Private firms need strategic petrochemicals alliances

13 June 2008
Financial backing and feedstock are both becoming far harder to secure for new petrochemicals schemes.

The petrochemicals sector is growing fast but private firms are finding it tough to get feedstock or funding for schemes.

State-owned producers are increasingly integrating their chemical production facilities with refineries. The reason is that ethane allocations are increasingly scarce while heavier, oil-based feedstocks such as naphtha, butane and propane are more readily available.

But the prices of these chemicals rise and fall with the cost of oil, which means the producers do not enjoy the same cost advantages as with cheaper ethane. But by integrating with refineries, at least some of the price risk is reduced.

Any private developer wishing to build a standalone naphtha cracker will struggle to prove the economic case to potential financial backers for a plant unless the feedstock is heavily subsidised and this is unlikely to happen. Project finance is hard to come by and expensive in the current economic climate.

Instead, private firms are expected to venture further downstream, building smaller facilities based on intermediate feedstocks which are produced locally. Even then, bankers say raising funding for such projects will be hard, especially if a firm is embarking on one of its first developments.

For the state-run petrochemical giants the situation is different. Bankers will no more turn down the chance to lend to Saudi Basic Industries Corporation (Sabic) today than they would have before the credit crunch hit.

The best opportunities for the private sector may be in working with the state-run entities that dominate the region. There have already been a number of joint ventures, including Dow Chemical Company and Saudi Aramco at Ras Tanura, and Honam Petrochemical Corporation with Qatar Petroleum at Mesaieed.

More will follow if private sector firms want to make the most of the opportunities for growth and compete with their government-owned rivals.

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