A sustained show of strength in uncertain times

ALL OF THE region’s main oil producers have been actively rolling out diversified energy and petrochemicals capacity for some time.
Qatar’s oil production may now be at record highs, for example - around the one million barrels per day (bpd) mark - but it is the country’s move into gas exports that has been the most notable success story.
This is not just because it is the world’s leading liquefied natural gas (LNG) producer. It is also proving increasingly successful in other areas, including pioneering fields such as commercial-scale gas-to-liquids (GTL).
The flagship Pearl GTL venture, which groups Qatar Petroleum with Shell, is expected to come onstream shortly, marking a further advance in the sophistication of the Gulf region’s energy sector. But Qatar is by no means alone. The world’s top oil producer Saudi Arabia is spending heavily, boosting a petrochemicals industry that has been under development for decades.
The chief executive of state-owned Saudi Aramco, Khalid al-Falih, said in January that his company alone would invest US$120 billion over the next six years across the oil and petrochemicals sectors.
He said Aramco plans to spend US$60 billion on the oil sector, while the remaining funds would be allocated to the development of petrochemical projects and also foreign investments.
Saudi Arabia has multiple petrochemical and refinery projects already underway.
Aramco is developing major integrated refinery-based chemical complexes through joint ventures with Dow Chemical of the US in Ras Tanura, Total in Jubail, and ConocoPhillips in Yanbu.
These will help position the country – and the Gulf region – as a major international producer of refined oil and gas products and chemicals.


Sophistication


The region is also taking a leap up the value chain with its investments in state-of-the-art energy facilities producing cleaner and more sophisticated fuels and chemicals products to meet ever more demanding environmental regulations.
In February, commissioning began on the Ultra Low Sulphur Diesel (ULSD) refinery in Jubail being developed by the Saudi Aramco Shell Refinery Co (Sasref) joint venture.
Sasref has been built as an export refinery with a total production capacity of 305,000 bpd. Arabian Light crude is upgraded into high-quality refined products such as ULSD plus kerosene, naphtha, benzene and liquefied petroleum gas (LPG).
Included in the total production, the plant will produce 100,000 bpd of diesel with sulphur levels less than 10 parts per million. Sasref president Abdulhakim al-Gouhi says this will make the company one of the frontrunners in ULSD production in the Middle East.
“This investment will protect Sasref’s long-term margins in world refining markets,” he said. The diesel produced is cleaner for the environment and better for engines and in compliance with new European fuel specifications.


Saudi strategy


Saudi Arabia’s move into the petrochemicals sector has been carefully staged for years, however. Flagship production centres such as Jubail and Yanbu, once a sleepy fishing port, are now thriving industrial hubs and models for regional diversification. In 2008, total Saudi petrochemical exports topped US$14 billion, a measure of how far the kingdom had come.
But the government wants to see more and aims to boost petrochemical output to 80mn tonnes per year in 2015 from 60mn tonnes.
Saudi Basic Industries Corporation (Sabic) is now one of the world’s biggest producers of various chemicals, plastics and fertiliser products.
It has spent US$20 billion on expansion on its own in the past five years. The Gulf’s largest listed company, Sabic benefits from lower feedstock costs than rival international petrochemicals producers. The company is majority state-owned.
Nonetheless, its 2009 profits still plunged 59 per cent to SR9.1bn, compared with SR22bn in 2008, as a result of the global economic crisis and oil price slump, which forced it to make price cuts.
Despite the uncertain market outlook, this year will be another year of growth for Sabic and others continuing to build Saudi Arabia’s petrochemicals industry. New production from projects at Sharq, Yansab and a new international petrochemical complex in China will all come on stream during 2010.
Sabic chairman Prince Saud bin Abdullah bin Thenayan al-Saud says this will add to total company production and boost sales going forward. And he expects the market to pick up as 2010 progresses. “Also, as the global economy improves during the year, we expect to see demand for our products improve,” he said when presenting the company’s 2009 results earlier this year.
Other new projects are also being planned that do not involve Sabic. Saudi Arabia’s Nabaa Industrial Development and Investment Company and Japan’s Mitsui & Company are reportedly looking into a new US$20 billion petrochemical complex at Yanbu. The facility would produce dozens of different petrochemical products. A final investment decision is anticipated this summer, and operations by 2019.
There are also plans to build a new US$10 billion petrochemicals plant alongside the planned Jizan oil refinery, the first Saudi refinery to be 100 per cent privately-owned. Saudi officials received two bids to build the refinery last year, one of which included proposals for an associated petrochemicals site.
One group includes Saudi industrial firm Tasnee, Saudi Nama Chemicals Group and Saudi Advanced Refineries and Petrochemicals Co. The other comprises Jeddah-based Arabian Peninsula Co for Industrialisation and Oil Services with Corral Petroleum Holdings AB, a Swedish-registered firm; both are owned by Saudi billionaire Mohammed al-Amoudi.
The Jizan refinery is expected to have a capacity of 250,000 to 400,000 bpd of crude.
All other Saudi refineries are either fully owned by Saudi Aramco or held by joint ventures involving Aramco and foreign energy partners.
The scale of this recent investment – and the promise of more to come – has put the Middle East among the rising stars of the petrochemicals world.
Analysts see a shift taking place from the traditional European and North American refining and petrochemical strongholds eastwards to the Middle East and China, which is also scaling up its domestic production.
“This will be driven in part by the continued growth of Middle Eastern chemical companies,” KPMG states in a recent report (Global M&A Outlook for Chemicals). “With their abundant oil supply and gas reserves, these companies are transforming themselves to become major global petrochemical players.”
As well as being close to cheap feedstock, these new and improved Middle East facilities benefit from proximity to the huge and growing Asian market. The report suggests that some project investment could be replaced as aspiring Gulf chemicals producers track acquisition opportunities elsewhere.
“With Western companies in the market to sell, Middle Eastern companies are currently finding it easier to buy ready-built business at low prices than to build new facilities; several of the mega projects in the pipeline have temporarily been put on hold while this acquisition strategy is pursued,” KPMG states.
In one transaction, Abu Dhabi International Petroleum Investment Co (IPIC) acquired Canada’s NOVA Chemicals for US$2.3 billion in cash and assumed debt in 2009.
The advantages of such acquisitions include ready access to western technologies and markets. Chinese companies are also on the lookout for distressed Western assets at good prices as a move to ensure this independence, while simultaneously securing the same benefits of technology, know-how, and improved market access that are driving corporate buyers in the Middle East.
A major advantage that Chinese and Middle Eastern chemical players share is ready access to cash. These petrochemical companies are generally under at least partial government ownership – governments that are cash-rich from the proceeds of nearly a decade of rising global trade and high oil prices.


Rise to prominence


Within a few years the Middle East’s rise to prominence in the global petrochemicals sector should become apparent. KPMG predicts that by 2015 three of the world’s top 10 petrochemical producers will come from the region – Sabic, in the number one slot, joined by IPIC of Abu Dhabi and Petrochemical Industries Company (PIC) of Kuwait.
Three out of the top 10 firms will also originate from China and India, it forecasts. This ‘seismic shift’ as KPMG calls it, with capacity growth moving eastwards from the developed markets in the west, is already happening.
Despite the current unpredictable state of the global economy – a fact that would usually make such large-scale investment too risky – Middle East producers hold a strong long-term advantage given their access to the world’s largest oil and gas reserves.
It is a long-term strategy that is now paying dividends. 

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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