Jamal Jamil Malaikah, president and chief operating officer of Saudi Arabia’s National Petrochemical Industrial Company (Natpet), has warned that bankruptcies and lower investment will be inevitable if the Saudi government follows through with plans to raise the ethane price to the petrochemicals sector.

Saudi Arabia’s existing crackers are still charged an ethane price of $0.75 a million BTUs, but the government has been mulling an increase of up to $1.50 a million BTUs. Saudi International Petrochemical Company (Sipchem) was the last producer to receive an ethane allocation from the government in 2006.

However, Riyadh froze the gas price for 2012, but scrapped the fixed-term contracts that had been in place. This means the Oil Ministry can change the price as needed, which allows it far more flexibility than in the past. It is still unclear when an announcement will be made.

Speaking at MEED’s Middle East Petrochemicals 2013 conference in Dubai on 19 March, Malaikah said the lack of ethane feedstock posed a serious challenge to Saudi petrochemical growth, but that price increases were not the solution.

“We will see reduced growth in petrochemicals production, lower profits. It is not just going to affect the petrochemicals market, but fertilisers, cement and power. It will have a negative impact on the Saudi stock market too,” Malaikah said.

“We will see increased costs to the conversion industry. There will be bankruptcies and lower investment. Will the current foreign investment stay in Saudi Arabia, let alone new investment? And what will happen to the government’s plan to invest downstream. This was all done on the assumption of low prices.”

The alternative feedstock is propane, but this means Saudi producers lose their advantage over global competitors. “Propane in the US in 2012 was 23 per cent lower than in Saudi Arabia, even after discounts,” said Malaikah.

Along with abundant feedstock from newly developed shale gas resources, US based petrochemical firms have several advantages over Saudi producers, such as lower capital costs, a larger skilled labour pool, its proximity to markets and the availability infrastructure.

In Saudi Arabia, the price of propane feedstock has been tied to naphtha prices since the 1970s when oil hovered around $10 a barrel. “Today, oil is $100 a barrel, so how can you maintain that formula? We are immediately uncompetitive against the US.”

Malaikah calls for the current ethane price to remain and a new pricing mechanism for propane, based on global prices.

“I sympathise with the government. There is not enough gas, but the strategy of increasing the ethane price is just shooting yourself in the foot.”