The Kingdom

Being the largest producer of oil in the world, with around 270 billion barrels of proven oil reserves, it seems only natural that the country develops its downstream sector. This becomes an even more of a pragmatic progression given the proximity of two of the largest growing economies in the world, India and China.

According to the Oil and Gas Journal, Saudi Arabia currently has seven refineries with a throughput capacity in the region of 2.1 million bpd (barrels per day). Saudi Aramco, who is the largest refiner in the country and the world’s sixth largest refiner, plans to invest approximately US$70 billion in expanding the sector to a capacity of 3 million bpd.

“The Saudi Aramco development plan calls for US$20bn of investment to increase domestic refining capacity to more than 3mn b/d and international holdings by at least 1-2mn b/d by 2011, particularly in an effort to meet the requirements of the fast-growing Asian market,” says a report provided by Business Monitor International (BMI).

Majors Total and ConocoPhillips have both signed deals to form JVs with Saudi Aramco in the creation of new refineries. The construction of the Total and ConocoPhillips JV complexes are both believed to be adding in the region of 400,000 bpd capacity each, with the Total refinery costing roughly US$6 billion.

“Saudi Arabia is keen to expand refining capacity to 3.4 million bpd by 2011, aided by the new Total plant at the industrial city of Jubail. IOCs are happy to invest in Middle Eastern refining ventures as a means of boosting global capacity without the environmental problems encountered in the United States or Europe – and with a source of plentiful cheap crude feedstock to improve plant economics,” the report continues.

For the plastics and chemicals segment, Saudi Arabia is also forging ahead with development. In early 2007 Aramco signed an agreement with US chemicals group Dow Chemical for the construction of a US$15 billion petrochemical plant at Ras Tanura.

Other projects include the Al-Waha Petrochemical Company, a joint venture between LyondellBasell, the Dutch petrochemicals major, and Sahara Petrochemical Company, which has seen the construction of a 450000 tpa Spherizone polypropylene plant in Al-Jubail Industrial City.

LyondellBasell also has a JV company with Tasnee and Sahara Olefins company for an ethylene and polyethylene complex, and a JV with Tasnee for an integrated polyethylene complex – all in Al-Jubail Industrial City, which are expected to be online and fully operational this month.

“The government wants to develop specialities in the petrochemicals sector within the country, and to encourage investment in the conversion industry in order to create employment and incorporate the whole chain downwards to finished goods,” explains Manuel Fraga, manager of LyondellBasell’s joint ventures in Saudi Arabia.

“And while the economic situation will certainly have a large impact on the US and Europe, we feel the Middle East and Asia will not be hit as hard, and growth in the sector will continue into 2009.”

This positivism in face of fiscal fears is shared by others looking to continue the unbridled downstream development in the Kingdom. Paul Hodges, chairman of International eChem, commercial advisers to the global chemical industry and its investment community, believes that projects within the country will arrive as expected.

“The industry in Saudi is in a period of major expansion, based on the supply of advantaged feedstock. It has very competitive economics versus other regions and also has advantages of bringing onstream world-scale plants, considerable experience of the markets in which it will be operating and strong logistics,” he says.

“The current expansions were all planned and financed back in 2003-5, and therefore their construction is not impacted by the current recession.  New projects are facing some delays, as sponsors wait for lower engineering costs to reappear, and lending markets to re-open.”

Challenges

One locally sourced challenge for those operating in Saudi Arabia over the past year has been congestion at the logistics hubs in the country. With a massive increase in total product produced, and booming export trade to the Far East, getting a sophisticated logistics base in the country over the coming years is of the upmost importance.

“Over the past year, particularly in the fourth quarter, there have been problems in terms of congestion at the Port of Dammam. Fortunately, I think that this has made people sit up and start to take the necessary measures to ensure we are in a better position in getting our products out to market,” says Mitchell Killeen, divisional vice president, Africa, Middle East and Indian Sub-Continent, LyondellBasell.

“There is also a lot of work being done at Al-Jubail Port, but there you are talking about 2010 before we have a logistics solution, so we need to focus our attention on making sure Dammam can cope with the levels of export trade we expect to see over the coming years.”

Other concerns in Saudi Arabia include the increase in costs, the competition for high skilled workforce and the possible potential for the country to continue oil output cuts.

“A real problem is finding and retaining the right talent with so many projects either coming online or in the pipeline. Then government is currently investing a lot of money on the development of Saudi based engineers and skilled labour for the growing demand for a specialised workforce,” comments Fraga.

Meanwhile, Hodges believes that a challenge to those bringing projects online in the country is to build a strong relationship with their upstream partners.

“The challenges are to have strong links with their upstream partners, and shared objectives, so that their projects are financially robust and in line with the Kingdom’s social agenda and other priorities. With regards to oil output cuts, there does not seem to be any major impact. This could change, however, if deeper oil output cuts took place, which reduced the supply of petchem feedstocks,” says Hodges.

Future market

Crucial to the growth of Saudi’s downstream sector is on exports to the massive Asia – Pacific market. With JVs and partnerships already built with the likes of China’s Sinopec and Japan’s Sumitomo, the world’s fastest growing economies in China and India will play the major role in making the Middle East the largest exporter of petrochemicals and plastics products.

“The main region for exports out of the country will be China and the rest of Asia. We expect, however, that demand in these regions will be impacted as a result of the downturn in the Western economy – much of these imports are related to export demand, due to China’s status as the manufacturing centre of the world,” says Hodge.

There has however been a slowdown in demand as the economic crisis hits the Asian continent. How much of an impact this will have on the Middle East suppliers is yet to be seen.

“I think right from the beginning China has played a large part in Saudi’s petrochemical development. It is going to be a challenging year ahead due to the trough we are currently in. But as we have most of our capacity coming online this month – a whole 1.5 million tonnes – we are convinced we are in a better position,” adds Fraga.

Indeed, the trough seems to have even impacted Saudi Basic Industries Corporation (Sabic), the country’s largest manufacturer of chemicals, fertilizers, plastics and metals, who this month posted a 95% drop in fourth quarter net profits for 2008. The drop was directly linked to the drop in demand for plastics and metals due to the global recession.

Undoubtedly these are hard times, even for the region’s number one downstream producer. But it is optimism and positivism that still is shown by many in the firing line, so to speak, so Petrochemicals Middle East still remains firmly upbeat for 2009.