SAUDI ARABIA - The Saudi Petrochemicals Sector; Big Expansions Ahead.

The Saudi Arabian Basic Industries Corp. (SABIC), owned 70% by the state and 30% by Saudi and other GCC investors, is one of the largest producers of petrochemicals and the most profitable firm of its kind in the world. Before it bought the Dutch firm DSM Petrochemicals in 2002 it was the world's No. 22. The acquisition raised its ethylene output by 1.2m tons to 6.9m t/y and gave it a key to the EU. In 2007, it grew further with a $11.6 bn acquisition of GE Plastics of the US. Expanding at home, it is on the lookout for major acquisitions or JVs on both sides of Suez.

The state-owned Saudi Aramco has entered the petrochemicals sector in a big way through integrated refining/chemical ventures in partnership with world leaders. It has such JVs in Saudi Arabia, including a mega-project to cost up to $26 bn, and in other parts of the world.

Addressing the Arab Economic Forum in Beirut on May 4, 2007, Petroleum and Mineral Resources Minister of Ali al-Na'imi said Saudi Arabia aimed to become the No. 3 petrochemicals producer by 2015. The kingdom is now ranked No. 10 in production of petroleum derivatives. Saudi petrochemical production has grown from 2m t/y in 1970, when this sector was born with the establishment of the Master Gas System (MGS), the Royal Commission for Jubail and Yanbu' and SABIC, to almost 60m t/y now. He said: "This is ample testimony that the kingdom has achieved impressive growth in this industry over the past 30 years...with a share of about 8% of global production". He said the kingdom will to hit the 100m t/y mark by 2015 with an annual growth rate of about 12%, adding: "This would make the kingdom the third largest petrochemicals producer in the world".

In the early 1980s, investments in this sector were below $500m. This grew to $20 bn in 2000. Na'imi said: "We can safely say that the increase in investments between 2005 and 2012 will total $70 bn". The kingdom has massive reserves of oil, natural gas and mining ores, such as bauxite, phosphate and others. Saudi Arabia's petroleum reserves exceed 265 bn barrels, or 25% of the world's proven reserves, and more than 245 TCF of natural gas. He said: "The kingdom will continue to be the largest and the most important oil producer and exporter during the 21st century, just as it has been the past half-century".

Saudi Aramco's two main integrated refining/chemical JVs the kingdom - PetroRabigh with Sumitomo Corp on the Red Sea coast and Ras Tanura with Dow Chemical on the Gulf coast - will alone involve up to $40 bn in investment to produce over 300 different chemical items which will be introduced to the Middle East for the first time (see down14SaudiRefOct1-07). These and other integrated refining/chemical JVs in the kingdom and abroad (see overseas investments in OMT No. 16), will make the state-owned Saudi NOC one of the biggest producers of plastics in the world.

Creating New Jobs & Diversifying Products: Until now, the kingdom has concentrated on basic chemicals, such as ammonia and methanol, and differentiated and forward commodities including polyethylene (PE), polypropylene (PP) and ethylene glycol (EG). From a commercial perspective, this makes perfect sense as base chemical production maximises the kingdom's considerable feedstock advantage - ethane, the feedstock of choice, is supplied at $0.75/m BTU, compared with $6-8/m BTU in other parts of the world. But these and SABIC's venture do little to alleviate the kingdom's chronic unemployment burden. Riyadh says basic petrochemical production employs about 0.5 people per $1m of investment, while manufacturing of plastic resin employs 1.4 people and plastic component will create jobs for 13.8 people for the same amount.

The government has been fearful of becoming too reliant on PE and PP production. Of the 3m t/y-plus of PP capacity due on stream over the next five years, just 10% will be converted into derivatives. The remainder will be mainly exported. In the current era of under-supply, this is a lucrative business.

Many of the new-generation, ethane-based, world-scale complexes in Saudi Arabia can make sales/profits ratios in excess of 80%. But when the crunch comes - as it inevitably will - relying on a limited product range can be problematic. Most Saudi polyolefins production is geared for the Chinese market, which has been the main driver of demand for the sector. However, most industry analysts say there will be a substantial incremental surplus in both PE and PP from 2009, as Asian demand growth slows and Beijing brings more domestic capacity on stream.

The aim now is to diversifying the product portfolio away from polymer production and spread risk. Volker Trautz, CEO of the European giant Basell, the world's largest polyolefins producer, says: "We have been in a unique situation. For the first time, India and China have been able to consume vast amounts of petrochemicals. We have had a good three years, but from 2009 onwards it very much depends on the global economy. Middle East products will have to find another home beyond the Chinese market".

Non-allocated supplies of ethane are exhausted. Any future production complex will need to use a heavier feedstock mix, either NGLs, such as propane and butane, or naphtha. By encouraging the use of non-ethane feedstocks, Riyadh can maximise all available feedstock resources and encourage production of a more diversified product portfolio.

Reliance on gas has resulted in an unbalanced mix of basic petrochemicals, which greatly influences the product portfolio. But while the move away from basic petrochemicals makes sense, it is resisted by producers, especially in the private sector. The problem is that each production process dilutes the cash cost advantage in feedstock to such an extent that by the fourth or fifth process, the advantage is negligible. Additionally, the producer is left with an item much harder and costlier to ship and sell to the end-user.

The original main shareholder on the $9 bn Saudi Kayan Petrochemical Complex, the local Project Management & Development (PMD), spent almost five years in vain trying to find a foreign partner for its amines-focused project. In the end, SABIC stepped in to leave PMD with a minority stake. The $8 bn Phase-3 Saudi International Petrochemical Co. (Sipchem) olefins and derivatives complex in Jubail could face the same fate. Despite the firm last year co-signing the feedstock allocation letter with a number of international chemical firms, a JV accord is yet to be reached. Riyadh has set a deadline for an agreement or Sipchem will have its feedstock allocation - the last given in Saudi Arabia - taken away.

Saudi Aramco has got Dow and Sumitomo to invest in the Ras Tanura and PetroRabigh mega-JVs. But in both cases, feedstock price and supply have been guaranteed by Saudi Aramco. MEED recently quoted a local producer as saying: "I also suspect that both foreign partners have a very high gearing towards the more lucrative upstream production".

In the case of Saudi Kayan, which will introduce the region's first amines and polycarbonate production, SABIC was is bolstered by its $11.6 bn acquisition of GE Plastics of the US. Buying such downstream manufacturing assets has enabled it to maximise synergies between its in-kingdom production, especially of polycarbonates from Saudi Kayan, and GE Plastic's expertise and marketing reach. But the private Saudi sector will have a tough time to make downstream chemical and plastic production work.