When Saudi Aramco announced in 2003 that it planned to invest in three giant integrated refinery and petrochemicals projects in the kingdom, it took the industry by surprise. Until this point, Saudi Arabia’s chemical sector had been seen as the exclusive domain of Saudi Basic Industries Corporation (Sabic), and many wondered whether the move was simply a way of keeping Sabic in check. After all, Aramco executives have long complained that they subsidise Sabic by supplying it with gas feedstock at below cost – it costs Aramco roughly $2 a million BTUs to extract and treat ethane, while Sabic receives it at just $0.75 a million BTUs. “We all thought this was a clear case of Aramco wanting a piece of Sabic’s pie,” says one industry analyst.
Five years on, the kingdom is a global leader in base chemical production, and it is clear there is enough business for everyone. Sabic is continuing its strides to become the world’s largest chemicals company, while Aramco, through its petrochemicals business, is set to intensify its earnings by maximising its production value chain. Even the private sector, through the likes of the Al-Zamil Group and Tasnee, have prospered in an environment of cheap feedstock and growing global demand.
For Aramco, the decision to look at utilising its gas and naphtha production was simple. “Every-one talks about the Aramco/Sabic rivalry, but in reality there is no such thing,” says one senior Aramco executive. “The petrochemicals sector in Saudi Arabia is open to anyone with a viable business plan to use the kingdom’s feedstocks. Moreover, look at the major IOCs [international oil companies] such as ExxonMobil and Shell, which have large petrochemical concerns. Why should Aramco also not strive to diversify?”
Economics is another major factor. Of the world’s 50 largest refineries, fewer than 10 are not integrated with a petrochemicals complex. Of those, most are in the Middle East, which has been late entering the game. Today, with the oil price – and subsequently gas and chemical prices – set to remain high, integration simply makes too much commercial sense to ignore. It also neatly fits into Riyadh’s strategy of diversifying chemical production and encouraging the development of a labour-intensive downstream manufacturing base.
For this reason, Aramco has not found it hard to attract either partners or finance for its mega-projects at Rabigh and Ras Tanura. For the first scheme at Rabigh, it eventually opted for Japan’s Sumitomo Chemical as its partner. The $10bn Petro-Rabigh project is approaching completion and will introduce a host of new products to the region. Aramco and Sumitomo are so confident of the scheme’s success that they are already pursuing a plan to expand it further.
The Ras Tanura project is set to be even more ambitious. With an estimated total cost of at least $20bn, it may well be the largest industrial project ever undertaken, producing more than 30 different products. As with Rabigh, the competition for the foreign partnership role was intense, but was eventually won in 2007 by the US’ Dow Chemical Company, one of the world’s largest chemical producers. The firm already has a long-standing regional production presence in Kuwait through Equate Petrochemical Company.
John Dearborn, India, Middle East and Africa president of Dow, says the scheme fits in well with the firm’s ‘asset light’ strategy towards upstream chemical production – most recently demonstrated by its sale of equity in some of its upstream businesses to Kuwait’s Petrochemical Industries Company – and gives it access to competitive feedstock. In return, Aramco derives benefit from Dow’s marketing reach and technological and production expertise in various production chains, especially chlorine.
A final investment decision on Ras Tanura is still some way off, but its market impact, should it go ahead, will be considerable.
The third, and so far final, project explored by Aramco in Saudi Arabia is at Yanbu, which like Rabigh lies on the Red Sea coast. Aramco has been holding exploratory talks with prospective partners for some time, but rumours that it is seeking to team up with Sabic to develop the complex are yet to be confirmed.
Such a deal would make sense both politically and commercially. It would not only demonstrate that local companies are mature enough to have the experience and expertise to proceed without international help, but also highlight that Sabic, especially after last year’s acquisition of GE Plastics, is sufficiently global to market and make best use of synergies from Yanbu’s output.
Aramco’s drive to become a vertically integrated oil company is now well under way. Certainly challenges remain: rising engineering, procurement and construction prices have doubled the cost of some projects, and the global credit crunch has made project finance harder to come by. Yet such is Aramco’s influence with contractors and banks alike that such concerns should be overcome, and it will not be long before the company joins Sabic as one of the world’s leading chemical producers.