Riyadh resists call to raise gas price

20 December 2012

Producers in the kingdom will continue to benefit from cheap feedstock for the time being

The global petrochemicals industry is one of the most competitive business sectors in the world and as consumption grows, especially in Asia, producers need to protect their margins like never before.

In the Middle East, this has traditionally been achieved by using subsidised feedstock such as ethane. Cheap gas has been a massive factor in the region’s share of global petrochemicals production growing from virtually zero in 1980 to 13 per cent by 2010.

Cheap feedstock gave producers incentives to set up facilities in the region and provided major oil producers with a profitable method of lengthening the hydrocarbons value chain in their respective countries.

However, with gas becoming more scarce recently due to its increased use in power production, there have been calls to raise the price of gas used for industrial purposes.

In Saudi Arabia, a price tag of $0.75 for a million BTUs has meant producers have enjoyed massive growth and prosperity over the past 30 years. It is understandable that they want things to stay exactly as they are.

Riyadh has considered raising the gas price, which is why they scrapped setting a long-term fixed price in early 2012. However, it is looking less and less likely that any change will occur in 2013.

With the shale gas boom in the US driving increased activity in the country’s petrochemicals sector, it is unlikely that the kingdom will want to increase the base costs for its producers in the short term. Other factors such as lower growth in Asia will also mean that Riyadh will want its chemicals industry to remain as competitive as possible.

Low gas prices are not sustainable in the long term, but for the time being it looks like Saudi Arabian producers will benefit from some of the cheapest feedstock prices on the planet.

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