7/29/2019 Saudi Petrochemical Sector Review http://slidepdf.com/reader/full/saudi-petrochemical-sector-review 1/15 Introduction What are Petrochemicals? Petrochemical Prices and Applications The Saudi Petrochemical Sector The Effect of the Economic Crisis Market Size and Trends Current Petrochemical Projects Petrochemical Leaders and Financing Structures Petrochemical Outlook and Future Challenges Conclusion • Saudi Arabia’s vast reserves of cheaply extractable feedstock, proximity to Asian markets, and supportive government policies give its P etrochemical sector a competitive advantage in the global market. • The global economic crisis reduced the global demand for all petrochemi- cals and their derivatives, thereby causing prices to plummet. High-cost pro- ducers around the globe were squeezed out. • Domestic producers were not immune to the economic crisis. The decline in global demand and oil prices lead to reduced earnings. The crisis also showed the growing dominance of Saudi producers as their margins allowed them to ride out this period of weakness relatively comfortably. • The slowdown has also created a supply glut with large scale capacity ex- pansions in 2009 and 2010 from the Middle East and Asia, expected to come onstream post 2012. • Global olefin and derivative consumption is forecast to have recovered in 2010 as demand from Asia, particularly China and India, accelerates. This resulted in the expansion of production in 2010, thereby raising exports by 13% to 31 million tonnes Furthermore, political turmoil in the MENA region is expected to increase oil and petrochemical prices in the short term. • By 2015, we forecast Saudi petrochemical production will expand by 32% from 2009 levels of 53.2 mntpa to reach 70.2 mntpa, accounting for 9.2% of global supply. • The capacities of ethylene and polyethylene are forecast to grow by 45.6% and 11.2%, respectively, to reach 17.38 mntpa and 5.45 mntpa by 2015. Meanwhile, the capacities of propylene and polypropylene are expected to expand by 44.6% and 118.7%, respectively, to reach 5.09 mntpa and 7.92 mntpa by 2015. Although there are no plans to increase the methanol ca- pacity of 5.36 mntpa, investments have been made to diversify into its de- rivatives. • There are currently 62 projects ongoing in the Saudi petrochemical sector valued at roughly SAR236 billion (USD63 billion). The highest value and volume of forecasted petrochemical contract awards is in 2011 at SAR124 billion (USD33 billion) and 23 projects; implying faster industry growth and project development post 2014. • Projects are funded through a variety of debt and equity combinations; in- cluding loans from domestic and international banks, the Saudi Industrial Development Fund (SIDF) and Public Investment Fund (PIF), export credit agencies as well as sukuks. • The sector is likely to face a few challenges in the medium term: (1) short- age of skilled labor force; (2) scarcity of ethane; (3) sustainability of demand recovery in the Chinese market; and (4) anti-dumping duties. • However, the benefits of the Kingdom’s sustained expansion and diversifica- tion of its petrochemical output far outweighs the industry’s challenges. Executive Summary The Kingdom’s Comparative Advantages Propel its Global Position in Petrochemica Saudi Petrochemical Sector Review Said A. Al Shaikh Group Chief Economist | [email protected]Paulina Chahine Senior Economist | [email protected]Contents2 2 3 3 4 5 8 10 11 12 September, 2011 www.alahli.com
• Saudi Arabia’s vast reserves of cheaply extractable feedstock, proximity to
Asian markets, and supportive government policies give its Petrochemicalsector a competitive advantage in the global market.
• The global economic crisis reduced the global demand for all petrochemi-cals and their derivatives, thereby causing prices to plummet. High-cost pro-ducers around the globe were squeezed out.
• Domestic producers were not immune to the economic crisis. The decline inglobal demand and oil prices lead to reduced earnings. The crisis alsoshowed the growing dominance of Saudi producers as their margins allowedthem to ride out this period of weakness relatively comfortably.
• The slowdown has also created a supply glut with large scale capacity ex-pansions in 2009 and 2010 from the Middle East and Asia, expected tocome onstream post 2012.
• Global olefin and derivative consumption is forecast to have recovered in2010 as demand from Asia, particularly China and India, accelerates. This
resulted in the expansion of production in 2010, thereby raising exports by13% to 31 million tonnes Furthermore, political turmoil in the MENA region isexpected to increase oil and petrochemical prices in the short term.
• By 2015, we forecast Saudi petrochemical production will expand by 32%from 2009 levels of 53.2 mntpa to reach 70.2 mntpa, accounting for 9.2% of global supply.
• The capacities of ethylene and polyethylene are forecast to grow by 45.6%and 11.2%, respectively, to reach 17.38 mntpa and 5.45 mntpa by 2015.Meanwhile, the capacities of propylene and polypropylene are expected toexpand by 44.6% and 118.7%, respectively, to reach 5.09 mntpa and 7.92mntpa by 2015. Although there are no plans to increase the methanol ca-pacity of 5.36 mntpa, investments have been made to diversify into its de-rivatives.
• There are currently 62 projects ongoing in the Saudi petrochemical sector
valued at roughly SAR236 billion (USD63 billion). The highest value andvolume of forecasted petrochemical contract awards is in 2011 at SAR124billion (USD33 billion) and 23 projects; implying faster industry growth andproject development post 2014.
• Projects are funded through a variety of debt and equity combinations; in-cluding loans from domestic and international banks, the Saudi IndustrialDevelopment Fund (SIDF) and Public Investment Fund (PIF), export creditagencies as well as sukuks.
• The sector is likely to face a few challenges in the medium term: (1) short-age of skilled labor force; (2) scarcity of ethane; (3) sustainability of demandrecovery in the Chinese market; and (4) anti-dumping duties.
• However, the benefits of the Kingdom’s sustained expansion and diversifica-tion of its petrochemical output far outweighs the industry’s challenges.
supply and demand for refined products leads to sur-pluses of some hydrocarbons. These surpluses are theraw materials or “feedstocks” for the petrochemical in-dustry (Chart 1). On average, only 5% of oil and gasproducts are used in the production of petrochemicals.
The principal component of natural gas is methane, thesimplest aliphatic hydrocarbon used as a fuel feedstock.Natural gas liquids (NGLs) are higher hydrocarbons innatural gas that are separated from the gas as liquidsthrough the process of absorption, condensation, orother methods in gas processing or cycling plants. Gen-erally NGLs consist of ethane, butane, isobutene, pro-pane and natural gasoline. Despite being an NGL, eth-ane is in fact a gas that can also be extracted from asso-ciated gas, which is a byproduct of the crude oil produc-tion process. The final liquid feedstock is naphtha, de-rived directly from crude oil.
These feedstocks are then cracked to produce primarypetrochemicals; that is their long chain of hydrocarbonmolecules is broken down to produce a small number of basic commodity chemicals. Olefins such as ethylene,propylene and butadiene are produced by steam crack-ing NGLs. Meanwhile, aromatics such as benzene, tolu-ene and xylene are produced by catalytically reformingnaptha. The most important basic petrochemical is ethyl-ene, accounting for roughly 40% of basic chemicalsglobal capacity.
Olefins and aromatics are the building blocks of petro-
chemical intermediaries, as well as more complicatedderivative products (Chart 2). The downstream chemicalproducts and their chemical processes include, but arenot limited to, the following:
Polymers: are natural and synthetic compounds madeup of chains or rings of linked, simple monomers. Poly-mers’ high molecular weight accounts for their high melt-ing and boiling points, thereby rendering them useful inplastics and rubber industries. Major products includepolyethylene (PE), polypropylene (PP), polyvinyl chloride(PVC), and polystyrene (PS).
Oxygenates: are chemical compounds that have been
combined or infused with oxygen. They mainly consist of alcohols and ethers, and include ethanol, methanol andmethyl tertiary butyl ether (MTBE).
Polyesters: is a category of polymers that contain theester functional group in their main chain (esters arechemical compounds formed by condensing an acid withan alcohol). They are synthetic fibers that are light,strong, and weather-resistant and are therefore used tomake textiles. A major product is nylon, which is derivedfrom benzene.
Introduction
Saudi Arabia is becoming a leader in the petrochemicalindustry. Its substantial reserves of cheaply extractablefeedstock give domestic producers a cost advantage
over their global competitors. Meanwhile, strong infra-structure, low energy costs and a supportive governmentpolicy continue to encourage large inflows of investmentinto the sector.
The Kingdom holds a considerable market share of sup-ply for basic petrochemicals and their intermediaries.However, Saudi petrochemical producers were not im-mune to the global downturn of 2008. The collapse inglobal demand for petrochemicals impacted profitability,while tight credit conditions led to a number of projectdelays. At the same time, the crisis showed the growingdominance of Saudi producers in the industry as their
margins allowed them to ride out this period of weak-ness relatively comfortably. Thus, the recovery of globalolefin and derivative consumption in 2010 saw the ex-pansion of domestic production and the return of pre-crisis profit levels.
An analysis of the Saudi petrochemical industry and itslong term role towards the economic diversification of the Kingdom is included in this report. We will examinethe key value chain markets in which domestic produc-ers cater to, as well as address a number of ongoingprojects. All in all, a bright future for the sector will beillustrated, albeit with concerns over a few challenges to
be faced in the medium term.
What are Petrochemicals?
The petrochemical industry lies downstream of the oiland gas industry. Crude oil and natural gas are ex-tracted from the earth and shipped to refineries for proc-essing to produce hydrocarbons. The mismatch between
Meanwhile, water conservation and hygiene has im-proved dramatically due to plastic water pipes and bot-tles. Thus, the petrochemical industry takes the residu-als of the oil and gas industry and turns them into usefulproducts that sustain and enhance life.
The Saudi Petrochemical Sector
The Saudi Arabian petrochemical industry is the mostattractive in the Middle East, promising a long-term pathtowards economic diversification. This is due to the stra-tegic advantages Saudi producers enjoy compared withtheir global competitors. The most prominent advantageis the Kingdom’s substantial reserves of cheaply extract-able feedstock. Crude oil reserves amount to 264 billionbarrels – the world’s largest reserve base -, while naturalgas reserves amount to 279.7 trillion cubic feet. Thegovernment offers ethane-rich associated gas to domes-
tic producers at a subsidized rate of USD0.75 a mnbtuthrough state-owned oil giant, Saudi Aramco. However,globally, producers procure this commodity at spot mar-ket prices that currently stand at USD5 a mnbtu.
As the price of oil increases, the relative feedstock costadvantage rises. The Kingdom’s competitive cash pointposition serves as an incentive for foreign petrochemicalcompanies to invest in the industry, while its accessionto the WTO in 2005 has eased market entry. Saudi Ara-bia has opened its market by lowering import tariffs: PE,PP and PS tariffs were reduced to 8% from 12% in2008, and have been brought down further to 6.5% atthe end of 2010. However, in the WTO agreement,Saudi Arabia was able to maintain its feedstock pricing
Intermediates: are compounds produced during theconversion of some reactant to a product. Chemical in-termediates include caustic soda, linear alkyl benzene(LAB), phenols, ethylene oxide and vinyl acetate mono-mer (VAM). These have a wide range of derivatives, in-
cluding textiles and soaps. Fiber intermediates includemonoethylene glycol (MEG), diethylene glycol (DEG),triethylene glycol (TEG), and purified terephthalic acid(PTA). These are used in the manufacture of antifreeze,detergents, paints and polyester.
Petrochemical Prices and Applications
Feedstock prices vary according to their drivers. Crudeoil prices set the cost of refinery operation, as well as thebottom end of the naphtha price band. The top end is setby premium gasoline prices; a downstream product
formed when naphtha is placed into a reformer (an ap-paratus that reforms the molecular structure of hydrocar-bons to produce richer fuel). The regional differences innaphtha prices are the result of differing freight costswhen the raw material is exported. For example, WestEuropean naphtha prices have averaged USD10 per tonlower than in the U.S. On the other hand, the price of ethane varies entirely with location. In the U.S., ethaneis linked to the market price of natural gas as well asextraction costs, while in Saudi Arabia it is set by aRoyal decree at the cost of extraction.
The price of refined products varies throughout the worlddue to (1) differences in market structure; (2) political
influences; (3) product quality specifications; (4) environ-mental legistlation; and (5) supply and demand imbal-ances. The regional differences of a particular productare once again attributed to differing freight costs. Unfor-tunately, petrochemical prices in general are not verytransparent. The larger a congregation of buyers andsellers, the more liquid the market is and therefore themore reliable the prices are.
It is undeniable that petrochemical derivatives have avast range of uses in the economy. The safety and com-fort of automotive transportation has been possiblethrough the presence of plastics, fibers and elastomers.
3
www.alahli.com
Chart 2: Petrochemical Industry
Chart 3: Downstream of Ethane
Chart 4: Downstream of Propane
Associated Gas Steam Cracker Ethylene
Natural Gas
Oil Refinery Cyclar
Ammoxidation
Propane Dehydrogenation
Aromatics
Acrylonitrile
Propylene
Fuel
Propane
Ethylene
Derivatives
Polypropylene
Propylene Oxide
Oxo‐alcohols
Cumene/Phenol
Acrylic Acid
Iso Propanol
Acrylonitrile
Resins Fibers
Plastics Elastomers
Solvents Coatings
End Uses Polymers Intermediates Basic Petrochemicals Feed stocks
2009. The situation was then exacerbated by destockingthroughout all petrochemical product chains. Thiscaused the price of polymers – particularly polyethylene– in Asian markets, a key benchmark, to plummet by20% in 2009.
Saudi petrochemical producers were not immune to theglobal downturn. Sharp declines in the price of oil to-wards the end of 2008 and into 2009 gave naphtha-fedcrackers outside the gulf a boost in competitiveness,undermining the feedstock advantage of ethane-fedcrackers in the Kingdom. The slowdown also reducedthe earnings of domestic producers with the collectivenet income of the sector falling to SAR273 million in 4Q08, down from SAR8,142 million in 4Q 07. However, thiswas mainly due to Sabic’s 95.5% Y/Y drop in net profits.Although Sabic attributed the result to the declining pet-rochemicals and plastics markets, the sharp drop was
probably related to a goodwill writedown on the com-pany's 11 billion-dollar 2007 acquisition of the US firmGE Plastics.
Overall, producers’ feedstock advantage and proximityto Asian markets provided a floor to their earnings. Afterbottoming out at SAR557 million in 1Q 09, Saudi firmstogether reported net income of SAR8 billion in 2H 09compared to the net income of SAR0.7 billion in 1H 09.
The global slowdown may create a supply glut with largescale capacity expansions in 2009 and 2010 from theMiddle East and Asia, expected to come onstream post
2012. The bulk is targeting the ethylene chain, with anadditional 15 mntpa capacity expected to come on-stream in the Middle East by 2012. This may represent achallenge to Saudi Arabia, as the additional capacity isintended for exports. Thus, projects were initially beingdelayed due to slowing demand.
However, in the medium term, high-cost producers inother parts of the world will be squeezed out, and petro-chemical prices are likely to come under pressure fromextra supply. It will take time for the market to absorbthis new capacity and reach a new pricing equilibrium. The resulting price trough will demonstrate the growingdominance of Middle East producers as their margins
will allow them to ride out this period of weakness rela-tively comfortably.
Another upside of the crisis for Saudi producers was thedeclining cost of petrochemical plant construction, whichhad rapidly accelerated from 2002 to 2008 amid the con-struction boom in the Kingdom. A scarcity of raw materi-als, labor, and engineering expertise was leading to pro- ject schedule slippages. The downturn of the construc-tion sector during the crisis freed up resources and gavethe petrochemical industry more negotiating leverageover the costs of planned projects.
comparative advantage by indicating that ethane is anatural resource that is not being exported. The argu-ment was also extended to naphtha and other liquids,arguing that because these liquids are used for domesticpurposes and require no investment in export terminals
or marketing, they can be sold to domestic customers ata discount on export prices. Naphtha receives an 11%discount on its export price and NGLs garner a 30% dis-count on the export price of naphtha. This will allow do-mestic producers to offer competitive prices to tariff-protected markets – such as the EU, U.S. and J apan –and lead to sizable increases in Saudi petrochemicalexports, particularly for polymers.
These comparative and policy drivers are encouragingthe inflow of capital. The Kingdom’s lucrative crude oilreserves allow for the world’s lowest project energycosts, while its supportive government provides some of
the lowest taxes and property registration costs. Largeeconomies of scale and proximity to European andAsian markets have also encouraged foreign invest-ment. For example, three international oil companieswith major Saudi Arabian petrochemical presence areExxonMobil, ChevronPhilips, and Royal Dutch Shell.
Despite the government’s commitment to reform, condi-tions on investment have been imposed and are en-forced through ethane allocations. The guidelines em-phasize diversification, value addition and Saudiasationof the work force. The drawback of ethane is that it onlyyields a small and low-value slate of products; basic ole-
fins, such as ethylene. The Saudi Arabia General Invest-ment Authority (SAGIA) strongly encourages greatercaptive use of olefins in petrochemical mega-complexesin order to increase the exportable value of petrochemi-cal projects and boost local employment. Currently thepetrochemical sector employs just over 43,000 nation-als, representing 6.4% of the Saudi workforce and only0.6% of the total labor force. Moving further down theproduct chain into intermediates and derivatives gener-ates far more employment opportunities.
Unfortunately, there are a number of disadvantages tothis conditional approach on investment. Diversificationinto the downstream sector requires a great deal of capi-
tal, compelling Saudi investors to seek JVs with foreignfirms. Meanwhile, restrictions of ethane allocations meanthat state-owned companies receive higher priority.Saudiasation also poses a challenge due to the shortageof necessary skills needed to cater to the growing de-mands of the sector.
The Effect of the Economic Crisis
Demand for petrochemicals and their derivatives gener-ally track global economic trends given their extensiveuse in everyday applications. Thus, global demand forolefins fell 3-4% in 2008, and remained largely flat in
barrel. The buoyant energy market has subsequentlypushed up petrochemical prices, allowing Saudi produc-ers to enjoy stronger first quarter earnings. This positivetrend is set to continue in the short-term as increasedproduction capacity comes onstream. Although 2011
petrochemical prices will remain above initial estimates,they are unlikely to maintain their upward momentum.
(1) Ethylene
Ethylene is an olefin produced by steam cracking ethaneand naphtha. It is an important feedstock for various pet-rochemical derivatives, mainly polyethylene and ethyl-ene oxide (Chart 6). Saudi Arabia’s ethylene capacity atthe start of 2010 was 11.94 mntpa, representing 8.94%of global capacity. Roughly 4.75 million tonnes cameonstream in 2009 alone. Investments made by SaudiKayan and National Chevron Philips are forecast to ex-
pand domestic ethylene capacity by 22.1% to reach14.58 mntpa by 2012. Meanwhile, joint ventures be-tween Saudi Aramco/Total and Saudi Aramaco/DowChimical will increase this total to 17.38 mntpa by theend of 2015. Thus, the Kingdom’s contribution to globalethylene capacity is expected to rise to 11.1% by 2015(Table 1). The Kingdom is set to emerge as a global hubof ethylene and its derivatives given the capacity addi-tions that are expected to become operational from 2012onwards.
Capital Expenditure from Saudi firms accounts for al-most 50% of the USD250 billion committed to petro-chemical projects in the Middle East. This large percent-age is due to the significantly lower share of the cost of raw materials per unit faced by Saudi producers. Thediscounted price of ethane results in the ethylene pro-duction cost of ethane-fed Saudi plants to averageUSD160 per tonne, versus the USD380 per tonne facedby producers using naphtha-fed crackers (Chart 7).
Market Size and Trends
Saudi Arabia currently accounts for 7% of global supplyof basic and intermediary products, and 50% of GCC’s105.7 million tonnes of total petrochemical capacity in
2009 (Chart 5). The Kingdom has gone from being a netimporter to a leading net exporter in the petrochemicalsector, supplying over 100 countries.
In 2009, the export volume rose to 27.57 million tonnes,an 11.14% rise Y/Y. However, the dramatic fall of pricesacross the petrochemical spectrum during the crisiscaused the value of exports to fall by 14.94% settling atSAR52.67 billion, slightly below its 2007 level. Petro-chemical imports represent a smaller share of the mar-
ket, catering mainly to downstream producers. In 2009,the sector’s import volume and value fell by 1.78% and3.60%, respectively, to reach 3.31 million tonnes valuedat SAR41.22 billion, largely attributed to the dominantshare of derivatives.
Global olefin and derivative consumption is forecast tohave recovered in 2010 as demand from Asia, particu-larly China and India, accelerates. Domestic export vol-umes increased by 13.31% to 31.24 million tonnes.Meanwhile, the recovery of oil prices also ensured asignificant growth in export value, with total level risingby 56.34% to reach SAR82.34 billion. Based on themonthly averages of 1H 2011, the value of petrochemi-
cal exports is forecast to reach SAR99.48 billion by theend of 2011.
The global landscape of the industry is set to radicallychange over the next 5 years as demand and supplyshift eastwards. By 2015, we forecast Saudi petrochemi-cal production will expand by 32% to reach 70.2 mntpa,accounting for 9.2% of global supply (Chart 5). The ex-pansion and further specialization of domestic produc-tion will continue to diminish the percentage of imports.
Recent political turmoil in the MENA region has boostedoil prices. Our estimate for the average 2011 price of
(Chart 8). The ethylene derivative has three forms: high
density polyethylene (HDPE), low density polyethylene(LDPE), and linear low density polyethylene (LLDPE).HDPE has a higher density and melting point than theother two forms, and its higher crystallinity (the degree towhich the compound is a crystalline) makes the com-pound relatively more rigid. Thus, HDPE is used for wa-ter pipes and detergent bottles, while LDPE and LLDPEare used for plastic bags, foils and protective coating ontextiles. Also, LLDPE is steadily eroding the LDPE mar-ket share as it allows lower thickness films that can re-duce costs for many applications while retaining a highertensile strength.
Saudi Arabia’s current polyethylene capacity is 4.90mntpa and has the following breakdown: HDPE at 1.1mntpa, LDPE at 1.55 mntpa, and LLDPE at 0.75 mntpa.Aggressive capital expenditure over the coming 5 yearswill increase domestic capacity of HDPE, LDPE andLLDPE by 113.6%, 35.4% and 33.3%, respectively.From 2012 onwards, the Kingdom’s polyethylene capac-ity will settle at 5.45 mntpa, accounting for roughly4.82% of global capacity (Table 1).
North America, North-East Asia and Western Europe arethe largest consumers of polyethylene, together ac-counting for 62% of global consumption in 2008. How-ever, once again the Middle East was leading in terms of
consumption growth. This can be clearly demonstrated
Ethylene demand closely tracks economic cycles, giventhe wide range of products its derivatives find applicationin: paints, pipes, films and sheets. The Middle Eastemerged as the leader of ethylene consumption growth,
with a CAGR of 7.7% during 2003 – 2008. However,North America and North-East Asia remain the largestconsumers of ethylene, accounting for 26% and 25% of the 111 mntpa consumed in 2008. Demand for the olefinslumped in during the crisis, and only slightly reboundedin the 2H 09. Estimates show that demand remainedmuted in 2010 on the back of slow recovery and weakconsumption in developed countries. Sluggish demandand new capacity additions is likely to restrict the globalutilization rates in the medium term. However, SaudiArabia is expected to continue operating higher ratesthan its Western and European counterparts given itsproximity to the North-East Asian market.
Ethylene prices averaged USD832 per tonne in 2009,falling 28.8% Y/Y. The majority of ethylene production isbased on naphtha or ethane procured at spot marketprices, thus oil prices largely govern the olefin’s pricemovement. As oil prices are forecast to rise in 2011 toaverage USD95 a barrel, ethylene is expected to rise toUSD1,320 per tonne. This growth may subdue in thelong-run as oversupply begins to weigh heavily on theKingdom’s price competitiveness (Chart 9).
(2) Polyethylene
Polyethylene is a flexible, durable and chemically inert
compound that finds applications in films and packaging
6
www.alahli.com
Chart 8: Applications of Polyethylene
0%
20%
40%
60%
80%
100%
120%
South Korea(N/E)
China (N/E) NW Europeinland (N)
NW Europecoastal (Na)
US Gulf Coast (E/P)
US Gulf Coast (NG)
W.Canada(N)
KSA (E) KSA (P)
F ixed costs Utilitie s R aw mate ria ls
Chart 7: Global Feedstock Plant Costs
Source: MEED
Source: NCB Estimates
Source: NCB Estimates, MEED Projects, Company Announcements
Films &sheets51%
Injectionmoldings
13%
Blow molding12%
Pipingapplications
7%
Paintingmaterials
3%
Others14%
Table 1: Saudi Basic Petrochemical Capacities, mntpa
growth of PP tracks that of propylene, albeit at a fasterpace: by 2015 capacity will increase by 118.7% to reach
7.92 mntpa, accounting for a projected 10.8% of globalcapacity.
Demand for propylene and its derivatives are largelydriven by North America, North-East Asia and WesternEurope. Consumption growth in the Middle East out-paced all other geographies, reporting a CAGR of 11.5%between 2003-2008. A greater shift in demand towardsthe East will be witnessed in coming years, restrictingthe detrimental effect slow recovery in developed coun-tries will have on demand. Furthermore, propyleneprices peaked in 2008 at USD1,748 per tonne. Reces-sionary pressures pushed prices down in 2008 and into
2009. Currently, pricing has recovered to USD1,510 pertonne and is expected to grow at a CAGR of 4.9% dur-ing 2009-2015. PP will track propylene price and is cur-rently at USD1,880 per tonne (Chart 9).
(4) Methanol
Methanol is a colorless, toxic liquid alcohol used in di-verse applications, such as an antifreeze, fuel and gen-eral solvents. The liquid is primarily used as a feedstockin the production of derivatives; including formaldehyde,acetic acid, and dimethyl ether (Chart 11). Saudi Ara-bia’s current methanol capacity is 5.36 mntpa, repre-senting roughly 7.54% of global capacity. Sabic is the
world’s second largest producer of methonal, with 4.123
in the HDPE market, where a CAGR of 13.8% was re-ported between 2003 - 2008 in the region, compared
with the 3.5% observed in North-East Asia. Although weexpect global consumption of polyethylene to continuerising in the medium-term, the growth will be at a slowerpace than witnessed historically given the anticipatedslow recovery and demand weakness of developedcountries.
The prices of HDPE, LDPE and LLDPE have risen be-tween 44-77% since the start of 2009. This is due to therising oil and ethylene prices. Moving forward, polyethyl-ene will continue to track ethylene prices with HDPE andLDPE expected to grow at a CAGR of 2.6% and 3.3%,respectively, during 2009-2015.
(3) Propylene & Polypropylene
Propylene is another commonly used olefin with a higherdensity and boiling point than ethylene due to its greatsize. As such, the compound finds applications in blowand injection molding, as well as fiber manufacturing(Chart 10). The Kingdom’s propylene capacity currentlystands at 3.52 mntpa, thereby accounting for 4.02% of global capacity. In the coming years, Saudi Arabia’s con-tribution is expected to rise given the growing number of propylene projects being announced. This is becausedomestic producers are also able to procure propane(the feedstock of propylene) at a discounted rate to the
naphtha export price. Although, the advantage is lesslucrative than that of ethylene, it keeps production costsbelow that of global peers. Key projects being under-taken include those being developed by Sahara Petro-chemical and Saudi Aramco. By the end of 2015, 1.57mntpa of propylene capacity will be added in the King-dom (Table 1).
Roughly 67% of propylene is used to produce its deriva-tive polypropylene (PP). The compound has a higherboiling point than the polyethylene derivative, and istherefore used in producing a wide array of home appli-ances and automotive parts. The Kingdom’s capacity
7
www.alahli.com
Chart 10: Applications of PropyleneChart 9: Price of Ethylene, Propylene and their Derivatives
current if it is tangible and will materialize in 3 years.Projects with the following statuses are classified as cur-rent: Planned, Study, FEED (Front End Engineering andDesign), EPC Bid (Engineering, Procurement, Construc-tion), EPC PQ (Engineering, Procurement, Construc-
tion), Execution, On Hold and Retender.
Roughly 21% of the sector’s projects value is in the exe-cution phase, where actual construction commencesand extends for 2 to 3 years. However, projects in thestudy phase represent a significantly higher 33% (Chart12), and 18% of projects currently undergo bidding. Thisindicates that although capacity expansions are alreadybeing undertaken, larger industry growth and projectdevelopment will be onstream post 2015. Projects OnHold also represent a significant share at 14.5%. Thisrelatively high number is due to logistical issues ratherthan shortage of funding sources.
The value and volume of forecasted petrochemical con-tract awards are significantly higher in 2012 than in pre-vious years, at SAR124 billion (USD33 billion) and 23projects (Chart 13). These capacity additions will be-come operational from 2015 onwards, thereby assertingthat the Kingdom will not only ride out the environmentof overcapacity in the medium term but also become theprimary centre of global production over the long-term.
Petrochemical Leaders and Financing Structures
Sabic, established in 1976, is the market leader in theSaudi petrochemical industry and currently ranks amongthe world’s top six producers. In the past, Sabic’s costadvantage and superior economics gave it a relativelywell position to survive the difficult market conditions of the global petrochemical sector. With 70% governmentownership, SAR50 billion in equity on hand, and strongfree cash flow generation, Sabic remains one of the re-gion’s most creditworthy companies.
Sabic formed a joint venture, known as Saudi Kayan,with privately-held Al Kayan Petrochemical company (AlKayan). The project will consist of an ethylene cracker
mntpa on-stream. However, while Sabic tries to offer abroad range of petrochemical products, Sipchem is pre-dominately focused on methanol producing 1 mntpa;thereby becoming one of its lowest-cost suppliers in theworld.
Although no further projects are expected to be under-taken to increase domestic capacity of methanol, Sip-chem is investing in the expansion of its J ubail Petro-chemical Complex to diversify into methanol derivativesand move up the value chain. The Phase 2 expansionwas completed in late 2009, with the new facility produc-ing carbon monoxide (0.345 mntpa), vinyl acetate mono-mer (VAM) (0.3 mntpa) and acetic acid (0.46 mntpa).Moreover, Phase 2 has an operating structure that per-mits 50% of acetic acid produced to be used as a feed-stock for the production of VAM. This ensures an in-house supply of feedstock at cost price.
Global demand for methanol slowed in 2008, bottomingout at the start of 2Q 2009. Demand is estimated to havedecreased at an annualized rate of roughly 37 milliontonne, leading to dramatic increases in inventory. De-mand is expected to recover in the medium term, grow-ing at a CAGR of 9.4% between 2009-2014. This surgein global demand will be driven by Asia, particularlyChina’s need for fuel and methanol across the core de-rivative slate.
The poor demand of late 2008 also brought about asharp decline in methanol prices. Prices averaged
USD232 per tonne in 2009, falling 37.47% Y/Y. As newderivative demand options offer a positive demand out-look, prices are expect to have risen to USD330 pertonne in 2010. However, a new wave of low-cost metha-nol production across the Middle East and Asia will re-sult in softer prices over the medium term.
Current Petrochemical Projects
At the time of writing this report, the value of the 62 cur-rent petrochemical projects in the Kingdom exceedsSAR236 billion (USD63 billion). A project is defined as
8
www.alahli.com
Chart 12: Share by Petrochemical Project Status
Source: MEED P rojects
Chart 13: Value and Volume of Forecasted Contract Awards
Source: MEED Projects
5.1%
32.9%
8.7%
12.1%
5.6%
21.2%
14.5%
11.3%
4.8%
9.7%
16.1%
12.9%
29.0%
16.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Planned Study FEED EPC (BID) EPC (PQ) Execution On Hold
cracker and araomatics complex, as well as 15 down-stream chemical production plants. Financial closure onthe USD2,000 million project is excepted to be reachedby early 2013.
The increasing scarcity of ethane has encouraged theintegration of refining and petrochemical plants in SaudiArabia. Integration allows for improved risk manage-ment, the reprocessing of off-gas streams and greaterfeedstock flexibility. Furthermore, to strengthen theirglobal position, Saudi producers must aggressively in-vest in diversifying their product portfolio, and a refineryestablishes the platform to do so.
Saudi Aramco and Total are planning a Saudi Aramco Total Refinery and Petrochemical Company (SATORP)at J ubail Industrial City 2. The refinery will be one of themost advanced in the world, processing Arab Heavy
crude and fulfilling stringent product specifications forenvironmentally friendly fuels. The full conversion refin-ery will maximize the production of diesel and jet fuels,as well as produce paraxylene (0.7 mntpa), benzene(0.14 mntpa) and polymer grade propylene (0.2 mntpa)(Appendix A.2, A.3). Financial closure for the USD8,500million project was achieved in mid-2010. Commitmentswere received from the Public Investment Fund(USD1,300 million), direct export credit agency loans(USD490 million), local bank facility (USD2,090 million),commercial facility provided by international banks(USD1,485 million), and a bridging loan from the spon-sors (USD955 million).
SATORP’S export refinery will also provide the feed-stock for the new J ubail Petrochemical Complex, ownedand operated by Sadara Chemical Company. This jointventure between Saudi Aramco and Dow ChemicalCompany was originally to be located in Ras Tanura,where the integrated complex was to produce an exten-sive and diversified slate of plastics and petrochemicals.Issues related to the site forced the project to be relo-cated and reduce the scope of production. The complexwill be now fed entirely by ethane gas - rather than thegas and petroleum mix initially planned for - and will pro-duce 8 mntpa of petrochemicals and gasoline products.Fortunately, the shift in location will allow Sadara to save
up to 40% in costs as the Royal Commission for J ubailand Yanbu (RCJ &Y) will provide the basic infrastructureneeded for the complex, including utilities such as powerand water. The project is valued at USD15,000 millionand is set to be completed by 3Q 2014.
Saudi Aramco has also aligned with China Petroleum &Chemical Corporation (Sinopec) to develop a 400,000barrel a day, full conversion refinery in Yanbu. The pro-posed refinery will be designed to process ArabianHeavy Crude and produce high-quality, ultra-low sulfurrefined products. The project is one of two new facilitiesthat will substantially increase the Kingdom’s supply of
and units producing ethylene glycol, HDPE, LDPE andPP. The project is valued at approximately SAR37.5 bil-lion (USD10 billion) and is being financed by a mix of debt & equity in the ratio of 62:38. Financial closure wasachieved by means of equity including IPO (USD3,998
million), term loan (USD727 million), Islamic loan(USD1,676 million), export credit debt (USD2,000 mil-lion) and government loan (USD1,599 million). TheKayan project is part of Sabic’s plan to raise the propor-tion of specialty chemicals to 30% of total sales by 2020.
Other Sabic affliates are increasing the production of polyolefins and polymers in the Kingdom. For example,the Yanbu National Petrochemical Company (Yansab)has begun commercial operations at its Yanbu petro-chemical complex, which has capacities of 1.3 mntpa of ethylene, 0.4 mntpa of propylene, and 0.5 mntpa of poly-ethylene (Appendix A.2, A.3). The project was funded
by means of term loan (USD1,700 million), export creditdebt (USD700 million) and government loan (USD1,067million).
Saudi International Petrochemical Company (Sipchem)is a similar major project, but with the complex located in J ubail. The facility will comprise an ethane/propanecracker providing feedstock for the production of a vinylacetate monomer (0.3 mntpa) unit, which will be usedwholly or partially to make polyvinyl acetate (0.125mntpa), polyvinyl alcohol (0.04 mntpa), polyvinyl bu-tyrate (0.015 mntpa) and ethylvinyl alcohol (0.015mntpa) (Appendix A.4). Phase III of the project is cur-
rently in execution, with roughly 40% of the engineeringwork complete. The project will be financed through70:30 debt-equity ratio, and has obtained a USD533 mil-lion Islamic working capital facility from five regionalbanks (Riyad Bank, Saudi British Bank, Al Rajhi Bank,Bank Al J azira and Arab Investment Company).
National ChevronPhillips Company (NCP) is a joint ven-ture between Saudi Industrial Investment Group (SIIG),Arabian ChevronPhillips Petrochemical Company andpublic shareholders. The company plans to build a large-scale petrochemicals complex at J ubail. The project,which will be ChevronPhillips' third in J ubail, will produce1.165 mntpa of ethylene, 0.1 mntpa of hexane-1, 0.4
mntpa of propylene, 0.4 mntpa polypropylene (PP), 1.1mntpa polyethylene (PE), 0.2 mntpa of polystyrene andstyrene (Appendix A.2, A.3). The project financing wasarranged in a mix of debt & equity in the ratio 53:47. Fi-nancial closure was achieved by means of equity(USD1,633 million), term bank loan (USD1,870 million),export credit debt (USD590 million) and governmentloan (USD1,120 million).
The joint venture of Saudi Aramco and SumitomoChemical has opened up the bidding to Phase II of itsPetro-Rabigh refinery and petrochemicals complex. Theproject entails the expansion of the existing ethane
The second and most important challenge of the sectoris the scarcity of ethane. Saudi Aramco has allocatedthe totality of its ethane reserves and is currently makingconcerted efforts to bring more gas online. With no guar-antee of finding additional sources, policy makers are
turning to liquid fuels. Naphtha is a more versatile feed-stock, whose production opens up a broader range of aromatics and intermediates, and involves more man-power (Chart 14). The hydrocarbon is derived fromcrude oil and is therefore in abundance in the Kingdom.However, the feedstock is higher in cost than the tradi-tional heavily subsidized ethane, and may constrainprofit growth. Furthermore, the additional labor costs andexpensive maintenance of naphtha fed crackers makethe rate of return on its products lower than those of eth-ane-based products.
The recent surge in petrochemical prices and subse-
quent growth of domestic producers’ profits will offsetthe higher cost of naphtha in the short term. However, inthe long-term a more sophisticated feedstock mix involv-ing both ethane and liquids will be required to encouragefurther foreign investment. This is why the trend towardsrefinery and petrochemical plant integration is on therise.
Another feedstock solution would be to increase the pro-duction of non-associated gas. Saudi Arabia is raisinggas production from non-associated gas fields to caterfor rising domestic demand, which has been growing at7% annually in recent years. Saudi Aramco is currently
developing Karan, its first offshore non-associated gasfield project, which is expected to produce 1.8 billionstandard cubic feet per day (cf/d) of gas. The project isvalued at USD3,375 million and is expected to be com-pleted in 2013. Saudi Aramco is also forging ahead withthe development of two other offshore non-associatedgas fields, Arabiyah and Hasbah. Total production fromthe two fields is expected to rival with the Karan devel-opment, flowing at 1.8 billion cf/d.
However, a burden facing the industry is the rising priceof exploration and production for non-associated gas. The mounting costs are due to increases in the globaldemand on offshore oil riggers and seismic survey com-
panies, as well as the additional processing unitsneeded to reduce the high-sulphur count of the non-associated gas fields. Consequently, the Kingdom’s do-mestic sale price of USD0.75 per mnBTU is expected tocome under review in the medium term. Despite this im-pending rise, domestic gas prices will still lie below theirglobal competitors. Thus, low cost feedstock, highereconomies of scale and logistical advantages will con-tinue to give Saudi Arabian producers a competitive ad-vantage in the petrochemical market.
The third challenge to producers is the sustainability of recovery in the Chinese market. China is Saudi Arabia’s
petroleum products to the international market. How-ever, financing for the USD10,000 million dollar projecthas been stalled since the departure of ConocoPhilips,the original international party involved in the joint ven-ture.
Petrochemical Market Outlook andFuture Challenges
The Saudi Petrochemical sector will continue to hold aconsiderable market share of product categories that lienot too far downstream of its pronounced feedstock ad-vantage. Producers’ low cost margins and recent profitgrowth will allow them to stay afloat during the supplyglut and squeeze out higher-cost producers in Europeand North America. This will open up acquisition oppor-tunities for Saudi producers, and encourage diversifica-tion into more sophisticated derivatives production. At
this point, distribution channels will become imperative.Although the Kingdom possesses feedstock, utilities anda strong infrastructure, it does not have access to mar-kets of specialized products. Thus, distributors in themature markets of Asia, Europe and the U.S. will be-come more attractive opportunities for acquisition.
Although the future of the Saudi petrochemical sector isbright, the following challenges are expected in the me-dium term: (1) shortage of skilled labor force; (2) scarcityof ethane and rising feedstock prices; (3) sustainabilityof demand recovery in the Chinese market; and (4) anti-dumping duties. A key challenge is the need for a welltrained and flexible labor force further down the productchain. Hydrocarbons extraction and basic petrochemicalproduction is heavily capital-intensive and is able to pro-vide employment to only 0.6% of the total labor force.However, downstream production requires skilled techni-cal and craft personnel. The Kingdom’s shortage of skilled personnel, particularly in petrochemicals, will notbe remedied overnight, and will require the import of ex-patriate workers. This will create a long-term constrainton Saudi Arabia’s capacity rollout and hinder its goal of creating sustainable job opportunities for Saudi nation-als.
ene and its derivatives. Furthermore, producers’ closeproximity to dominant Asian markets not only allowsthem to capture a greater share of demand, but also en-courage foreign investment. Thus, domestic producerswill be able to ride out the supply glut and be in a strong
supply position when the market absorbs the new ca-pacity and prices reach a new equilibrium.
The capacities of ethylene and polyethylene are forecastto grow by 34.7% and 11.2%, respectively, to reach16.08 mntpa and 5.45 mntpa by 2015. Domestic produc-ers are also able to procure propane at a discountedrate to the naphtha export price, thereby making propyl-ene a commonly used olefin. Projects by Sahara Petro-chemical and Saudi Aramco will expand propylene andpolypropylene capacities by 44.6% and 107.7%, respec-tively to reach 5.09 mntpa and 7.52 mntpa by 2015. Al-though there are no plans to increase the methanol ca-
pacity of 5.36 mntpa, Sipchem is investing in diversifyinginto its derivatives.
There are currently 62 projects ongoing in the Saudi pet-rochemical sector valued at roughly SAR236 billion(USD63 billion). The majority of projects, 33%, are in thestudy phase indicating that greater capacity additionsand industry development will be observed post 2015. This notion is further enforced by the significantly highervolume and value of forecasted contract awards in 2012;23 contracts amounting to SAR124 billion (USD 33 bil-lion).
Current projects in the sector are, for the most part, theresult of joint ventures. Sabic formed a joint venture,known as Saudi Kayan, with privately-held Al Kayan Pet-rochemical company (Al Kayan) to build an ethylenecracker and units producing ethylene glycol, HDPE,LDPE and PP. National ChevronPhillips Company(NCP) is a joint venture between Saudi Industrial Invest-ment Group (SIIG), Arabian ChevronPhillips Petrochemi-cal Company and public shareholders, aimed at con-structing a large-scale petrochemicals complex at J ubail.Financing of these projects, among others, was pro-cured through a variety of debt and equity combinations. These included loans from domestic and internationalbanks, the Saudi Industrial Development Fund (SIDF)
and Public Investment Fund (PIF), export credit agen-cies as well as sukuks.
The Saudi Petrochemical sector will continue to hold aconsiderable market share of ethylene and propyleneproduct categories. However, domestic producers mayneed to acquire the units and complexes of higher-costproducers squeezed out of the market in order to diver-sify into more sophisticated derivatives production. Thesector is also likely to face a few challenges in the me-dium term. Most importantly is the scarcity of ethane andthe need to diversify into more versatile feedstock, suchas naphtha. The recent surge in petrochemical prices
largest importer of petrochemicals, and acts as a proc-essing center for European and U.S. demand. However,rising Chinese petrochemical capacities threaten to re-duce its demand for foreign imports. China is now estab-lished as the world’s principle manufacturing location for
low-cost plastic products due to its low cost labor force,significant government support and large domestic mar-ket. Roughly 11.95 mntpa of ethylene capacity is fore-cast to come onstream in China over the next five years,leading a steady decline in its import demand.
The final challenge facing the sector is the accusationthat Saudi producers exporting petrochemicals are earn-ing high dumping margins on their products. Acting onthese claims, India recently imposed an anti-dumpingduty on Saudi exports of polypropylene in a move to pro-tect its own producers of the chemical. The tariff will belevied for a period of 5 years from the start of the provi-
sional anti-dumping duty imposed on J uly 30 of lastyear, and ranges from USD28.49 to USD323.50 pertonne. The duty will hinder Saudi producers’ ability toexpand sales in India’s lucrative petrochemicals market;where polypropylene is used to make finished goodsand make woven sacks needed to carry cement, foodgrains, sugar and fertilizers. Manufacturers affected bythe duty include Saudi Yanbu Petrochemical Company,Saudi Polyolefins Company and National Industrializa-tion Company.
Trade representatives in Saudi argue that the Indian de-cision will not have a great financial impact on the King-dom’s producers, as total petrochemical exports from
Saudi Arabia to India amount to a modest USD200 mil-lion a year. Suppliers can also easily shift their exportsto other Asian markets to avoid such losses. Neverthe-less, concerns over encouraged future dumping claimsare being raised following the decisive move of the In-dian government.
Conclusion
Global demand for olefins and polymers is forecast tohave recovered in 2010 as consumption in China andIndia accelerated. The global market for basic petro-chemicals is forecast to remain in oversupply in the me-
dium term due to large capacity additions coming on-stream by Middle Eastern and Asian producers. High-cost producers in other parts of the world will besqueezed out, and petrochemical prices are likely tocome under pressure from extra supply in the mediumterm.
Fortunately, Saudi Arabian producers benefit from thelowest cost margins in the world and a supportive gov-ernment determined to diversify its economy and expandits petrochemical sector. The abundance of ethane-richassociated gas allowed the launch of a series of projectsthat are set to put the Kingdom as a global hub of ethyl-
will enable Saudi producers’ to purchase the heavierfeedstock without constraining profit growth. Further-more, a more sophisticated feedstock mix of gas andliquids has begun to encourage the integration of refiner-ies and petrochemical complexes, and act as another
incentive for foreign investment. Saudi Arabia is alsoraising gas production from non-associated gas fields tocater for the insufficient supply of gas. However, the in-creased cost of exploration and production of thesefields will put upward pressure on the gas price of theKingdom.
The second significant challenge for Saudi producers isthe sustainability of recovery in the Chinese market, asrising Chinese capacities threaten to reduce the volumeof Saudi exports entering the market. The final chal-lenge, that is of less importance to the industry, is thelegal accusations stating that domestic producers ex-
porting petrochemicals are earning high dumping mar-gins on their products. This has propelled countries likeIndia to enforce antidumpting duties.
The benefits of the Kingdom’s sustained expansion anddiversification of its petrochemical output far outweighsthe industry’s challenges. Furthermore, the significantcost advantages that Saudi producers are entitled tohave ensured that project financing is of no issue. Thus,a bright future as a leading exporter lays ahead for theSaudi Petrochemical sector.
Disclaimer : The information and opinions in this research report were prepared by NCB’s Economics Department. The informationherein is believed by NCB to be reliable and has been obtained from public sources believed to be reliable. However, NCB makesno representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report consti-tute the current judgment of the author/authors as of the date of this report. They do not necessarily reflect the opinions of NCB asto the subject matter thereof. This report is provided for general informational purposes only and is not to be construed as advice toinvestors or an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or other securities or to partici-pate in any particular trading strategy in any jurisdiction or as an advertisement of any financial instruments or other securities. Thisreport may not be reproduced, distributed or published by any person for any purpose without NCB’s prior written consent.
To be added to the NCB Economics Department Distribution List:
Please contact: Mr. Noel Rotap Tel.: +966-2-646-3232
