The petrochemical sector in the Kingdom has reached a defining moment. It has assumed a critical mass. Higher oil prices, enhanced liquidity and cheap feedstock continue to provide the industry in the Kingdom with the zeal and encouragement to explore new horizons. The public-private partnership, a comparatively new local phenomenon, is driving the industry to greater heights.
Estimates are that more than $70 billion of petrochemical projects are currently under development in the Kingdom. Saudi Basic Industries Corp. (SABIC) and non-SABIC players both seem to be striving for a share of the pie. The Saudi Arabian Oil Company (Saudi Aramco) is also forging ahead with its own plans to be a serious player in the downstream petrochemical sector.
For once, the horizon seems clogged and this is a major challenge in many ways. A large number of projects is currently in various stages of planning, development and construction. Despite competition, SABIC continues to lead the way with plans to invest $20 billion over the next three years, taking its output to 64 million tons per year by 2008 from the current 47 million tons per year. A big leap indeed!
A long list of world-scale complexes is currently in various stages of development in different areas of the Kingdom. Even Saudi Aramco, the feedstock supplier, has entered the industry with a $16 billion Ras Tanura project that envisages a 1.2 million tons per year ethane/naphtha cracker, a 400,000 tons per year propylene, 400,000 tons per year benzene, 460,000 tons per year paraxylene and a polyolefin mix unit. Aramco and Dow are discussing jointly developing this project. Saudi Aramco is also working on the Yanbu Petrochemical Complex (and refinery upgrade). The project includes a steam cracker and an aromatics complex. Start-up is set for 2012. Work is also under way at full speed on the world’s largest integrated $9.8 billion plus Petro-Rabigh complex. This is a joint venture between Saudi Aramco and Sumitomo Chemical Company of Japan. The project is expected to come on stream by mid-2008. The plant will have the capacity to produce 600,000 tons per year of mono-ethylene glycol (MEG) and 200,000 tons per year of propylene oxide (PO).
Another major project being taken up in the Kingdom is the Saudi Kayan Petrochemical Company. This $7 billion-$8 billion project is expected to go live in 2009. It picked up momentum only after SABIC acquired a 35 percent stake. Saudi Kayan plans to have a 1.3 million tons per year mixed feedstock cracker and a one million tons per year of EO/EG unit.
Ten other downstream units including a 675,000 tons per year high-density polyethylene (HDPE) unit, a 250,000 tons per year low-density polyethylene (LDPE) unit and a 600,000 tons per year polypropylene (PP) facility will also be constructed. Once it gets on stream, apart from producing the commodity plastics, it also envisages producing ethoxylates, amino ethanols, amino methyls, dimethy formamide, choline chloride, phenol, cumene, polycarbonate and others. This is the first time that specialties would be produced in the Kingdom, heralding a new era in the regional petrochemical industry.
SABIC has also undertaken 450,000 tons per year PP and PDH plants at Ibn-Zahr in Jubail at a cost of $1 billion. Another SABIC subsidiary Petrokemya is working on the expansion and de-bottlenecking of two ethane crackers (Units 1 & 3) of 800,000 tons per year capacity each and a 550,000 tons per year VCM and 450,000 tons per year S-PVC unit.
SHARQ (Eastern Petrochemicals), another SABIC unit in Jubail, is also undergoing expansion. The product from the expanded plant will come on stream in the second half of 2008. A PET conversion unit and de-bottlenecking of the Ibn Rushd plant is also planned.
In the private sector, Saudi International Petrochemical Company (Sipchem) is pressing ahead with the Jubail Olefins Complex and an ammonia plant at a cost of $3 billion-$5 billion. The project includes 1.2 million tons per year of ethane/propane cracker, a bimodal HDPE, PP, vinyl acetate, polyacrylonitrile and 1,650 t/d of ammonia.
Reports indicate that Sipchem has received the necessary feedstock allocation. Tasnee Petrochemical is working on a 1.8 million tons per year of methanol, 500,000 tons per year of acetic acid and 275,000 tons per year of vinyl acetate monomer plant at an estimated cost of $1.5 billion. Tasnee in a joint venture with Basell and Sahara have also announced the construction of Sahara Olefins due to begin operations by the second half of 2008.
The local Al-Rajhi Group is also working to get into the petrochemical sector. It plans a $4 billion ethane cracker, besides PP and EG units. The group is further planning a 55,000 tons per year benzene recovery unit from pygas. The INEOS/Delta Oil Company is pursuing a 1.2 million tons per year ethane cracker and several downstream units including a PE plant at an estimated cost of $2 billion. Commissioning has been set for 2009.
A group made up of Midroc, Sara Development Company and House of Invention (HOI) Company, is also planning an olefins project in Jubail at a cost of $2 billion. This plant includes a 1.3 million tons per year ethane/propane cracker, 400,000 tons per year LDPE, 300,000 tons per year of PP, 750,000 tons per year MEG, 400,000 tons per year of ABS and another 400,000 tons per year unit for alpha olefins.
Saudi Arabia has recently invited Chinese entrepreneurs to invest in the petrochemical sector in the Kingdom. Initial reports indicate of a project worth $4 billion currently being discussed between the two countries. But for all these projects to materialize some major impediments need to be overcome. The availability of feedstock is a key issue facing the industry in the Kingdom today. The Saudi petrochemical industry owes its growth and development to the competitive feedstock availability. This has provided the petrochemical ventures in the Kingdom with a major advantage during their infancy. Its lower availability now could have serious consequences. There are already definite question marks over the availability of sufficient ethane, the preferred feedstock, to meet all the eventual demand. Currently, only a limited quantity is available. It is insufficient for more than two plants, yet a large number of projects is vying for allocations. New feedstock would be available, if and when the new round of gas initiatives is completed but that could be at the least a few years away.
In the meantime, most of the new plants will have to opt for feedstock, other than the most sought-after ethane. That will impact on the bottom line of the new facilities. Feedstock availability remains a major challenge to economy managers in Riyadh. The entry of Saudi Aramco, the feedstock supplier, into the downstream petrochemical sector, is also a cause of concern to some. Saudi Arabia did, however, win an important battle during negotiations to enter the World Trade Organization (WTO), when it gained concessions on feedstock prices. The basic argument that clinched this agreement for the Kingdom was that the government does not subsidize feedstock for consumers. The cost of production to Saudi Aramco is low, the Kingdom emphasized. Similarly, Saudi Arabia also argued that the availability of competitive feedstock pricing was not limited to national petrochemical companies. Feedstock will be available, even to the joint venture private companies, at the same price. However, the WTO has insisted there have to be some price improvements after the grace period is over. Indications are that the prices will go up from the current $0.75 million BTU to somewhere around $1.25 million BTU — still competitive enough. In the meantime, upwardly spiraling construction costs are also becoming a major impediment for new facilities. Plants are being delayed. Some regional consulting houses are saying that construction costs have risen by almost 40 percent since mid-2004 and 80-110 percent since early 2003.
Engineering, procurement and construction (EPC) prices have gone up accordingly. A striking example of this ballooning cost is the Petro-Rabigh plant. When it was originally planned, the investment was estimated at $4.3 billion. When finally it went off the board, the price had gone up to $9 billion.
Analysts confirm that when all these plants begin operating by 2010, the region, with Saudi Arabia in a distinct lead, is set to become the only net exporter of commodity resins, polyethylene and polypropylene. A number of large crackers is due on stream in Saudi Arabia, the GCC and Iran by 2010-2012. About 8.3 million tons per year of ethylene capacity is to be added in the region by 2009. However, analysts fear that all this capacity could change the market environment, with oversupply depressing prices. Industry has to be prepared for it as this is a cyclical business.
The petrochemical industry in Saudi Arabia and in other Gulf countries needs to adapt to these emerging challenges. The focus of the petrochemical industry in the region has so far been on commodity resins. And there have been reasons for that. According to Saudi Arabian General Investment Authority (SAGIA), while undertaking primary processing, local resin producers enjoy 80 percent cost advantage over their European counterparts.
However, SAGIA says this advantage drops to 40 percent when the plants opt for secondary processing and it drops to a minimal 10 percent when they go for tertiary processing. Hence, the plastic producers concentrate on producing ethylene.
In the meantime, the growth of basic plastics in the target market of China is slated to slow down in the coming years. There are informed estimates that Beijing’s reliance on PE and PP imports as a ratio of total consumption will drop to below 30 percent by 2010 (just when most of these new plants will be coming on stream) from 40 percent today. The regional industry needs to beware of this. On the other hand, the global demand for aromatics, benzene, paraxylene (a product of non-ethane feedstock) is expected to go up by at least 10 percent during the same period. Propylene demand is also projected to go up from the current 65 to 80 million tons per year by 2012. It is safe to say that this will have major repercussion on the markets. Producers with a diversified product mix will be better insulated from the vagaries of the market. And thus one can see a push in the region to integrated petrochemical-refining complexes. The Saudi petrochemical industry is now entering a new, more mature phase. Despite major challenges ahead, the industry is confident of its future.