RIYADH, 30 January 2006 — The “feedstock issue” was a highly contentious issue in Saudi Arabia’s bilateral negotiations with major petrochemical producing countries. Their concern was that Saudi Arabia was charging an “unfairly” low price for its petroleum-based and natural gas-based inputs, dubbed as “feedstock”, to it domestic petrochemical producers, thus giving them a huge advantage over foreign-based producers. The products in question were methane, ethane, butane, propane and natural gas or liquefied petroleum gas.

The argument arose from the fact that since 1991, Saudi Arabia had a “dual pricing” scheme under a Council of Ministers resolution, that set NGL prices locally to be 30 per cent lower than the export prices charged for those same products. The Saudi view during the negotiations was quite nuanced. First, a distinction had to be made between methane and ethane on the one hand and butane, propane and natural gasoline (or NGLs). The natural gases — methane and ethane — were not sold for export due to the high cost of liquefying, transporting and regasifying.

Hence, there is no international reference price in the Gulf region. In the past, natural gas used to be flared. Now, it is sold to all local users (Saudi or non-Saudi) at a non-discriminatory price of $0.75 per million BTU, thus maintaining consistency with the World Trade Organization’s (WTO’s) national treatment principle. By making it available to all domestic users, the country was simply utilizing its comparative advantage.

As for butane, propane and natural gasoline, since 2002, they have been sold using “commercial pricing” criteria, negotiated between producers and consumers, ensuring full recovery of production costs plus reasonable profit. Domestic-based producers get a “discount” after adjusting for a number of cost savings. Domestic sales did not require an export infrastructure (refrigeration, storage, terminal) and there was no need for export marketing.

Moreover, domestic sales are based on stable, long-term contracts, while export sales are volatile and based on short-term contracts.

Furthermore, the price was the same for all users within the Kingdom whether Saudi or non-Saudi. This use of comparative advantage is the core of the world trading regime. The most contentious discussions were with the European Union (EU), which is Saudi Arabia’s key competitor in petrochemical production. In the EU, average price of ethane is much higher at $6 per million BTU.

The US was not particularly concerned because it is not a global petrochemical player like Europe, Asia and Saudi Arabia and hence did not see Saudi production as a threat to itself. The issue was left unresolved when the EU-Saudi Arabia bilateral agreement was inked in 2003. After the US bilateral agreement with Saudi Arabia in September 2005, further negotiations resumed with the EU and the issue was finally resolved. In the end the Saudi arguments won the day and the existing pricing regime will remain essentially unchanged after the WTO.

(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)