Emerging opportunities in Saudi petrochemical industries

Oct 25, 2004 02:00 AM

by Dr Abdul Wahab Al Sadoun

The petrochemical industry represents a cornerstone in the diversification drive that Saudi Arabia launched primarily for the purpose of reducing the heavy reliance of the national economy on oil revenues.
A major move in this direction came with the establishment in 1976 of the Saudi Basic Industries Corporation (SABIC), a majority-owned government enterprise engaged in manufacturing basic and intermediate petrochemicals.

Over the course of the past two decades or so, the petrochemical industry's contribution to the Saudi economy include :
-- A sizable output, which adds significantly to GDP. In 2003, for example, the petrochemicals represented about 60 % of the total Saudi non-crude revenues.
-- Opening of large export markets in more than 100 countries.
In 2003, petrochemicals export accounted for about 9 % of the total Saudi exports ranking third after crude oil and refined petroleum products.
-- Creating rewarding job opportunities, particularly that more young Saudi nationals are entering the labour market. The industry employs presently about 17 thousand persons, of whom 80 % are Saudi nationals.

Early petrochemical production in Saudi Arabia
In the chronology of the Saudi petrochemical industry, a key event which marks the beginning of its rapid evolution is the production, in 1983, of methanol by SABIC's affiliate ARRAZI. Since then, SABIC has been on a consistent expansion course and is now not only the dominant regional petrochemical producer but also a global player. SABIC is now the 11th largest petrochemicals manufacturer in the world, 3rd in polyethylene production and 6th in polypropylene.
At present, there are 18 world-class petrochemical complexes, 15 of which are joint ventures with international partners with world-renowned reputation. It is worth reporting that the development of the Saudi petrochemical industry came against the recommendations of the international consulting firms, which unanimously asserted that the venture of producing petrochemicals in the Kingdom is not feasible.

Fortunately enough, their recommendations were not taken into consideration by the Saudi government, which went ahead with its strategic plan to make the Kingdom a global hub for petrochemical production. The plan entailed investing over $ 20 bn to build a modern infrastructure in Jubail and Yanbu industrial cities, providing feedstock at a competitive prices and offering soft financial loans for petrochemical producers in the Kingdom.
Surprisingly enough, though, this development has not been in response to a surge in local demand or to a development of indigenous technologies as has been the case in the industrialized countries.

Instead, it can largely be attributed to :
1. The very low boiling point of the associated natural gas, which renders its transportation uneconomical. As a result, it can be flared, used as a fuel or re-injected into the oil fields. These uses generate a low, or in some cases, even a negative economic value.
2. The volatile oil export earnings, due to large oil price fluctuations in international markets, which prompted the Saudi governments to take steps toward adding value to their vast natural hydrocarbon reserves (crude oil and natural gas), and
3. The accumulation of financial capital following the upward adjustments in crude oil prices, in the 1970s. As a result of this, the Kingdom has emerged as an international hub for production of commodity petrochemicals.
Petrochemical production capacities rose about 6 folds over the last 15 years, from 4.5 mm tpy in 1985 to 28.8 mm tpy at the end of 2000. It also shows that this exponential growth pattern is forecasted to maintain its momentum in the next few years reaching around 60 mm tons by the year 2010.

Future outlook for short to medium term direction
The future developments in the Saudi petrochemical industry can be inferred from a number of indicators, the most notable of which are :

1. Strong growth in building blocks capacities
In the petrochemical industry, the seven building blocks with the largest output volumes are: methanol, ethylene, propylene, butadiene, benzene, toluene and xylenes. These chemicals are referred to as "Basic Petrochemicals" which are essential precursors to a variety of intermediates that are further converted into a multitude of consumer and industrial products which are often referred to as "Tertiary Petrochemicals.
The Saudi petrochemical producers are pushing ahead with plans to add new production capacities, which will total 21.9 mm tons over the 2003-2010 time period of which over 13 mm tons are basic petrochemicals. The planned basic petrochemicals capacities include :

The outlined planned capacities bring to the fore the following observations :
I. The ethylene capacity addition represents over 56 % of the total capacity additions in the planned basic petrochemicals projects. This is attributed to the fact that the petrochemicals industry in the Kingdom is gas-based. Hence it is not surprising that the most developed product chains in the Saudi petrochemical industry are those based on ethane.
This, in turn, pinpoints a product mix which is unbalanced in terms of the full basic petrochemicals slate, and is reflected in the under-development of product chains based on propylene, butylenes and BTX.

II. The biggest share of the planned projects are private investment, indicative of the strong direct involvement of the private sector in the petrochemical industry, which is in line with the strong governmental endorsement for the private investment in this sector. It is pertinent to report that private investment has previously been concentrated on downstream petrochemical projects.

III. The outlined capacity addition of basic petrochemicals will translate into remarkable capacity additions of their derivatives as most of these basic petrochemicals are not export-oriented but are primarily manufactured for captive use.

IV. About 85 % of the planned projects are joint ventures with leading US, European and Japanese petrochemical producers. This demonstrates conclusively the commitment of these international players to the development of the Saudi Industry, and it also demonstrates the confidence in the future of the Saudi Petrochemical industry by the international community.

2. Diversification into downstream
The investments made in the Saudi industrial sector, in general, and the petrochemical industries, in particular, are heavily concentrated in the upstream segments of large-scale basic and intermediate industries. The primary reason is that the petrochemicals producers have access to low-cost and abundant feedstock which provides them with a substantial cost advantage at the basic and intermediate level and thereby makes them highly competitive in local and export markets.
A downstream move tends to dilute the feedstock cost advantage, as the share of feedstock in total production costs decreases. In view of this dilution and unlike the basic and intermediate petrochemicals, downstream products are generally not exported, but are produced locally.

This suggest, that there is a good opportunity for the manufacture of these products in the Kingdom to meet the rising demand of local and regional markets, induced by the high population and income growth. The development of the fabricated plastic industries in the last two decades or so lends support to this possibility.
Parallel to the growth in the polymer production capacities in Kingdom, the fabricated plastic industries have witnessed a remarkable growth pattern. In the early 1980s, there were handful producers of plastic products with a combined production capacity of 15,000 tpy. At present, there are 470 plants with a combined capacity in excess of 1.6 mm tpy.

The new wave of basic and intermediate petrochemical projects in Saudi Arabia will induce a significant growth in the Tertiary Petrochemical Industries in the Kingdom. This is evident by the growth in the polyolefins (polyethylene and polypropylene) production capacities which will stimulate a similar growth in the demand for these resins by the domestic conversion industry.
The growth in the production capacities of the polyolefins will increase from its present level of 4.2 mm tpy to 11.4 mm tpy by 2010. Likewise, this will simulate a similar growth in the domestic consumption of these resins, which will double from its present level of 0.6 mm tpy in 2003 to 1.1 mm tpy by 2010.

Within this context, it is believed that Aramco's Rabigh project will have a significant impact on the development of the downstream industries in the Kingdom.
This is associated with the fact that this project is designed to produce new intermediate products that are not currently among the products slate of the Saudi petrochemical producers such as: propylene oxide which is a precursor for: polyurethane, propylene glycol, flame retardants, synthetic lubricants, oil field drilling chemicals and textile surfactants.

3. Globalised production
Given the fierce global competition resulting from the growing number of petrochemical producers, globalisation has become today an essential strategy for large corporations. The driving force behind this trend is international cost competitiveness, which leads the chemical companies to go global in order to take advantage of the most favourable conditions to produce chemicals at a low cost and with a good capital-output ratio.
As globalisation continues to pick up momentum, the Saudi petrochemical industry, which has until recently located its production plants in the Kingdom close to the feedstock supply, is leveraging external production plants close to the so-called emerging "exploding" markets, where growth is the fastest and capital cost is lower.

This drive is exemplified by :
1. SABIC acquisition, in July 2002, of the petrochemicals business of the Dutch group DSM, establishing its new affiliate: SABIC Europe which has two major manufacturing sites in Geleen (The Netherlands)and Gelsenkirchen (Germany).
2. Saudi Aramco's recent agreement with Fujian Petrochemical and ExxonMobil to jointly fund a world class integrated refining and petrochemicals complex at Fujian Province in China. The Fujian Project, which is scheduled for completion in the first half of 2008, involves construction of a grassroot 800,000 tpy ethylene steam cracker, polyethylene and polypropylene units, and a 700,000 tpy para-xylene unit.
In the light of this, it is believed that several opportunities will be opening up for the Saudi petrochemical producers over the coming ten to fifteen years to invest in new external plants and capture a major share of the burgeoning Asian market given the strong demand demonstrated by that market and its close proximity to the Kingdom.

Concluding remarks
The Kingdom has become a significant global hub of commodity petrochemicals. Its position in the global market will grow over the coming five years, as new ethane crackers and ethylene derivatives capacity come on stream.
With the anticipated accession of Saudi Arabia to the WTO, Saudi Petrochemical Industry's prospects will continue to be "bright" despite the strong competition among petrochemical producers, both globally and locally that will result from the market opening as stipulated by the WTO. Given the strong competitive advantage enjoyed by the Saudi players, it is believed that they are likely not only to survive the competition, but will also gain entrance into new export markets.

To achieve this end, however, the Saudi petrochemical producers need to focus attention on continually reducing their production costs and ensure that their product qualities match or prevail the world standards.
These measures will enable them to maximize their market shares, and ensure greater technical and commercial success in the future.

Source: Saudi Commerce and Economic Review
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