The Red Sea port of Rabigh once served as the headquarters for the southern army of Sharif Hussain bin Ali Hussain, Emir of Mecca and self-styled King of the Arabs, in the revolt against the Ottoman Empire. But that was back in 1916 and the Ottomans and the emir are long gone.

Today, this small coastal town is better known as the site of the kingdom's largest refinery. And in four years' time, Rabigh will have another claim to fame, when it produces the first petrochemical products for Saudi Aramco. The $8,000 million expansion of the Rabigh refinery represents the Saudi oil giant's biggest investment in a downstream project to date. Not only will it see the upgrade of the existing 400,000-barrel-a-day (b/d) refinery, but also its integration into a world-scale petrochemicals complex and a major industrial zone. In early July, one of the kingdom's most ambitious schemes took a major step forward with the award of four key contracts worth more than $1,500 million.

At first glance, Aramco's plans might not seem that unusual. But the Rabigh scheme represents a major departure for the Saudi oil giant. It marks Aramco's first foray into petrochemicals. It is the first integrated project of its kind in the Middle East, and as such is expected to set a trend for other refiners seeking to improve their economies of scale. And it is the first downstream joint venture between Aramco and a foreign company since the mid-1980s.

Aramco's move into petrochemicals is driven largely by commercial considerations. Refining is, even at the best of times, a low-margin business. By introducing a petrochemical capability, refiners can benefit from synergies on feedstock and shared utilities, reducing operating costs and increasing efficiencies. The case is even more compelling for Saudi refineries since Aramco is the kingdom's sole source of cheap oil and gas feedstock.

'The bottom line is that integrated refinery and petrochemical projects can be a very profitable thing and achieve better returns,' says a London-based analyst.

An upgrade of Rabigh has been under consideration for some time. Originally commissioned in 1989 by a joint venture of the local General Petroleum & Minerals Organisation (Petromin) - now part of Aramco - and the Greek company Petrola Hellas, which was owned by the late Greek billionaire John Latsis, Rabigh has long been considered the kingdom's least sophisticated and most inefficient refinery.

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Aramco bought out its Greek partner in 1997. After years of study, it finally took the decision in 2003 to optimise the refinery by introducing a petrochemicals capability at the site. The problem was that although Aramco had the necessary resources to undertake a straight refinery upgrade, it lacked the experience on the petrochemicals side. As a result, Aramco began the search for a foreign partner, approaching a select band of oil and petrochemical companies. In May 2004, Japan's Sumitomo Chemical Company was selected to take a 50 per cent stake in a new joint venture, signing a memorandum of understanding (MoU) with Aramco.

The roles of the partners are clearly defined. In addition to providing the project site, Aramco will ensure the availability of feedstock at highly competitive prices under a long-term agreement. To achieve this, Aramco plans to convert one of the pipelines transporting oil from the Eastern Province into a gas line. Sumitomo, which recorded sales of more than $12,000 million last year, will license proprietary technologies for some of the ethylene and propylene-based downstream units, and - most importantly - will provide marketing and distribution expertise.

A key advantage of having Sumitomo on board as a 50 per cent shareholder is that the project was eligible for funding from the Japan Bank for International Co-operation (JBIC). The Japanese government-funded institutio