Natural gas is a most precious resource to modern life around the world, and while most countries need it for a variety of purposes only a few still have it and fewer even possess the technology to extract and exploit it economically in unconventional reserves. This article addresses a few of the consequences, opportunities and challenges presented to the petrochemical industry of the GCC facing a paucity of unallocated gas while the US holds a monopoliztic knowhow in exploiting unconventional gas reserves.

Today natural gas accounts for a quarter of the energy used worldwide and its importance — according to Energy Information Administration of the US — will grow evermore indispensable for several decades ahead.

Its relative cleanliness in emissions of carbon dioxide, nitrogen oxides and sulfur dioxides makes natural gas the most environmentally friendly among fossil fuels, which now account for nearly 90 percent of all energy feedstock around the world.

Because modern life around the world has come to depend existentially on energy to make most products we need in our daily life; when in a particular country the cost of availing energy feedstock to industries, commercial centers and households is lowered there are considerable economic benefits to citizens: higher disposable income and more savings which eventually could translate into investments.

We currently witness the economic boons of successful slanted drilling and hydraulic fracturing ("fracking") in the US where the lucrative knowhow is the appanage of a handful of hegemonic highly specialized oil and gas exploring companies.

These few companies have proven they can extract natural gas from shale rocks at such a comparative economic advantage to most of the rest of the world that the use of shale gas in the US now constitutes over 40 percent of total gas used, up from 7 percent in 2007.

The combined overall economic and environmental advantages of using gas are synergistic: gas is now increasingly used not only as a preferred fuel to generate energy in industry, commercial centers and households but in transportation as well and as feedstock to make chemical raw materials which are processed into final products that represent the building block of our daily life.

The knowhow necessary to accompany the value chain that transforms invisible matter — gas — into precious end products enriches society through specialized education and high paying jobs.

What we are witnessing today in the US is an economic rebirth powered by the gas revolution spurring the economy through massive investments in the petrochemical industry that augur a reverse migration of investments from China back to the US. This embryonic wave of prosperity could very well pay off the colossal national debt while creating much needed jobs.

The new capacity additions in natural gas in the US are also to play a geopolitical role: the present total demand for natural gas in the US is roughly around 25 trillion cubic feet a year while the existing production capacity is fast approaching twice that figure.

In Europe, a third of the need for nearly 20 trillion cubic feet a year of imported natural gas is being met from Russia while the balance is imported from a number of friendly Middle Eastern and North African countries.

The US has now readied several ports throughout the Gulf of Mexico to accommodate storage and shipment of Liquefied Natural Gas (LNG) to European ports loaded onto existing and newly built LNG vessels.

It has been a historical constant that the US and Russia vie for expansion and world domination.

The US would probably prefer for its European NATO allies to be less dependent on Russian gas for their energy needs, and purchase their future gas requirements from the US.

The amount of revenues in hard currency from the sale of such a significant amount of LNG will help reduce the national debt and stimulate the US economy further.

On the petrochemical front, the shale advantage has as of the present led to the addition of about two and a half million tons of shale ethylene with more than 12 million tons of shale ethylene committed by fourteen independent suppliers to be on stream by 2020 at the latest.

Separate from the petrochemical feedstock major capacity additions spurred by the shale advantage, oil production and refining — using conventional and unconventional resources in the US and Canada — is also at a historical peak as it's expected to reach 14 million barrels a day in 2014.

This will also avail at comparatively competitive rates the widest gamut of chemical and petrochemical feedstock to the downstream converting petrochemical economic sector of the US.

In fact, US-based converters might very well find it more lucrative to build within the Gulf of Mexico region plants which a few years ago would have been built in China.

This allows to presage near future clusters in the US of chemical and petrochemical manufacturing integrated to their feedstock suppliers in industrial parks fully equipped with necessary infrastructure.

It is worthwhile for us here in the Gulf Cooperation Council countries (GCC) to note that our competitive advantage in a feedstock of fundamental and global importance like ethylene is eroding as compared to that of US based manufacturers and will by 2017 narrow down to US$251/MT, half what it used to be less than a decade ago.

The US, however, maintains the lead in advanced specialty raw materials like catalysts and surfactants to name only a few, which make up an important percentage of the cost if not of the tonnage and this could pretty much assure leadership of the US in this industry.

Europe and China will be the least competitive to manufacture ethylene; China will, however, continue to attract investments with its fast growing economy (presently second largest in the world), albeit they will be barely profitable.

GCC petrochemical manufacturers have a historical opportunity to lure to their fold the petrochemical industry of Europe which faces a choice between the US and the GCC for its future growth.

Saudi Arabia is one country firmly intent on translating its vast resources — oil and gas in particular — into high paying jobs for its citizens and concrete initiatives that have already started to pay off have been taken: The National Cluster Program and Six Economic Cities.

The National Cluster Program consists of five major sectors, of which three are directly plastics related:

1. Automotive

2. Plastics and Packaging

3. Home Appliances

4. Minerals and Metal Processing

5. Solar Energy.

The first three clusters are being filled with converters who very often bring hitherto nonexistent technologies to Saudi Arabia which is leading to import substitution and an improved balance of payment.

In parallel to its industrial initiative Saudi Arabia has made inroads in its education initiatives by building several educational and academic institutes: Vocational and Technical schools across the country, as well as modern universities and Research and Development centers, sponsored both by government as well as by the private sector and working closely with industry to reach commercially significant results.

The Six Economic Cities are taking shape, albeit at a pace slower than most would like to see.

The King Abdullah Economic City (KAEC) has already a major port operational as well as a world-class university and an industrial park that is being filled with manufacturing plants.

In Jazan and Tabuk, each host to one of the Six Economic Cities, the largest seafood culture, development and packaging complexes in the world are nearly finished being built.

A number of petrochemical manufacturers in Saudi Arabia currently obtain critical natural gas feedstock at the cheapest rate in the world.

There is a solid understanding between the beneficiaries of the lowest and most precious natural gas feedstock in the world and the Ministry of Petroleum and Minerals that they have a responsibility to grow the incipient industrial parks within proximity to their manufacturing facilities; almost integrated to it, and that they give priority to Saudi-based converters in their overall sales and marketing approach.

Profits per ton will remain important in the choice of targeted markets, but as long as a supplier is benefiting from advantaged feedstock they will be expected to live up to their part of the bargain.

The immediate challenge facing Saudi Arabia is that it has run out of unallocated gas and has taken steps of unprecedented magnitude to find more gas reserves.

The challenge will be to benefit from its components at a cost that will remain the most competitive in the world.

If the reserves to be discovered next are of a conventional nature Aramco could still be able to offer its components at competitive levels; however, if the gas reserves are unconventional (shale gas) then it becomes probable that the acquisition of technology could drive the costs of supplying its components to a higher level than what petrochemical manufacturers have been able to obtain from the Saudi Government.

Saudi Aramco is very active in mobilizing knowhow from around the world to find and unleash its hydrocarbon resources and convert them to jobs for Saudi citizens.

The Saudi Government has for the first time allowed foreign companies to search for oil and gas underneath soil and sea bed within the borders of Saudi Arabia.

There are now three major foreign joint ventures with Aramco: SRAK, Luksar Energy and Sino Saudi Gas.

A new company, SRAK (South Rubh Al-Khali) has been evenly formed between Aramco and Royal Dutch Shell to find and develop gas reservoirs.

The SRAK initiative covers non-associated gas exploration activities and the evaluation development and production of natural gas liquids (NGL) and field condensates in two promising areas in the southern and eastern Rubh Al-Khali.

The total surface area allocated to SRAK covers around 210,000 square kilometers and it can be exploited by SRAK for a period of a quarter century.

The Saudi Government is keen to have the downstream converting sector receive the precious gas components because investments downstream create jobs manifold than mega projects in drilling and exploration.

Luksar Enery is a joint venture between Russia's — and perhaps one of the world's largest vertically integrated oil company Lukoil and Aramco.

The Russian partner has a 20 per cent stake in Luksar and Saudi Aramco owns the remaining eighty per cent.

The area to be searched and eventually drilled for gas covers a surface area of 30,000 square kilometers in the Rubh Al-Khali Basin.

Sino Saudi Gas is a joint venture between the second largest crude oil producer in the world that is China's Sinopec and Saudi Aramco.

The Chinese partner owns eighty per cent of the joint venture with Saudi Aramco owning the balance twenty per cent.

The search and drilling operation will also take place in Rubh Al-Khali over an area of 40,000 square kilometers.

The success of such ventures will positively impact the oil and gas value chain within Saudi Arabia by availing gas — it remains to be seen at what cost for a million British Thermal Units — to polymer suppliers to encourage them to add more capacity to make the much needed specialty polymers that are still imported by converters.

With a trillion-dollar GDP (Purchasing Power Parity) and a per capita consumption of plastics surpassing that of even OECD countries as well as that of neighboring Turkey, the vision of Saudi Arabia exporting to the world’s key chemical and petrochemical ingredients it once imported, as well as plastic finished products is fast taking shape.

This is being achieved thanks to the good governance of the country that invests in education, infrastructure and raw material exploration and downstream derivatives.

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Adeib Al-Jafari is marketing and sales dept. manager at Petro Rabigh.