Catalyst for industry

26 May 2010

Abu Dhabi plans for economic growth hinge on the development of a petrochemicals industry to drive investment in converting industries

When Abu Dhabi unveiled its vision for economic development in September 2007, it set itself the target of generating 64 per cent of its gross domestic product (GDP) from the non-oil sector by 2030.

Given that on average 60 per cent of Abu Dhabi’s annual GDP over the past 10 years has been generated by hydrocarbons production, with little more than 10 per cent from manufacturing industries, the emirate faces a huge challenge to try to move away from its reliance on oil and gas revenues.

Key fact

Abu Dhabi aims to develop 64 per cent of gross domestic product from the non-oil sector by 2030

Source: MEED

So far, of the Gulf states, only Saudi Arabia has managed to cut its economic dependence on oil and gas to less than 50 per cent of the country’s GDP.

To achieve its target, Abu Dhabi placed developing its petrochemicals sector at the heart of the vision. But while Saudi Basic Industries Corporation (Sabic), Saudi Arabia’s flagship producer, has been making petrochemicals since the 1970s, Abu Dhabi’s sole petrochemicals firm, Abu Dhabi Polymers Company (Borouge) only commissioned its first plant in 2001.

Abu Dhabi has a lot of catching up to do. The state producer has been expanding ever since the start-up of its 450,000 tonne a year (t/y) Borouge 1 polyethylene plant in 2001, boosting its capacity to 580,000 t/y in 2005. It is currently in the process of commissioning Borouge 2, and is tendering contracts for Borouge 3, which it hopes to award in the third quarter of 2010.

Borouge 2 will be able to produce 540,000 t/y of polyethylene and 800,000 t/y of polypropylene, while Borouge 3 will add another 2.5 million t/y of capacity by 2014. Once these schemes have been completed, the firm’s total petrochemicals production capacity will be more than 4.5 million t/y. And a fourth phase of production is being planned. Sources close to the company tell MEED a feasibility study will be undertaken in 2011.

But Saudi Arabia, by comparison, produced more than 10 million t/y of ethylene-based basic plastics in 2008, before accounting for propylene-based products and other petrochemicals. The kingdom is also in the midst of a major capacity expansion programme, moving away from the production of basic petrochemicals from ethane to a more diversified product slate based on naphtha.

Abu Dhabi is also following this path. Its plans for developing the petrochemicals sector hinge on the use of naphtha feedstock, as natural gas is in limited supply in the emirate due to rising demand from the utility and industrial sectors.

As naphtha is more expensive than gas, producers need to build huge plants to capture economies of scale and maintain their competitive advantage, and where possible integrate them with refineries to cut costs. German chemicals giant BASF says the integration of refining and downstream petrochemicals operations at its Ludwigshafen site saves up to E500m ($615m) a year.

Saudi Arabia is building its world-scale petrochemicals projects through joint ventures with several private and government-run firms.

But Abu Dhabi has taken a different approach and is building up its industry using just one state entity: Abu Dhabi National Chemicals Company (Chemaweyaat).

Chemaweyaat was first launched in March 2008, when Abu Dhabi Investment Council (Adic) signed a memorandum of understanding with state-owned International Petroleum Investment Company (Ipic) and Austria’s Borealis to develop a new chemicals city.

Changing plans

Then, in February 2009, an emiri decree was issued for the formation of the company to be owned by Adic and Ipic, each with a 40 per cent stake, while the remaining share would go to state oil and gas giant Abu Dhabi National Oil Company (Adnoc).

The initial plans were for Chemaweyaat to develop the basic infrastructure to support 12 petrochemicals complexes at the new Khalifa Port and Industrial Zone at Taweelah in northern Abu Dhabi itself, and then partner with other firms to build the actual production facilities in a series of joint ventures. However, it now says only the first company, Tacaamol, will be based at Taweelah with the remaining facilities to be built in a 70-square-kilometre plot in the emirate’s western region.

Tacaamol will develop one of the world’s largest petrochemicals complexes, able to produce about 6.2 million t/y of petrochemicals from 6 million t/y of naphtha. It is projected to cost about $10bn to construct.

A second company, Al-Chemeya will build two giant propane dehydrogenation units to produce more than 1 million t/y of propylene. Consultants and analysts have estimated that the entire Chemaweyaat project could cost more than $70bn in total, and would involve the construction of nine cracker complexes, two propane dehydrogenation units and two aromatics complexes. To achieve all this by 2025 will require a new complex to be completed every 20 months.

The project is the foundation stone of Abu Dhabi’s planned economic growth, says one senior Chemaweyaat executive. The idea is the project will act as a catalyst for further industrial development, and private investors are being encouraged to establish manufacturing facilities to convert the petrochemicals produced by Chemaweyaat into intermediate plastics and finished goods.

“Even though these plants are fed by oil and gas, they are still a major driver for Abu Dhabi’s economic non-oil growth plans,” says an industry executive.

But development of the project has been slow. The global financial crisis of 2008-2009 reportedly led the company to commission a new feasibility study for Tacaamol in the first quarter of 2010. Sources close to the project now expect Tacaamol to issue tenders for front-end engineering and design (Feed) contracts for the complex by the end of the second quarter, with engineering, procurement and construction (EPC) contracts to be tendered in 2011 or 2012.

Chemaweyaat is not the only state-owned company set up in 2007 to support the Vision 2030 plans with its eye on the petrochemicals industry. Abu Dhabi Basic Industries Corporation (Adbic) is also playing a role in developing the emirate’s downstream sector. Its Abu Dhabi Polymers Park subsidiary is planning an industrial zone comprising 60-65 plots, where local and international investors can build plastics conversion plants.

The company is aiming to produce 1.4 million t/y of plastic goods at the park by 2015, generating $4bn of investment in the process. But Adbic’s plans extend further than this.

Another player

Industry sources in talks with Adbic tell MEED it also wants to build a petrochemicals production complex in the emirate on a similar scale to the Tacaamol scheme.

Progress stalled in early 2010 as the company did not want to impede the progress of the Chemaweyaat project by tendering contracts at the same time.

In May, Adbic’s chairman, Hussain al-Nowais, confirmed to local and international journalists that the company is planning a petrochemicals complex, but did not give a time line for the development of the scheme.

However, analysts believe that a combination of tight credit markets, falling demand for petrochemicals and a glut of new capacity in recent years could cause both Adbic and Chemaweyaat to reconsider their plans for separate petrochemicals complexes.

“It really doesn’t make sense to build two big plants in the same place,” says one UK-based analyst. “And I think Abu Dhabi knows that.”

The two state-firms are already in discussions over potential areas of cooperation.

“Where the left hand wasn’t talking to the right in the past, that is happening now,” says a senior executive at one Abu Dhabi petrochemicals company. “Now, for obvious reasons, there is a lot more coordination.”

Sources close to Chemaweyaat say the new feasibility studies conducted in early 2010 recommended a new partner be brought in to help develop the complex and the time-line originally planned for the project to be lengthened.

As a result, Adbic and Chemaweyaat are now at an advanced stage of talks over the possibility of the former working on one of the latter’s projects, possibly with a European petrochemicals firm joining as well. One of the senior executives involved in discussions on the Tacaamol scheme says this would be a good reason for Ipic to reduce its stake in the company.

“It would mean spreading the risk of the project around a bit more, reducing the financing burden on Ipic in particular, and at the same time making sure that everyone gets to take part,” he says.

But if the emirate is to hit its ambitious targets for non-oil economic growth, the scheme needs to move ahead, and quickly. Furthermore, engineering contractors working in the country warn that the huge number of major developments under way in the emirate could cause prices for labour and materials to rise.

Adnoc has awarded almost $40bn of EPC contracts for work on a series of oil and gas developments in the emirate since early 2009, capturing savings of up to 20 per cent from prices seen in 2008. But it is only a matter of time before costs start rising again.

Abu Dhabi might well be prepared to pursue economic diversification at any cost, but international partners will have their eye firmly on the bottom line.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications