When the contract to sell gas for industrial use in Saudi Arabia expired in December, most petrochemicals producers braced themselves for the price being at least doubled to $1.50 a million BTUs.

So it must have come as a relief to Saudi Basic Industries Corporation (Sabic) and other local producers when the kingdom’s Oil Ministry announced that for 2012, the figure would remain at $0.75.

What should be made clear is that had the price increased two-fold, the kingdom’s ethylene producers would continue to have a major market advantage over competitors.

“Even if you doubled the ethane price, the kingdom’s producers are still enjoying huge margins compared to producers in Asia or Europe,” says Manuel Asali, a principal at technology consultancy Nexant. “This is because making ethylene from ethane rather than from naphtha is far cheaper, due to naphtha being linked to the oil price.”

The figures are compelling. The production price of making a tonne of ethylene using ethane as a feedstock is $90-$100. The cost using naphtha is $700-$800 a tonne. A tonne of ethylene sells for about $1,000.

Even $1.50 a million BTUs of ethane would still only mean a cost price to the kingdom’s producers of about $160 a tonne.

With this in mind, it is no surprise that international investment is still very popular in the kingdom’s petrochemicals industry. Multinationals such as the US’ Dow Chemical and Japan’s Sumitomo Chemical have built, or are building, huge complexes that take full advantage of the cheap feedstock on offer.

What is clear is despite the bonus of a price freeze for 2012, the kingdom’s gas will not remain at that price. One change Riyadh has made is that the price is no longer fixed for a specific term. The Oil Ministry can change the price as needed, which allows it far more flexibility than in the past.

None of the major producers seriously expect $0.75 a million BTUs to remain in the medium term either. All of the new facilities being built have been budgeted with incremental gas price rises taken into account.

The kingdom’s low gas price was introduced more than 20 years ago, when oil prices averaged about $20 a barrel, to incentivise companies to set up petrochemical facilities in Saudi Arabia that would provide jobs and industry to the country.  

In 2012, the landscape has changed with the kingdom fast becoming a global powerhouse in the chemicals industry, with the oil price sitting comfortably at $100 a barrel.

The time is quickly approaching when Riyadh will feel confident to ask its petrochemicals industry to start paying a little more for its feedstock.