Gas shortage delays development at Yanbu and Jubail

27 June 2008
While Riyadh’s plans for the industrial cities at Jubail and Yanbu appear viable in the long term, problems securing the necessary gas feedstock are slowing the pace of expansion.

Uncertainty over future access to gas feedstock is forcing a slowdown in the pace of development at Jubail II, the planned extension to Saudi Arabia’s industrial port city on the Gulf coast. While the long-term viability of the scheme and its Red Sea sister project, Yanbu II, remains solidly based, there are serious questions over how soon major proposed industrial plants at the two sites can be brought into operation.

Disappointing results from Saudi efforts to discover and open up major gas reserves, and surging demand from domestic consumers, have forced the kingdom to look abroad for the extra gas it needs to satisfy its industrial development ambitions, and securing new import supplies is not easy.

Securing feedstock

Adequate gas supply has been arranged for the Marafiq power generation programme and to meet the feedstock needs of Jubail II petrochemicals projects - the vast bulk of the industrial development planned for the site - that are already under construction or have committed financing. However, for most of the other industrial projects envisaged, gas feedstock is not yet secured.

“This is leading private sector petrochemicals investors with plans to develop plants at Jubail II to witness delays,” says John Sfakianakis, chief economist at local bank Sabb. “I know that with the case of Jubail II in particular, there are some issues that directly relate to the feedstock availability, so the expansion is moving ahead more slowly than anticipated.”

Sfakianakis says the problem is not so urgent for the Yanbu II development as it was always due to be implemented over a longer timescale.

Qatar, the most obvious external source of gas supply, has already said it does not want to commit itself to further increases in export capacity before 2010.

Meanwhile, Riyadh would be reluctant to base the development of key strategic industries on the purchase of gas from Iran, because relations with the Islamic Republic are not at their best. Iraq might be able to help out, but that is a distant prospect.

Other challenges include rising engineering, procurement and construction (EPC) costs, and attempts to encourage investment in petrochemicals activities.

Until securing gas feedstock became a concern, the second-phase expansion of existing industrial hubs at Yanbu and Jubail had been good. New businesses were able to build on the success of cities that were already key centres of downstream hydrocarbons processing and manufacturing. The Royal Commission for Jubail & Yanbu (RCJY), set up to lead the cities’ development, is more than three decades old, and has a track record of delivering a steady flow of projects over time.

Each city has already developed complementary industrial activities and support services. This has helped to attract investors and stimulate private sector interest in the two new extensions - dubbed Jubail II and Yanbu II.

The decision to embark on these, in paral-lel with Riyadh’s programme of city creation, and strengthened by the commitment to a new export refinery in each location, confirms the continuing importance of Jubail and Yanbu to Saudi Arabia’s industrial strategy.

Direct funding

It is also a gesture of confidence in the RCJY development model, with the commission directly funding much of the basic infrastructure, providing the framework into which private investors or parastatal commercial ventures such as Saudi Basic Industries Corporation (Sabic) can install their projects.

Jubail II and Yanbu II may lack the futuristic, environmentally aware glamour of the new King Abdullah Economic City, but they are well placed to match it in the development of economic activity.

Already, the RCJY has launched a steady programme of project proposals, tenders and contract awards, laying out the basic infrastructure for the new extension zones.

In the first phase of development, neither city grew at the pace that had been envisaged. But that was more a reflection of their over-ambitious plans than an indication of shortcomings in project design and implementation. This time, it seems that gas feedstock is the limiting factor.

One advantage that the second-phase extensions have over the original cities is that they are starting from a more favourable position: both are settled into the wider business and infrastructure framework of the Saudi economy.

When Yanbu was first developed, the ind-ustrial city was for modern practical purposes a ‘greenfield’ project on a site that was geographically cut off from key elements of the existing Saudi infrastructure, despite the presence of a historic Red Sea port town. Power, water, desalination and telecommunications provision had to be installed independently of the national networks, which did not then reach into this part of the northern Hejaz.

Jubail Industrial City was developed in a less-isolated location, adjacent to the old port town of Jubail, itself only an hour’s drive north of Dammam. Even so, utility and transport needs were so far in excess of the limited existing local capacity that huge investment had to be made in new installations.

Yanbu II and Jubail II are being developed in a much less isolated way. After two decades of isolation in terms of utility provision, Yanbu Industrial City is now linked to Saudi Arabia’s western region grid through a 380kV interconnector, and to the area water network servicing the old city of Yanbu al-Bahr and a nearby Saline Water Conversion Corporation (SWCC) desalination plant.

Still, further investment in utility provision has been one of the key priorities for the RCJY in development work for the second-phase city extensions, with the Power & Water Utility Company for Jubail & Yanbu (Marafiq) playing a key role. The utility firm is owned by the RCJY, Saudi Aramco, Sabic, the Public Investment Fund and private investors,

In 2004, it launched a tender for an independent power and desalination project to service Jubail and the surrounding regions of the Eastern Province.

Building infrastructure

A consortium of Brussels-based Suez Energy International (SEI), regional investment banking firm Gulf Investment Corporation and the local Arabian Company for Water & Power Projects was selected to develop the 2,500MW, 900,000-cubic-metre-a-day (cm/d) project, which reached financial close in June 2007 and is due for commissioning in 2009, under a build-own-operate-transfer contract.

Marafiq has already issued a request for proposals for its second independent water and power project (IWPP) to meet the growing needs at Yanbu, and 12 potential developers, including Suez, have been prequalified. The others are the local Acwa Power with the US’ Kepco, the UK’s International Power with Abu Dhabi-based Oasis International Power, Japan’s Marubeni, Mitsubishi, Mitsui and Sumitomo Corporation, Malaysia’s Powertek Berhad and Tenaga Nasional Berhad, Singapore-based Sembcorp Utilities, Spain’s Union Fenosa, Abu Dhabi National Energy Company (Taqa) and the local National Power Company.

The new plant, fuelled by heavy oil with Arabian Light crude as a back-up, will produce 1,700MW of power and 150,000 cm/d of water. Marafiq will take a 40 per cent stake. HSBC is financial consultant for the scheme and the bidding deadline is 27 August.

Meanwhile, Hadi Haider Contracting has already been contracted to upgrade the local power transmission network to meet the needs of Yanbu II.

Management of the $3.8bn expansion of civil infrastructure to service Jubail II, which lies inland, 3 kilometres southwest of the existing industrial zone, has been entrusted to the US’ Bechtel, which has already played a major role in the development of the existing industrial city.

A seawater intake structure and pumping facility, more than 33km of new roads and 30km of pipelines for gas and feedstock, and a water distribution system, have been installed, while the King Fahd Industrial Port’s capacity to handle petrochemicals traffic has been expanded. The Saudi railway network is also being extended to Jubail.

Development of the Jubail II infrastructure is being staged over four phases, stretching to 2015. By the end of 2007, the first phase was almost complete. Much of the work has been carried out by local contractors, including Saudi Binladin Group and Al-Dossary.

Development of the industries that will use Jubail’s expanded infrastructure is under way. But this is substantially in the hands of the private sector, and the pace at which projects are implemented therefore depends on business and economic realities including gas availability.

The worldwide rise in engineering costs is also leading commercial investors to think carefully before making final commitments. But news that Saudi Aramco and its joint venture partners, France’s Total and the US’ Conoco-Phillips, have committed to the Jubail and Yanbu export refineries is encouraging for other potential investors.

Partnership delays

Saudi International Petrochemical Company (Sipchem) may not now seek financing for its proposed $7-10bn olefins and derivatives complex - not only a key element of Jubail II but also likely to be Saudi Arabia’s largest ever private sector project - until 2009, because of delays in finalising joint venture partnership arrangements and changes to the configuration of the plant. Originally, it had hoped to tie up funding this year.

However, work on Sipchem’s $1.4bn acetyls complex is under way and due for completion in early 2009, while the National Petrochemical Industrialization Company, a subsidiary of National Industrialization Company (Tasnee), is developing two polyethylene plants at Jubail, due to open this year.

Jubail is already the site of the Middle East’s first butanediol plant, managed by Gulf Advanced Chemical Company, an affiliate of Sipchem. The 75,000-tonne-a-year (t/y) plant came on stream in December 2005.

At Yanbu, industrial development is also moving forward. One of the cornerstone projects in the expansion of the Red Sea industrial city is the complex of Yanbu National Petrochemical Company (Yansab), a Sabic subsidiary, which will have total production capacity of more than 4 million t/y for ethylene, propy-lene, polyethylene, polypropylene, ethylene glycol, benzene, toluene, xylene, butene 1 and butene 2.

By the end of 2007, construction work was about two-thirds complete, and engineering work on some facilities had been finished. “The complex is expected to start commissioning in the second half of this year,” said Mutlaq al-Morished, chairman of Yansab, in January.

As Saudi Arabia seeks to diversify the employment and industrial base of Jubail and Yanbu, investment in manpower, transport and education are all key complements to the major heavy industrial projects. But without more feedstock availability, industrial growth may happen much more slowly than RCJY would like.

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