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KUWAIT - Sa'd Al-Shuwaib & PIC.

It is 40 years since Petrochemical Industries Co. (PIC) marked its presence in the region with the opening of the Middle East's first fertiliser complex in the Shua'iba industrial zone. Since then it has not looked back, cementing its position as Kuwait's pre-eminent industrial firm. Now, with its home base secured, it is looking to international as well as local markets for its future expansion plans and Shuwaib, acting CEO of KPC as well as CEO of PIC (see OMT), has prepared the grounds for the company's external expansions.

MEED on June 15 quoted Shuwaib as saying: "We want to build more capacity both in and outside Kuwait in order to meet our targets and objectives and provide a good return on investment to our main shareholder KPC". PIC's targets have been set by KPC as part of its 2020 vision to boost Kuwait's oil and gas production capacity both locally and internationally.

Adding value through petrochemicals is a key strand of the strategy and, according to MEED, "PIC has been given carte blanche to explore for investment opportunities outside the state", which give access to plentiful feedstock and are closer to the end customer. MEED said Shuwaib "will not be drawn on the precise targets and potential international investments partly because most of PIC's future projects will involve publicly listed companies", such as Dow Chemical of the US and local public investment vehicles al-Qurain Petrochemical Industries Co. (QPIC) and Boubyan Petrochemical Co.

PIC is looking at developing up to three polymer production projects in the Middle East in addition to the Olefins-III complex in Kuwait (see down24KuwtPetchmJun11-07). Two of the three ventures are understood to be in Egypt and Qatar, while a third could be in Oman. All three will be dependent on PIC getting a competitively priced feedstock allocation.

Whether the Olefins III project goes ahead or not will depend largely on the state's natural gas requirements for power generation. Shuwaib said: "Essentially what we look for when making these investments is the availability of cheap feedstock and the chance to get a good return on investment. One thing is for sure, however. We won't be doing international projects without partners".

The obvious candidate for partnering is Dow Chemical. Shuwaib said: "The Dow alliance is excellent. It has been very successful so far, and we hope we can continue to work together in the future".

Since PIC and Down formed the Equate Petrochemical Co. as a JV to develop Olefins-I in the early 1990s, the relationship has gone from strength to strength: PIC has benefited from Dow's technical, contracting and marketing expertise; Dow has gained access to low-cost feedstock and the opportunity to develop its Gulf market knowledge. The bond was further strengthened in 2004 when the two companies set up international JVs, MEGlobal and Equipolymers, for the manufacturing and marketing of ethylene glycol, polyethylene terephthalate resins and purified teraphthalic acid.

Under the deal, PIC bought existing Dow production assets in Canada, Germany and Italy to give it a foothold in the marketing and production of the speciality resins. This gave PIC a wealth of experience.

PIC has proved it can work alone if it needs to. The associated Olefins-II aromatics complex at Shu'aiba, which is under construction by a JV of Tecnimont of Italy and SK Engineering & Construction of South Korea, is being developed by Kuwait Aromatics Co., in which PIC and QPIC are the main shareholders. Almost uniquely for a state-sponsored venture in Kuwait, it is project-financed, with financial close due soon.

The aromatics plant underscores PIC's commitment to maximising the value chain, in this case using excess naphtha feedstock from the Mina Abdullah refinery operated by KNPC. Shuwaib said: "We had this naphtha and wanted to utilise it. Dow is not involved in the aromatics field so we decided to go it alone with QPIC. As there is a lot of liquidity in the market, and it is a profitable business, we opted to go to the banks for finance. The benzene produced from the plant will be delivered to the styrene plant, which is again being built in a joint venture with Dow".

The aromatics JV has provided PIC with valuable experience of project development and non-ethane-based petrochemicals production. The experience is expected to be put to use further afield.

In 2005, PIC with Kuwait Petroleum International (KPI) signed an MoU with Beijing to develop a refinery and integrated petrochemicals complex in the southern Chinese province of Guangdong (see gmt25KwtTransJun18-07).

Part of KPC's 2020 vision is for its subsidiaries to concentrate solely on their core businesses. For PIC, this means the sell-off of its fertiliser plants, which, although profitable, are no longer central to its plans. Shuwaib said: "We are moving in a new direction towards base chemicals. And so fertiliser, we feel, is no longer the core product it once was".

PIC's ammonia, ammonia sulphate and urea facilities are to be sold off by end-2007, pending a final investment decision by the SPC. The sale of these assets will add to PIC's cash pile, boosting its position to expand locally and overseas.

Like its counterparts across the Gulf, PIC has been hit by a sharp rise in construction costs, ranging from 20% to 100%, and has had to adopt some innovative contracting strategies. The solution, according to Shuwaib, is to try to develop the capabilities of local contractors so that they can provide greater competition for the established players.

The other option, and one used on the Olefins-II complex, is to procure long-lead items directly to avoid material price increases and delays. Shuwaib forecast that 2008 will bring a downturn for the industry as more capacity will come on stream - especially in the Middle East - and the global economy will slow. However, MEED said Shuwaib was "optimistic that PIC can ride out the expected trough". He said: "Good and professionally run companies can pass through a crisis unscathed. We feel we are a good company and we hope that we can remain in the top quarter-percentile when the crunch comes". In this highly competitive battle for PIC, concessions may have to be made on product slate and operating margins. Having a mutually beneficial alliance with Dow, however, PIC has solid foundations on which to build.

Sami al-Rushaid as head of KNPC and Jamal al-Nouri as head of KPC's international marketing have the difficult task of deciding whether or not Kuwait should go ahead with the 615,000 b/d al-Zour refining project. If they decide against it, they should recommend alternatives (see down23KuwtRefJun4-07), which is an equally difficult task.

Nouri, who until August 2004 used to be head of KPI in charge of KPC's overseas downstream investments (see down25KwtTransJun18-07 & gmt25KwtTransJun18-07), has long experience in the field and should be a major help to Rushaid concerning this project.

KNPC is to restart the prequalification process for the main engineering, procurement and construction (EPC) packages for the project. Interested international companies have until July 3 to submit their applications, with a shortlist of prequalifiers to be announced by the end of the summer. Tenders for each of the main process packages are due to be issued soon thereafter.

KNPC originally intended to prequalify companies only for the fourth and fifth process packages, covering marine works and tank farms, which it recently decided to split. But after a meeting of contractors in Houston at the end of May, KNPC opted to extend the prequalification process to all five main packages including the offsites and utilities and process contracts 1 and 2. It is unclear how many contractors are likely to respond to the invitation.

Several firms pulled out of the original tendering process before and after prequalification in 2006, claiming they would have to take on too much financial risk. However, changes to the contracting strategy, such as awarding the contracts on a cost-reimbursable rather than lump-sum basis, are likely to result in greater contractor interest than before.

Yet, the total cost is the biggest challenge. Rushaid and Nouri will have to explain why KNPC should go ahead with a project which contractors say would cost more than $17 bn. The alternatives to a refinery proposed so far have not been tested in Kuwait or in the neighbouring countries.
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Publication:APS Review Downstream Trends
Date:Jun 25, 2007
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