Saudi petrochemicals producers keep projects on track

13 March 2009

With access to cheap feedstock giving Saudi petrochemicals firms an advantage over their international rivals, plans to develop a series of major ventures will go ahead despite the global economic downturn.

Regardless of the global financial crisis and its impact on demand for their products, Saudi petrochemicals producers will see through the major projects that are planned up to 2014.

Figures from Gulf projects tracker MEED Projects show that 81 petrochemical projects in Saudi Arabia are either planned or under way, of which 32 are due for completion in 2009, with a total value of $11.6bn.

A further 10 projects are due for completion between 2010 and 2013, at a total cost of $8.95bn. Another 39 projects worth more than $40bn are yet to reach the final investment decision or contract award stage.

Few Gulf states have taken the initiative in the petrochemicals sector the way that Saudi Arabia has, building the industry from scratch in the 1970s to global pre-eminence today, through state and private sector initiatives.

Key facts

The value of petrochemicals projects in Saudi Arabia$11.6bn
Sabic’s basic chemicals production capacity23 million t/y
The value of Saudi Arabia’s petrochemicals exports in 2007$14bn
t/y=tonnes a year. Source: MEED

Healthy reserves

According to the 2008 annual petrochemicals report from the Gulf Petrochemicals & Chemicals Association (GPCA), Saudi Basic Industries Company (Sabic) has five times the production capacity - 23 million tonnes a year (t/y) of basic chemicals - of its nearest regional rival, the US’ ExxonMobil Chemical.

In Sabic and Saudi International Petrochemical Company (Sipchem), Saudi Arabia now boasts two of the 10 largest petrochemicals companies in the world by sales. The former is now the largest listed company in the Middle East, with market capitalisation of more than $39bn.

The industry also serves the purpose of creating jobs for the country’s growing population, with 32 per cent of the 27 million population aged 14 or younger. Sabic employs more than 17,000 people, 85 per cent of whom are Saudi nationals.

With access to cheap feedstock and strong relations with emerging Asian markets, chemical exports from the country reached $14bn in 2007, according to the World Trade Organisation.

The cost of producing ethylene in Saudi Arabia has remained static, at $85 a tonne, since January 2007, compared with $394 a tonne on the US’ Gulf coast. With polyethylene prices currently hovering about $800 a tonne in the Middle East, cheap feedstock offers Saudi producers a significant advantage.

However, the global financial crisis has still taken its toll on the kingdom’s petrochemicals producers. Sabic’s profits fell by 95 per cent in the final quarter of 2008 to SR311m ($83m), from SR6.87bn in the fourth quarter of 2007.

Market observers say that project work on Saudi petrochemicals infrastructure will continue, albeit at a slower pace.

“The projects that have been planned will go ahead, perhaps with a slight delay,” says a senior source at one major international contractor based in the kingdom. “They are all now trying to get prices lower than they were in 2008.”

This has been evident at Saudi Aramco, which is pressing ahead with both its joint venture integrated petrochemicals complex at Ras Tanura and the refinery that will feed it. The company is believed to be targeting a reduction of 10-20 per cent in the cost of the project, which was initially valued more than $22bn.

Other major projects that have been assured as going ahead are Saudi Kayan’s petrochemicals project at Jubail, valued at $10bn, and PetroRabigh’s $10bn integrated complex.

This has also faced delays, with commercial operations beginning in 2009, rather than the planned September 2008 start date.
The pressures that state-owned Aramco faces are different to those of listed companies. Both Saudi Kayan and PetroRabigh held initial public offerings (IPOs) to partly fund their businesses before they had produced any chemicals.

Sabic is 70 per cent state-owned, with 30 per cent of its shares held by private investors.

There is a lot riding on their success, says one London-based analyst, but they will not be allowed to fail. “If you look at who owns them [Kayan and PetroRabigh], they are essentially in the hands of Sabic and Aramco, and the shareholders are the ruling Saudi families,” says the analyst.

Saudi Kayan is a joint venture of Aramco, with a 35 per cent stake, and the local Al-Kayan Petrochemical Company, which owns 20 per cent. The remaining 45 per cent is held publicly. PetroRabigh is a 50:50 joint venture of Aramco and Japan’s Sumitomo Chemical, with about 40 per cent of the company listed.

Paul Hodges, chairman of consultant International Echem, tells MEED the Saudi chemical industry will not be kept on course solely for commercial reasons. “The focus for a company like Sabic is the social agenda, [which is] creating jobs for a young population,” he says.

It is expected that between now and 2014, the 81 petrochemicals projects planned or under way in the kingdom will create tens of thousands of jobs for young Saudis. Saudi Arabia has spent decades building up its petrochemicals production capacity.

Once the $11bn worth of planned projects are completed by 2014, the kingdom’s petrochemicals giants will be focusing on solidifying their position at the top of the league of global petrochemicals producers.

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