been making major profits. Expansions beyond Equate are Olefins II and a styrene venture.

Petrochemical Industries Co. (PIC), a unit of state-owned Kuwait Petroleum Corp. (KPC), is optimistic about the prospects for this decade. It believes that a robust petrochemical industry should help diversify Kuwait's sources of income. Equate and the other petrochemical ventures would form a low-cost base for exports to Europe and Asia, with Asian demand expected to grow rapidly. This would give Kuwait a strong competitive downstream position overseas.

PIC's partner in Equate is Dow Chemical Co. of the US, the world's largest chemical producer. Dow will triple its Middle East production capacity over the next four years with completion of joint venture projects in Kuwait and Oman.

Dow's new CEO Andrew Liveris made his first trip abroad in early March 2005 - not to Europe or Asia, but to Kuwait - to attend the groundbreaking ceremony for the Olefins II and styrene projects in the Shuaiba industrial zone. With a seismic shift taking place in the global petrochemical industry to areas of low-cost production, Dow is intent on expanding its Middle East presence. MEED on April 22 quoted Liveris as saying: "Beyond the two new joint ventures [in Kuwait and Oman], Dow is on the lookout for new opportunities. Out there in the next five-seven years are a couple of plays we will go after. When you are a 15 million-lb producer of polyethylene, you need a plant or two a year to keep up with growth and to maintain your number one position. You also need low-cost feedstock and that is only available in certain parts of the world".

Access to low-cost and stable energy has become key for the global chemicals industry. In Dow's case, roughly half of its $40,000m-a-year business is directly dependent on oil and gas. As a result, feedstock price volatility has an immediate impact on its bottom line, a point underlined in Dow's results for the last quarter of 2004. While its net earnings were up 10% to $1,026m in the fourth quarter, driven by a 30% jump in sales, the performance would have been considerably better had it not been for a 50% rise in energy and feedstock prices. High naphtha and natural gas prices in the US and Europe were to blame, not the long-term ethane contracts enjoyed by Dow's JV in Kuwait, Equate Petrochemical Co. (Equate).

Strong world demand for petrochemicals, coupled with tight supply, has driven prices up over the last two years, providing welcome respite for the industry. Liveris maintains the upturn has to be placed in context, saying: "In 2003 and 2004, we recovered $3,400m of margin of the $9,000m lost between 1995 and 2002. As good a year as 2004 was, this industry still has some way to go to get back the margin loss. There is now some tailwind behind us, as there is no question that not enough capacity has been built, especially in 2000 and 2001".

One of Dow's growth priorities is to invest in emerging markets, with the main focus being on the Middle East for its feedstock advantage, and China for its size. "The expansion will be in the Middle East and the Far East. But that does not mean abandoning the US or Europe: you will always need production for domestic demand but not for export".

Dow has established two JV production companies in the Middle East - Equate in Kuwait and Arabian Chemical Co. (ACC) in Saudi Arabia - as well as a regional office in Dubai. Dow is expanding its Kuwait presence, implementing the worldscale Olefins II project and the 450,000 tons/year ethyl benzene/styrene plant, both in partnership with its Equate shareholder, PIC. Further south, in partnership with Oman Oil Co. (OOC), it has formed Oman Petrochemical Industries Corp. (OPIC), which is planning a worldscale olefins complex at Sohar. The three projects are evidence that, despite the growing ability of a regional giant like Saudi Basic Industries Corp. (SABIC) to undertake big petrochemical ventures on their own, there is still considerable demand for foreign partners in the region.

Dow is helping PIC extend its geographical reach, having formed last July two 50:50 JVs with the Kuwaiti firm: MEGlobal, based in London, produces and sells ethylene glycol (EG); Zurich-based Equipolymers has a similar role for polyethylene terephthalate (PET) resins and purified terephthalic acid (PTA). Liveris said: "Our relationship with PIC had developed to the point that we could put in place a global business model for EG and PET, which would take advantage of a low-cost asset base in Kuwait and Dow's access to technology and markets. There may be more [similar type of arrangements]. I do not close the door on any new opportunity that creates a winning, game-changing proposition. Dow is 108 years old for a reason - it has been willing to change".

Having technology licences and production assets across much of the chemical chain, Dow's regional focus is not just on bulk chemicals. A projected surge in Middle East refining capacity provides opportunities for its proprietary technologies. Raising its downstream petrochemical interests is also a priority.

Nor is PIC a newcomer to the petrochemical business. PIC and the Kuwait Investment Office (KIO) have equity in chemical ventures in various parts of the world, including plants in Tunisia, China, Turkey and Bahrain, plus a stake in Hoechst of Germany which has merged with Rhone-Poulenc of France and their entity Aventis has become a world life sciences leader (see overseas ventures in next week's DT 24).

Because of limited supplies of natural gas in the offing (see Gas Market Trends of this week), the $3,000m Olefins II complex currently under construction at Shuaiba is likely to be the last in Kuwait unless new feedstock sources can be found. KPC's head Hani Hussain has said of the petrochemicals sector: "We in KPC are very happy with Equate; it is well run and produces good results. It's a successful venture which we in the oil industry can learn from. The problem for us in Kuwait is the availability of gas and especially ethane, so we are looking at using other feedstocks and other countries where gas is more plentiful".