Chain Reaction: Saudi Arabia downstream profile

KSA's firms are being urged to be creative to justify cheap feedstock

Saudi Aramco and Sumitomo are set to increase the production capacity of their integrated joint venture project located in Rabigh.
Saudi Aramco and Sumitomo are set to increase the production capacity of their integrated joint venture project located in Rabigh.

As part of its diversification programme Saudi Arabia’s new policy for hydrocarbon resource utilisation is based on adding value at every step in the production chain.

This means the procedure of allocating feedstock for future projects won’t be as easy as it has been in the past, due to stiff competition for gas feedstock.

But first the Kingdom needs to increase the availability of gas feedstock amid increasing domestic demand. In this regard, Saudi Arabia has undertaken an aggressive programme of exploration to move gas resources in reserve utilisation and developing the most advanced technologies.

“This will enable the Kingdom to grow its gas production capacity to about 15 billion standard cubic feet per day by 2016, from 7.7 billion standard cubic feet per day in 2002,” says Prince Faisal bin Turki bin Abdulaziz, advisor, Ministry of Petroleum and Mineral resources.

The plan to increase gas production will offer companies from different industrial sectors the opportunity to implement their long-term investment without worrying about the availability of feedstock.

Downstream producers are asking at what cost the feedstock will be allocated. The current price for ethane gas in Saudi Arabia is US$0.75 per million British thermal unit (btu), while propane is calculated according to a specific formula of naphtha price in Japan multiplied by a conversion factor, currently estimated at about 0.700.

This officially expired in 2011, but the government is yet to disclose any new pricing. “The feedstock prices for petrochemical companies haven’t been increased and it will remain stable at the same level,” Ali bin Ibrahim al-Naimi, Minister of Petroleum and Mineral Resources, told reporters in early January.

Leading petrochemical companies said that they have not received any confirmation from Saudi Aramco, but they expect the price to be reviewed by the end of 2012.

This has created a limbo situation among major companies who need to know the price to set their future investment strategy.

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In spite of a shortage of gas feedstock, the Saudi petrochemical industry is entering a golden era.

“We are witnessing the largest growth in the industry’s history with the total production of petrochemicals, chemicals and polymers expected to be over 100 million tonnes by 2016; a 250% growth from 2006 levels,” says Prince Turki.

“Our annual production of ethylene and propylene is expected to grow by over 230% and 300% respectively from 2006,” Prince Turki adds.

“The associated cumulative investments for all of these petrochemical projects are expected to be more than $150 billion by 2016,” he reveals.

Saudi Arabia has focused on expanding its downstream portfolio and moving up the value chain to include 120 new petrochemical and chemical products, which will empower its future downstream conversion industries, supporting Saudi Arabia’s drive towards economic diversification.

“In addition to the existing products, examples of the new products that will be available for Saudi industries are synthetic rubbers and carbon black to support tyre and construction materials industries, and polycarbonate, ABS, polyurethanes and nylon to support the automotive industry and many more,” Prince Turki says.

In keeping with this plan, Saudi Aramco, in a joint venture with The Dow Chemical Company, has launched Sadara Chemical Company which will comprise 26 manufacturing units, several of which constitute “mega projects” in themselves. Once complete, the Sadara JV complex will be one of the world’s largest integrated chemical facilities, and the largest ever built in a single phase.

“Sadara is a milestone for Saudi Aramco and a cornerstone of our transformational downstream growth strategy, which will add further value to our significant petroleum value chain,” says Khalid al-Falih, president and CEO of Saudi Aramco.

“As the world’s largest integrated and most reliable supplier of energy and petroleum-based derivative products, our strengths complement those of Dow, the world’s foremost chemicals company, with a global track record and unique suite of chemicals technology,” he says.

“We are looking forward to Sadara being an enabler of further economic development, entrepreneurial and employment opportunities in Saudi Arabia,” al-Falih adds.

Sadara is expected to deliver annual revenues of approximately $10 billion within a few years of operation while contributing significantly to Saudi Arabia’s industrial diversification. The first production units are expected to come on line in the second half of 2015.

All units are expected to be up and running in 2016.

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In addition to Sadara Chemical, Saudi Aramco and its Japanese partner Sumitomo are expected to discuss “where to go from here” on the planned expansion of their jointly owned Petro Rabigh project, says al-Falih. The partners were supposed to meet in 2011 to decide whether to invest $6 billion to $8 billion to enlarge the facility, but this didn’t happen.

Saudi Aramco has also have agreed with China Petrochemical Corporation (Sinopec) to the formation of a joint venture related to the ongoing development of Yanbu Aramco Sinopec Refining Company (YASREF) Limited, formerly the Red Sea Refining Company.

The YASREF project involves construction of a new “grassroots” refinery on the Yanbu` site covering more than 5.2 million square meters. With construction well underway, the project is on schedule with 10 per cent of construction completed.

The YASREF refinery is scheduled to be operational in the second half of 2014, and the refinery will process 400,000 barrels per day (bpd) of Arabian heavy crude’s.

Upon the completion of YASREF and Jazan refinery project, Saudi Arabia refining capacity will reach 3.5 million barrel per day. “We have created the largest refining network in the Middle East, which is expected to reach 3.5 million barrels per day of capacity by 2016,” says Prince Turki.

Saudi Arabian companies are also looking for expansion opportunities outside the country, and Saudi Aramco has also revealed plans to build refineries in China and Indonesia.

SABIC has revealed plans to establish a methanol project in Trinidad and Tobago. “We are in talks over a potential methanol venture in Trinidad,” says Mutlaq al-Morished, CFO of SABIC and Chairman of the Board of Saudi Kayan during a conference held in Dubai.

The potential project would cost $5.3bn. “Due to anti-trust law, our growth through merger and acquisitions became limited, and that’s why we turned into organic growth,” adds al-Morished.

SABIC will conduct the methanol project with its strategic partner, China Petrochemical Corporation (Sinopec). It also has an agreement with Sinopec to build a $1bn-plus polycarbonate plant in Taijan where the two companies have been operating a petrochemical joint venture since 2010.

To enable the petrochemical expansions, Saudi Arabia has invested billions of dollars in the process of delivering feedstock and fuel, building the industrial infrastructure and power, and providing significant levels of loans, all of which have enabled the stellar growth of the industry.

“Saudi Arabia is willing and able to continue with those types of investments and is endowed with the necessary resources, but as we move forward the government needs to be clear on what the Kingdom expects in return,” says Prince Turki.

The government wants a diversified economy and sustainable growth to create substantial number of quality jobs for its people. “The companies benefitting from the resources must be explicit in how they are helping the Kingdom achieve that,” he says.

The Saudi Arabian government also wants local downstream companies to be more innovative, and not purely rely on competitive feedstock and energy as their only source for growth because competition is high for those resources.

“Therefore, companies looking for energy and feedstock can compete for these resources but they have to recognise that the government analyses the projects from a 360 degree perspective, to ensure that the project and the industry can generate significant jobs and growth for the nation,” he explains.

Service providers operating in the country find the Kingdom very attractive and lucrative compared to neighbouring countries. “Saudi Arabia has a healthy budget surplus and we see an active role played by the Saudi Arabian General Investment Authority (SAGIA) in boosting investments in the country,” says Najib al-Naim, general manager Saudi Arabia and Bahrain for Invensys Operations Management.

“Invensys has plans to further invest in Saudi Arabia and strengthen our presence in one of our key markets,” he notes.

Competition between service providers operating in the Kingdom is very fierce, leading companies to develop new strategies to attract talented people in order to better serve their clients.

“We are always on the lookout for fresh talent to overcome this. We recently launched a very successful Graduate Development Program to attract Saudi Nationals and are looking at other programs in this direction including partnering with some of the leading universities in the country,” concludes al-Naim.

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