Jubail and Yanbu: Taking advantage of the downturn

25 January 2009
The kingdom is capitalising on falling raw materials and contracting prices by forging ahead with the next phase of expansion at the industrial cities of Jubail and Yanbu.

The cities of Jubail and Yanbu are at the heart of Saudi Arabia’s industrialisation programme. Built from scratch on empty plots of land more than 25 years ago, the cities have become the cornerstones of Riyadh’s strategy to develop a strong industrial sector that capitalises on the kingdom’s petroleum resources and provides job opportunities for generations to come.

Home to more than 230 industries, it is their sheer size that sets them apart from other industrial cities in Saudi Arabia. In 1983, Jubail Industrial City was listed in the Guinness Book of Records as the largest engineering and construction project ever attempted.

The twin industrial complexes were founded in response to the kingdom’s second five-year development plan, launched in 1975, which called for a diversification of the country’s economy away from its reliance on oil exports, and recommended the geographical concentration of infrastructure to support new hydrocarbons-processing industries.

That year, to set up the cities, the government established the Royal Commission for Jubail & Yanbu (RCJY), an autonomous agency with a board of directors and a chairman who report to the Council of Ministers (cabinet). The commission’s remit was to encourage the development of globally competitive basic, downstream and light industries in Jubail and Yanbu, by providing all the physical and social infrastructure needed for companies to settle there.

Attracting investment

The cities were built in strategic locations to enable the kingdom’s natural resources to be used to produce value-added products for domestic and export markets.

Jubail lies on Saudi Arabia’s eastern coast, close to the kingdom’s vast oil fields and perfectly placed to service Asian import markets. Yanbu is on the Red Sea coast, within easy reach of the Suez Canal, which provides access to European markets. It is also well positioned to exploit the western region’s abundant deposits of iron, copper and other metallic ores.

A crucial feature of the Jubail and Yanbu strategy was that the industries would use gas produced during oil extraction that until then had been flared off. To facilitate this, state energy company Saudi Aramco built a system to gather, process and distribute the associated gas to the industrial city of Jubail, as well as a 1,170-kilometre-long double trans-peninsular pipeline to take oil and gas to the Yanbu industrial complex and its nearby port for export. The pipeline was completed in 1982 and the first industries started commercial operations shortly after.

Traditionally, foreign companies and individuals had been prevented from owning land in Saudi Arabia, but international corporations were encouraged to lease developed land in Jubail and Yanbu from RCJY and set up shop, thereby driving inward investment and technology transfer into the kingdom.

Companies investing in primary, ethane and methane-based industries were offered 30-year fixed and renewable leases to operate in the industrial cities. Secondary industries that used feedstock produced by the primary industries, such as plastics and synthetic polymers manufacturers, were granted 20-year leases, while support and light industries, such as packaging plants, were given 10-year leases.

The physical and social infrastructure provided by the RCJY, in addition to access to feedstocks and fuel, included seawater cooling systems, drinking water and wastewater networks, transport and telecommunication links, as well as housing, hospitals and schools.

“The set-up time when you come to Jubail and Yanbu is fast,” says Mubarak Abdullah al-Mubarak, director general, planning and investment, at RCJY. “We are talking about a developed area, where everything is nearby and services are geared towards you.

“The community is very nice for employees. There are hospitals, there is education, everything is thought of in a very organised manner. This reduces the set-up cost for industry."

The government-funded infrastructure investment in Jubail and Yanbu, which over the years has totalled $25bn, has prompted the creation of more than 230 industries that have invested $94bn in the cities and created 107,000 jobs.

Jubail now spans 55 square kilometres. Companies located there include Saudi Aramco, the UK/Dutch Shell Group, US energy major Chevron Phillips and the local Arabian Petrochemical Company (Petrokemya). Yanbu, meanwhile, about one-third the size of its sister city, is home to local titanium-dioxide producer Cristal and Norwegian paint-maker Jotun, as well as many companies affiliated to petrochemicals producer Saudi Basic Industries Corporation (Sabic) and Saudi Aramco. Combined, the cities house more than 150,000 residents.

As the larger of the two industrial hubs, Jubail’s contribution to the Saudi economy is the greatest. About 70 per cent of Saudi Arabia’s non-petroleum exports originate in Jubail, accounting for 11.5 per cent of the kingdom’s gross domestic product. About half the country’s total foreign direct investment has been spent in Jubail and the city produces 7 per cent of the world’s petrochemicals.

The success of these cities has been such that in 2006, the RCJY launched Jubail 2 and Yanbu 2, which are being built adjacent to the existing sites. Jubail 2 will double the size of Jubail Industrial City. Built over four stages, the cost of setting up the infrastructure is estimated at $3.7bn. The original date for completion was 2024, but the project has been accelerated in light of the perceived demand for industrial space in the region, and the infrastructure works will now be finished in 2015.

The RCJY expects to attract $56bn in investment largely from international petrochemicals companies, which equates to a 15-fold return on the government’s input.

Seizing opportunity

The RCJY is investing $3.2bn in setting up the infrastructure for Yanbu 2, and industries are expected to spend $30.6bn on establishing manufacturing plants in the city.

Jubail 2 is estimated to provide direct employment for 55,000 people and the project will add a second industrial area capable of housing 22 new basic petrochemicals and smelting plants, as well as areas to accommodate secondary and support industries.

The scheme includes expansion of the ports, feedstock and seawater distribution systems, along with the installation of new drinking water and wastewater networks. Highways to connect the original Jubail with the new city are being built and an industrial railway will link the complex with the commercial port. One of the main developments so far announced for Jubail 2 is for a 400,000-barrel-a-day refinery, which is scheduled to start up in 2013, owned by Saudi Aramco and France’s Total.

Despite the global economic crisis and the slump in world petrochemicals prices, the RCJY intends to press ahead with installing the infrastructure for the two new cities.

“Saudi Arabia is going to use the financial downturn to its advantage,” says George Dinic, programme manager at the US’ Bechtel, the consultant for Jubail 2. “It has increased the budget on projects for the kingdom this year because it sees this as a good opportunity to reap the benefit of cheaper materials and better availability of construction companies and workers. Jubail 2 is not slowing down; in fact we are increasing substantially this year."

Some contracts previously awarded are being resubmitted to capitalise on falling raw materials and contracting prices.

The first phase of the Jubail 2 project is set to be completed in March, but there is likely to be a delay before industries move in because of problems with ethane availability.

The key attraction for international firms investing in Jubail and Yanbu has always been access to low-cost energy supplies. Ethane, when available, costs about $0.75 a million BTUs, compared with $7-9 a million BTUs elsewhere in the world.

However, the interest in setting up plants in the industrial cities has been so great that Saudi Aramco is now struggling to provide the necessary ethane feedstock. Without a secure gas allocation, companies are understandably reluctant to commit to new projects.

But Al-Mubarak says investors should not ignore the alternative feedstocks available. “We should not think of feedstock as only ethane; there are also liquefied petroleum gases, such as propane, butane and natural gasoline ,” he explains. “Naphtha is also available in the country, along with other products."

The cost of these products is based on international prices, but with the handling and shipping costs removed, industries still gain a reduction of about 30 per cent by being based in Saudi Arabia.

The RCJY is keen for more of the intermediate feedstocks produced at Jubail and Yanbu to be used on site. Currently, many of the basic and secondary petrochemicals are exported and reimported later as further refined products.

“We have made a study on the existing products that are manufactured at Jubail and Yanbu,” says Al-Mubarak. “And we concluded it would be economical to have more downstream industries that use the output of primary industries. We came up with about eight clusters, which is about 24-28 products that could be made from existing industries."

Given the already colossal size of Jubail and Yanbu, it is remarkable to think that the full potential of the cities has still to be harnessed.

With mounting interest and increasing government support for adding as much value as possible to petroleum products domestically, the cities are set to lead the country’s industrialisation agenda for many years to come, with their contribution to the national economy growing inexorably.

Jubail and Yanbu’s influence on the global petrochemicals market will also continue to rise as their product portfolios increase, and with the RCJY’s ambitions, competing regions should not dismiss the possibility of a further expansion to the cities.

“Strategically speaking, there could be demand for Jubail 3,” says Al-Mubarak. “But strategies change with time. Jubail 2 will be enough for the next 15 years."

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