Pricing in Gulf Region

Pricing of Feedstock in the GulfA Policy Conundrum

World Refining Association.

12/13 November 2007

Country Strategies Group | Page 2

OUTLINE

11Stating the problemStating the problem

22Main argumentMain argument

33WTO issuesWTO issues

44Feedstock pricing and cost advantageFeedstock pricing and cost advantage

55SummarySummary


Stating the problem current production patterns

State companies have access tocheapest feedstock in the world

Are able to maximize the NaturalAdvantage of the Gulf countries

Leading to an enormousdevelopment

Gulf states likely to become largestproducers of Chemicals by 2015

Provide enough incentive forcompanies to go further and furtherdownstream

Develop its own distribution

Especially SABIC develop its ownR&D

The private sector does not haveaccess to the same advantage oflow cost

Prices to the private sector arebased on world prices minus adiscount

Not directly related to the Naturaladvantage of the Gulf

With high EPC and distance toclients, the private sector in theGulf cannot compete in the FarEast

State producers vs. the private sector:

State companies are prospering.. However..


The Conundrum

It would allow the private sector to benefitfrom the Gulfs natural advantage..

Would provide much larger creation of jobs

Accelerator effect on the economies of the Gulf could be very large

Would make industrial development much deeper and complementthe State owned firms

However, it would reduce the profits ofstate-owned companies

Should theStates pricefeedstock forall local buyersat cost + a fairmargin?

Source: Team analysis

Would impact state companies like Saudi Aramco, SABIC, QPC,ADNOC, KPC

Would reduce the income of the States and limit State expenditureson the people

It will transfer more wealth in the pockets of the wealthy privateinvestors and the foreign companies active in the region

State producers vs. the private sector:


OUTLINE





55SummarySummary


The Vision

Costadvantage

Create jobs

Create a deepindustrial base invalue addedproducts

Limit dependenceon non-renewablecommodities: oil andgas

Enhance andsupplementthe growthcreated by thestatecompanies

Share advantage oflow-cost feedstock

Inject funds backinto the nationaleconomy throughinvestment

Will invest indownstreamchemicals

Will develop itsowntechnologies

Will partner withhigh tech firmsaround the world

The PrivateSector

The State

Oil between $1.5and $4.50/ barrel orbarrel equivalent

Associated gas =cost is that ofgathering, treating

Energy advantagemeans cheapestfeed-stocks in theworld

Methane andEthane sold at$0.75/MM btu tostate companies

The Gulf states needthe private sector toachieve true industrialdevelopment


What is the hold back..

State-owned companies The private sector

Today Gulf private sector provides only 8% of chemical production

There are no private sector investments in the Gulf outside Saudi Arabia

This is against the goal of having a very deep-seated growth

! Private firms get a discount fromworld prices

! However, discount does notcover the differences for

Higher EPC in the Gulf

Higher cost of operating farremoved from the clients

! It makes private sector just asdependent of vagaries of worldmarkets as the competition

! Major developments by stateowned/controlled firms basedon their access to low cost feedstocks

! Exclusive access to low costfeedstock makes them vastlymore competitive than theprivate sector

Take over the market fromthe private sector

Concentrate all growth intheir organization

Better to be nearthe consumers: iebuild plants in Asia

Lower EPCcost

Closeness toclients allowseasier marketshare [BASFsexample]


The solution..

! The private sector should have the sameright as the public sector to access theNatural advantage of the Gulf

! Pricing policy should be changed

Cancel the discount approach

The state energy providers should sellon a cost + fair profit basis as per WTOagreements

! The pricing policy should apply to allinvestors in the Gulf as demanded by theWTO

A role for the private sector

The private sector can then..

Compete despite cheaperEPC in other countries,especially China

Compete despite lower laborcosts in China, Iran

Focus on downstreamproducts

Help the Gulf countriesprotect & expand theirworldwide market share

Fulfill the Gulf countries goalof building a major industrialpower

Help promote sustainableeconomic growth


Impact on economic development

Attractive pricing

arrangements will

encourage the

private sector to

invest in

downstream

chemicals

This can give the incentive necessary

to bring large investments: There are

unlimited private (local and foreign)

funds ready to invest in the chemicals

industry

New investments will create

employment opportunities for nationals

New private sector investments will

have a large multiplier effect on GDP

and BoP

! Each ton of feedstock will add to

GDP a multiple of the potential

loss to the state as a result of

lower feedstock sale price

Private sector is likely to focus on high

value added downstream products.

Pricing policies must be definedto pass the cost advantage tothe private sector:

Policies should be simpleand consistent: full cost+ fair profit

Should be fair to allparties

Based on professionalevaluations of costs

Should include some formof Social Cost nowborne by the State


RequirementsPolicy Overview Potential problems

! Policy should provide for feed-stocks to be sold to the privatesector at:

Full Cost + Fair Profit

Rather than at a discountfrom the most expensiveforeign reference forNaphtha

! Policy should apply to allcompanies operating in theKingdom whether local,foreign or JVs

! Should apply to all productsusing local feedstock

! Should focus on protectingGulf market share worldwide

! Define the cost of Feedstock atthe state-owned companies forBTX, Propylene, Ethyleneobtained through Naphtha, etc.

! Evaluate the cost of producingNaphtha

Use Oil at $1.5 to $4.50/b[$11 to $34/t] + Associatedgas + processing to sell atworld prices

Ethane, Methane at$0.75/MM BTU

! Define the idea of fair profit

! Evaluate the Social Cost implied in present oil price

! How to define socialcosts?

! How to prevent thechange in pricingfrom just being atransfer of wealth tolarge merchantfamilies?

! Could be opposed bythe operators today

! May not necessarilyachieve the desiredjob-creation

Private sector isstaffed mostly byforeign workers

Pricing policy: possibilities


Pricing policy: potential solutions

2. The PrivateSectorSolution

1. The KayanSolution

3. Link thecost +feedstockprices tobenchmarks

Potential

solutions

Only state-owned companies benefit from theGulfs natural advantage

Sooner or later all chemical companies may comeunder state companies

De facto nationalization of the industrial sector

Provide private sector access to the Gulfs naturaladvantage at par with state companies

Provide Feedstock at Full Cost + Fair Profit

Give private sector the opportunity to fullycontribute to economic growth

Manage and train local personnel

Develop extensive downstream production lines

Allows sharing of profit with the public at large

Use a sunset clause limiting the advantages of theCost + solution to a certain period of time and thenbe re-evaluated


OUTLINE





55SummarySummary

Country Strategies Group | Page 13* Most commonly interpreted as a conflict not between nations, regardless of whether it was internal or transnational; i.e. it could be a conflict between a state vs.a rebel group (see Hamdan v. Rumsfeld, US SC 2006)

! Naphtha and other refined products

[Gasoline, Kerosene, etc.] are not subject to

WTO rules except that of transfer at Full

Cost + Fair Profit

! Final agreement with WTO provides for

NGL feedstock can be sold at Full Cost +

Fair Profit

! Double pricing of NGLs no longer an issue

Renders moot all pricing based on

Tokyo prices for Naphtha -30%

Allows a new formula to be defined

Feedstock under the WTO

Definition of FullCost, includesdepreciation,amortization,financial cost,overhead, training,etc.

Definition of FairProfit isaccording tostandard practicein the industry


OUTLINE





55SummarySummary


Current Saudi Pricing Policy

Sold to SABIC & other Ethane users at$0.75/MM btu

! Gives SABIC a major advantage ininternational markets

! Saudi Aramco new refineries will give itgreat flexibility in costing feedstock fromNaphtha to its JVs at Petro Rabigh and atRas Tannura

Propane, Butane, Natural Gasoline:

! Price paid by the private sector is based on Naphthain Tokyo minus 30% discount after freight. Formulais meant to compensate for:

_ Security of long term contract

_ Savings by Saudi Aramco on long termstorage for foreign markets

_ Savings in Marketing

! Formula has little to do with actual market for NGLs

_ Does cover the privates sector fordifferentials Propane-Naphtha price

_ Is presently penalizing the Saudi firm

_ Does not have market logic

At this time BTX is mostly exported to Asia atworld market prices, or used internally bySABIC and Saudi Aramco, or sold to privatesector at world prices

Sold to SABIC, SEC, SWCC &Others at$0.75/MM btu

Methane Ethane

NGLs Naphtha BaseProducts


Cost advantage of $113/t over European production cost

$233 $4 32

$545

SABICs cost @$/0.75/MMbtu &49.2mmBTU/t [=$37/t]

At suggestedcost of Ethaneof $55/t whichincludes 50%fair profit

Using Ethane feedstockcost + 50% fair profit +$150/t social cost

European production cost

$210

$1070

Effect of cost + fair profit on product: C2s (1/2)

Ethylene

Note that all figures are rough estimates, based on Saudi feedstock costs. All other costs (catalysts, utilities, depreciation, etc) are basedon costs in Europe.


SABICs cost @$/0.75/MMbtu &49.2mmBTU/t =$37/t

At suggested costof Ethane of $55/twhich includes 50%fair profit

European production cost



$522

$546 $749

$864

Using Ethane feedstockcost + 50% fair profit +$150/t social cost

HDPE



$1070

$564 $591

$832 $842

S. Aramco cost @1,25/MMbtu &47.7MMbtu/t [=$60/tof propane]

At cost of propaneof $89/t whichincludes 50% fairprofit

At cost + fair profit +$150/t social cost

Sale price to Saudiprivate sector @ 70%of Tokyo-Naphtha-Freight

S. Aramco postedprice

Effect of cost + fair profit on product: C3s


Polypropylene



Est. productioncost/t

At suggestedcost + fairprofit/t

At cost + fair profit+ $150/t socialcost/t

Price to Saudiprivate sector at30%discount offTokyo-Freight

Est. export saleprice/t

Note that all figures are rough estimates, based on Saudi feedstock costs. All other costs (catalysts, utilities, depreciation, etc) are based on costs in Europe.

PFCs estimates based on SRI and PFC figures **Benzene, Toluene, Xylenes; 1b BTX requires 3b. Naphtha + 10% of 1b for energy source - resulting 2 b. of lowoctane-low value gasoline. Cost 1b Naphtha= $5.00, Value of low octane gasoline=$2.0 BTX cost results in 1b BTX @ $12.5/b=$100/t


Butane

$47$70

$220

$441

$612



Est. productioncost/t

At suggestedcost + fairprofit/t

At cost + fair profit+ $150/t socialcost/t

Price to Saudiprivate sector at30%discount offTokyo-Freight

Est. export saleprice/t

Note that all figures are rough estimates, based on Saudi feedstock costs. All other costs (catalysts, utilities, depreciation, etc) are based on costs in Europe.

PFCs estimates based on SRI and PFC figures **Benzene, Toluene, Xylenes; 1b BTX requires 3b. Naphtha + 10% of 1b for energy source - resulting 2 b. of lowoctane-low value gasoline. Cost 1b Naphtha= $5.00, Value of low octane gasoline=$2.0 BTX cost results in 1b BTX @ $12.5/b=$100/t


BTX

$100$150

$300

$1000 $1000



OUTLINE





55SummarySummary


Summary

" Pricing at Cost + fair profit could generate hundreds of$billions in investments for local and foreign investors

" Will equalize somewhat the cost advantage of Statecompanies

" Savings of feed-stocks will carry through the downstreamproducts

" Provides protection for increase in EPC costs

" Provides sustainable long term economic growth

Date post:	16-Dec-2015
Category:	Documents
Upload:	ian-deakin
View:	216 times
Download:	1 times

Pricing in Gulf Region

Documents