In a televised address in January this year, Khalid al-Falih, chief executive officer of the state-owned hydrocarbons giant Saudi Aramco, announced the company plans to spend about $120bn over the next five to six years developing its oil, gas and petrochemicals businesses.
It showed Saudi Arabia’s keenness to reinvest its hydrocarbon revenues in developing the kingdom’s industrial base, already demonstrated by the numerous multi-billion dollar projects under way in the country.
Major industrial schemes require suppliers to deliver vast quantities of raw materials quickly and economically.
And it was with this in mind that Luxembourg-based ArcelorMittal, the world’s largest steel manufacturer, decided to join forces with local contractor, Bin Jarallah Group, to build a 600,000 tonne a year (t/y) mill to produce steel tubes and pipes at the Jubail Industrial City on the kingdom’s Gulf coast.
Key fact: Construction costs on ArcelorMittal’s seamless tube mill have been cut by 16 per cent as a result of falling materials prices
“The mill will supply products for the oil and gas industry” says ArcelorMittal spokesman Lynn Robbroeckx. “The focus will be on markets in the Middle East and Africa region.”
The exceptional economic circumstances had some impact on planning, but the project is under way
Lynn Robbroeckx, ArcelorMittal spokesman
Two-thirds of the mill’s capacity will be used to manufacture oil-country tubular goods (OCTG), for which Saudi Aramco will be the main customer. OCTGs comprise pipe and tube products used in the petroleum industry, such as drill pipes, pipe casings and oil pipes. The remaining capacity will be used to manufacture line pipes in sizes ranging from 4-14 inches. The mill will be fed with billets and slabs produced by ArcelorMittal steel plants located around the world.
The initial joint venture agreement to build the mill was signed by ArcelorMittal with Al Tanmiah, a subsidiary of Bin Jarallah Group, in February 2007.
Under the deal, ArcelorMittal owns 51 per cent share in the company with the Bin Jarallah Group holding the remaining 49 per cent. ArcelorMittal holds management and operation rights for the facility. Construction of the mill began later than initially planned due to the global economic crisis and start-up is now set for late 2011 or early 2012 – two years later than scheduled.
“The exceptional economic circumstances had some impact on planning, but the project is under way,” says Robbroeckx.
“Work on the site has already started and all major process equipment and steel structurals have been ordered. Cold commissioning is expected in early 2012.”
Germany’s SMS Meer was selected as the technology provider by ArcelorMittal and is supplying the facility with its patented PQF (premium quality finishing) seamless steel plant. The centre of the mill will be equipped with an individual roll drive and an all-hydraulic roll adjustment system.
The plant also includes a pipe wall thickness measuring system.
Italian company Tenova LOI Italiampianti is providing the rotary hearth furnace for the hot mill, a heat treating line that consists of one hardening furnace and quench system, and a tempering furnace and related material handling equipment.
Switzerland-based ABB won the contract to supply electrical infrastructure and equipment to the project including a 115kV substation. ABB will also provide an automation system to manage orders and storage issues at the plant.
Despite being the largest steel company in the world, ArcelorMittal has to date had a low-key presence in the Middle East. In its 2009 annual report, the firm said just 135 employees were based in the Middle East out of a total workforce of more than 280,000.
Gaining a foothold in the region with the Jubail seamless tube mill project gives ArcelorMittal an opportunity to break into an important growing market.
“This project gives us a strategic opportunity to enter the Middle East, and in particular, Saudi Arabia’s thriving market,” said Sudhir Maheshwari, a member of ArcelorMittal’s group executive committee, when the joint venture agreement was signed in 2007.
“The plant’s location provides access to international sea routes as well as proximity to energy sources. The Jubail project will allow us to strengthen our relationship with Saudi Aramco, who will be one of the key customers of the mill.”
Bin Jarallah Group was chosen by ArcelorMittal as its joint venture partner based on its experience as a local projects contractor in the kingdom. The company has been in operation since 1976 and now employs 8,000 people in offices spread across Saudi Arabia.
Although the project suffered delays due to the global financial crisis, a positive result of the downturn has been that raw materials and construction costs for the mill are now much lower. The original budget estimates varied between $800m to $1bn. But the estimated construction cost has now been lowered to $670m, representing a saving of more than 16 per cent.
The project has secured a loan of $160m from the Saudi Industrial Development Fund (SIDF), and the rest of the financing is being sourced from local banks including Banque Saudi Fransi, Riyadh Bank and Samba.
“Financing is available and there is no problem about money being available for a good project,” says a banking source.
“This was also true even in the bad times. Saudi Arabia is a vibrant market and banks are quite keen and able finance. Any industrial project that makes sense see banks lining up and providing finance.”
The $160m loan is the maximum amount the SIDF provides for a project in the kingdom.
“Steel is a major requirement in Saudi Arabia, so it is not surprising the project secured the maximum amount from the SIDF,” says the banking source.
Once complete, the Jubail seamless steel tube mill will be only the second plant of its kind in the GCC region. The other facility is also located in Saudi Arabia. The Jubail Energy Services Company’s (Jesco’s) 500,000 t/y mill started commercial production in 2009.
Like ArcelorMittal’s scheme, it produces OCTG products and line pipes for the oil and gas industry. Jesco is a subsidiary of the Saudi Arabian state-controlled Industrialisation & Energy Services Company (Taqa). The mill used rival technology from Italian metals industry equipment provider Danieli and was funded on a bilateral basis with no syndicate involved.
If pipes are available at the right price from a mill in Jubail, then that is where they [contractors] will buy it
Oil and gas contractor
While the technology and funding chosen for the two schemes are different, the end-user is still the same – Jesco sells the bulk of its production to Aramco. As a state-owned entreprise, it could perhaps expect to be the preferred supplier to Aramco. Fortunately for the Arcelor-Mittal-managed mill, demand is such, for the time-being at least, that output from both plants will be easily absorbed by the energy giant.
“Anything to do with flat products, there is already a shortage,” says a steel industry source. “While demand is there, it won’t be a problem.”
International contracting firms executing engineering, procurement and construction contracts on Aramco projects tend to source high-end materials from companies in their home countries that are on Aramco’s preferred suppliers list. But, with the cost savings that locally produced goods offer, this should not prevent ArcelorMittal from breaking into the market.
“Contractors think with their pockets first,” says an oil and gas contractor. “If pipes are available at the right price from a mill in Jubail, then that is where they will buy them from. Loyalty comes after profits.”
And, since production is limited in the region, the Jubail plant will also be able to supply projects elsewhere in the Middle East and North African region.
“Even if the oil demand is not growing like before, the demand for OCTGs will grow as you need more and more tubes per barrel to be explored,” says Dietger Schroers, regional director for SMS Meer.
“The oil and gas industries are still the most vital industry sectors in the region.
“And investment in the oil and gas sector both in exploration and processing in the Gulf region not only creates its own demand, but also encourages massive investments in infrastructure and industrial diversification.”
It remains to be seen whether ArcelorMittal will stop at just one steel mill in the region. With the amount of steel products required by the hydrocarbons industry in region as well as other industrial and commercial projects, expansion in the Middle East makes perfect business sense for the steel giant.