Pursuing a Vision

From the liberalisation of Saudi Arabia’s upstream petrochemical sector in the 1990’s to the construction of the world’s largest integrated production facilities today, the progress has been astounding. Building such an internationally competitive industry in such a short period has not been easy by any stretch of the imagination.

The region has led the world in terms of chemicals production growth since 2007, more than doubling its chemicals (excluding pharmaceuticals) exports between 2002 and 2012. In the last five years, chemicals production growth in the GCC has grown annually at an average rate of 10.4 per cent.

Such consistent and accelerated growth had made the GCC a global hub for the production of chemicals and petrochemicals.

With the rising global status of the regional industry, a platform that represents the industry and acts as its “voice” became critical to sustaining its rapid growth on one hand and to influencing the regional and global policy agenda on the other.

This set the ground for the launch of the Gulf Petrochemicals and Chemicals Association (GPCA) back in March 2006 and since then the organisation has been expanding its influence and reputation on a regional and global level.

So far, the GPCA has successfully acted as a networking platform for knowledge sharing and best practices exchange. It has further expanded its role and activities to include: “thought leadership “ and “advocacy”.

With over 80 per cent of its output produced for export, the industry is considerably vulnerable to international market fluctuations and thus, the focus of the GPCA has been to work closely with regional governmental bodies to ensure free access to global chemicals markets. Needless to say, access to consumers overseas has always been critical for its survival and lowering the barriers to trade has been imperative.

“When there is a recession, like that in 2008 and 2009, the number of trade remedy cases raised against our members increases significantly, especially in key markets. After what happened in India, China and Europe, it became apparent that there was need for a platform that advocates open market policies,” explains Dr. Abdulwahab Al-Sadoun, secretary general of the GPCA.

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“History has proven that protectionist measures are not useful in protecting indigenous industries, in fact they are counterproductive as they render industry players complacent and does not drive them to optimise their performance and come up with the right products in terms of specifications and cost of production.” With this understanding, the GPCA has continued to support the demolition of trade and non-trade barriers on products, services and investments.

The cynics among us would be quick to point out that the region has a decisively unfair advantage. The Gulf’s easy access to hydrocarbon resources allows it to survive on access to cheap feedstock alone, a luxury other regions do not enjoy.

But shale plays in North America have lowered gas prices from $12/MMbtu to under $4/MMbtu. At the time of writing, Houston-based producer Magnum Hunter Resources reported that Australia was to become the most attractive shale gas prospects outside North America, backing up its claim by becoming the largest shareholder of Perth-based New Standard Energy.

The U.S. Energy Information Administration also reported that Russia may hold an estimated 75 billion barrels of recoverable shale oil. With the shale revolution spreading across the world, the Arabian Gulf’s access to cheap feedstock may no longer be the competitive advantage it was in the past.

“Our competitive advantage is not derived from feedstock advantage alone. That said, with the shale gas developments in the USA, we are no longer the only producers who enjoy the feedstock cost advantage,” he warns.

“There is now some cut-throat competition; with China’s reserve of shale gas which is reported to be the largest by the IEA on a global level, the competition will only be tougher in the future,” he says.

For Dr. Al-Sadoun, the only option is innovation, for which he is a very strong advocate. “The bottom line is we have to be very innovative to be ahead of our competitors, investing in technologies, in optimising our operational models and the supply chain. As an export oriented producer, we need to optimise our supply chains,” he says.

“Investing and developing the right capabilities and infrastructure whether it’s human capital or the legislative framework will lead to a brighter future for the sector while minimising the heavy reliance on volatile oil revenues.”

The GPCA’s Research & Innovation Committee, alongside last year’s launch of the Plastics Innovation Awards, aims to promote best practice and support innovation in products, processes and talent.

“We are sending a message to all that, ‘guys you really need to consider investing in innovation,’ that’s the only way you can ensure that you secure your domestic market and expand your customer base to overseas markets,” he reiterates.

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Streamlining the customs clearing procedures which local products are subjected to is an example of how the GPCA has effectively optimised the supply chain. Shorter lead time for customs and clearance can easily be reflected in significant savings.

For instance, the OECD estimates that every one-percent reduction in global trade costs pushes global incomes up by $40 billion.

“The good thing is we see good cooperation with the government bodies which are in charge of customs, we have excellent relationships with the GCC secretariat in both customs and trade issues.” The region is showing some promising signs that innovation is being taken seriously.

SABIC’s investment in a plastics innovation centre in Riyadh, as well as, another technology centre in Shanghai, China highlights how some of the region’s leading companies are taking the drive seriously.

The SABIC Technology Centre in Shanghai will aim to develop portable consumer electronics, working closely with OEM’s across the globe. The move will allow SABIC to strengthen its technology and innovation capacity by deepening its academic partnerships in China.

Not only has the GPCA encouraged the industry to pursue international leadership in innovation, but it has done the same with implementing the International Council of Chemical Associations’ Responsible Care initiative, as evidenced by its rapid ascension through ICCA’s ranks. “We are the youngest trade association to become a full member of the ICCA,” says Dr.
Al-Sadoun. Full membership of the ICCA requires adherence and implementation of the organisation’s responsible care initiative, a programme which seeks to improve the industry’s health, safety and environmental performance.

“The ICCA does rankings for the implementation of responsible care; assessing the progress of 57 associations, national and regional, and the GPCA for a second year has ranked as number one,” he adds.

“Being a young association which has been in existence for only seven years, and being ranked number one on a list of 57 associations is really something that gives us a lot of confidence to move forward, to create and apply international initiatives that address issues within the industry.”

Responsible Care has improved the industry’s management of chemicals, including the communication of chemical risks throughout their life cycle, helping companies to report and track progress on critical elements of product stewardship.

While the industry has had numerous successes in building the international presence and competitiveness of the GCC’s petrochemicals and chemicals industries, it is here in the region that it has seen the most challenges. Chief among these is the development of employment opportunities for GCC nationals and the creation of economic value to its shareholders.

“It has been striking to find that in this particular area there is a huge demand for locals and the key requirement here is different skill sets, people who have strong technical backgrounds combined with the soft skills” he reveals.

The GPCA publishes reports and studies that tackle this area outlining the skills gap and thereby assisting policy makers with information on the skills required by the industry on a short to mid-term basis.

“We see the plastics conversion industry as having the untapped potential to fulfil the objectives of the local governments by adding more value to the natural resources and creating more opportunities for locals,” he explains.

But perhaps the biggest challenge which the industry has faced yet is the constraints on the supply of gas within the region, a fact that Dr. Al-Sadoun is no stranger to.

As the GCC countries look to diversify their economies, there is competing demand for natural gas allocation between the various energy intensive industries (power generation, water desalination, metal smelting, etc).

“All those are very energy intensive industries which compete for the gas and that will reflect directly on the allocation of gas for the chemical and petrochemical industry,” he says.

Utilities in particular, will be a critical issue for resource regulators in the region. With population growth and urbanisation, per capita demand for power is among the highest around the world.

Significant part of the power is dedicated to air conditioning due to the extremely hot climate during the summer months. But Dr. Al-Sadoun remains hopeful about the future of the industry, and its ability to secure the resources it needs to survive.

“For now, the gas allocation is linked to the social economic benefits brought to the country and the community, so if the project developers are able to illustrate the value of the project in terms of job creation and local innovation capability building, then they can raise their chances of securing gas allocations,” he says.

In this regard, the GPCA has been quite successful at communicating the benefits of developing the downstream industries. In its 2012 Facts & Figures report the association found that employment in the GCC chemicals industry grew at a compound annual growth rate of 13.5 per cent between 2008 and 2012.

It pointed out that in 2012 alone, direct employment in the industry grew by 18 per cent compared to 2011, employing over 138,000 people. Saudi Arabia’s petrochemicals sector leads the region, employing over 76,500 people. Beyond direct employment, an estimated 416,000 jobs were created indirectly through the petrochemicals sector.

As the GCC continues to look for ways to diversify its oil-export based economy, the petrochemicals and chemicals industry will have to compete with other booming markets.

While the industry may no longer be able to enjoy the economic advantages of cheap and abundant gas supplies as regulators look to support sectors, it can be sure that the GPCA, and Dr. Abdulwahab Al-Sadoun will keep pushing it forward.

In numbers
– $40 bln Every 1% reduction in global trade costs pushes incomes up this much.
– 80% This much of the region’s output is destined for overseas markets