The Kingdom holds a considerable market share
of supply for basic petrochemicals and their intermediaries. However,
Saudi petrochemical producers were not immune to the global downturn of
2008. The collapse in global demand for petrochemicals impacted
profitability, while tight credit conditions led to a number of project
delays. At the same time, the crisis showed the growing dominance of
Saudi producers in the industry as their margins allowed them to ride
out this period of weakness relatively comfortably. Thus, the recovery
of global olefin and derivative consumption in 2010 saw the expansion of
domestic production and the return of pre-crisis profit levels.Saudi
Arabia currently accounts for 7 percent of global supply of basic and
intermediary products, and 50 percent of GCC's (Gulf Cooperation
Council’s) 105.7 million tons of total petrochemical capacity in 2009.
The Kingdom has gone from being a net importer to a leading net exporter
in the petrochemical sector, supplying over 100 countries, the report
added.In 2009, the export volume rose to 27.57 million tons, an
11.14 percent rise. However, the dramatic fall of prices across the
petrochemical spectrum during the crisis caused the value of exports to
fall by 14.94 percent settling at SR52.67 billion, slightly below its
2007 level. Petrochemical imports represent a smaller share of the
market, catering mainly to downstream producers. In 2009, the sector's
import volume and value fell by 1.78 percent and 3.60 percent,
respectively, to reach 3.31 million tons valued at SR41.22 billion,
largely attributed to the dominant share of derivatives.Global
olefin and derivative consumption is forecast to have recovered in 2010
as demand from Asia, particularly China and India, accelerates. Domestic
export volumes increased by 13.31 percent to 31.24 million tons. Meanwhile,
the recovery of oil prices also ensured a significant growth in export
value, with total level rising by 56.34 percent to reach SR82.34
billion. Based on the monthly averages of first half of 2011, the value
of petrochemical exports is forecast to reach SR99.48 billion by the end
of 2011.The global landscape of the industry is set to radically
change over the next 5 years as demand and supply shift eastwards. By
2015, According to the NCB report, Saudi petrochemical production will
expand by 32 percent to reach 70.2 mntpa, accounting for 9.2 percent of
global supply. The expansion and further specialization of domestic
production will continue to diminish the percentage of imports.Recent
political turmoil in the MENA region has boosted oil prices. NCB
estimate for the average 2011 price of Arab Crude Light has risen by
18.75 percent to $95 per barrel. What are petrochemicals?The
petrochemical industry lies downstream of the oil and gas industry.
Crude oil and natural gas are extracted from the earth and shipped to
refineries for processing to produce hydrocarbons. The mismatch between
supply and demand for refined products leads to surpluses of some
hydrocarbons. These surpluses are the raw materials or "feedstocks" for
the petrochemical industry. On average, only 5 percent of oil and gas
products are used in the production of petrochemicals.The principal
component of natural gas is methane, the simplest aliphatic hydrocarbon
used as a fuel feedstock. Natural gas liquids (NGLs) are higher
hydrocarbons in natural gas that are separated from the gas as liquids
through the process of absorption, condensation, or other methods in gas
processing or cycling plants. Generally NGLs consist of ethane, butane,
isobutene, propane and natural gasoline. Despite being an NGL, ethane
is in fact a gas that can also be extracted from associated gas, which
is a byproduct of the crude oil production process. The final liquid
feedstock is naphtha, derived directly from crude oil.These
feedstocks are then cracked to produce primary petrochemicals; that is
their long chain of hydrocarbon molecules is broken down to produce a
small number of basic commodity chemicals. Olefins such as ethylene,
propylene and butadiene are produced by steam cracking NGLs. Meanwhile,
aromatics such as benzene, toluene and xylene are produced by
catalytically reforming naptha. The most important basic petrochemical
is ethylene, accounting for roughly 40 percent of basic chemicals global
capacity.Olefins and aromatics are the building blocks of
petrochemical intermediaries, as well as more complicated derivative
products, the NCB report said. Petrochemical prices Feedstock
prices vary according to their drivers. Crude oil prices set the cost
of refinery operation, as well as the bottom end of the naphtha price
band. The top end is set by premium gasoline prices; a downstream
product formed when naphtha is placed into a reformer (an apparatus that
reforms the molecular structure of hydrocarbons to produce richer
fuel). The regional differences in naphtha prices are the result of
differing freight costs when the raw material is exported. For example,
West European naphtha prices have averaged $10 per ton lower than in the
US. On the other hand, the price of ethane varies entirely with
location. In the US, ethane is linked to the market price of natural gas
as well as extraction costs, while in Saudi Arabia it is set by a Royal
decree at the cost of extraction.The price of refined products
varies throughout the world due to (1) differences in market structure;
(2) political influences; (3) product quality specifications; (4)
environ- mental legislation; and (5) supply and demand imbalances. The
regional differences of a particular product are once again attributed
to differing freight costs. Unfortunately, petrochemical prices in
general are not very transparent. The larger a congregation of buyers
and sellers, the more liquid the market is and therefore the more
reliable the prices are.It is undeniable that petrochemical derivatives have a vast range of uses in the economy. Meanwhile,
water conservation and hygiene have improved dramatically due to
plastic water pipes and bottles. Thus, the petrochemical industry takes
the residuals of the oil and gas industry and turns them into useful
products that sustain and enhance life.The Saudi petrochemical sectorThe
NCB report said Saudi Arabian petrochemical industry is the most
attractive in the Middle East, promising a long-term path toward
economic diversification. This is due to the strategic advantages Saudi
producers enjoy compared with their global competitors. The most
prominent advantage is the Kingdom's substantial reserves of cheaply
extractable feedstock. Crude oil reserves amount to 264 billion barrels -
the world's largest reserve base — while natural gas reserves amount to
279.7 trillion cubic feet. The government offers ethane-rich associated
gas to domestic producers at a subsidized rate of $0.75 a mnbtu through
state-owned oil giant, Saudi Aramco. However, globally, producers
procure this commodity at spot market prices that currently stand at $5 a
mnbtu.As the price of oil increases, the relative feedstock cost
advantage rises. The Kingdom's competitive cash point position serves as
an incentive for foreign petrochemical companies to invest in the
industry, while its accession to the World Trade Organization (WTO) in
2005 has eased market entry. Saudi Arabia has opened its market by
lowering import tariffs: PE, PP and PS tariffs were reduced to 8 percent
from 12 percent in 2008, and have been brought down further to 6.5
percent at the end of 2010. However, in the WTO agreement, Saudi Arabia
was able to maintain its feedstock pricing comparative advantage by
indicating that ethane is a natural resource that is not being exported.
The argument was also extended to naphtha and other liquids, arguing
that because these liquids are used for domestic purposes and require no
investment in export terminals or marketing, they can be sold to
domestic customers at a discount on export prices. Naphtha receives an
11 percent discount on its export price and NGLs garner a 30 percent
discount on the export price of naphtha. This will allow domestic
producers to offer competitive prices to tariff-protected markets - such
as the EU, US and Japan - and lead to sizable increases in Saudi
petrochemical exports, particularly for polymers.These comparative
and policy drivers are encouraging the inflow of capital. The Kingdom's
lucrative crude oil reserves allow for the world's lowest project energy
costs, while its supportive government provides some of the lowest
taxes and property registration costs. Large economies of scale and
proximity to European and Asian markets have also encouraged foreign
investment. For example, three international oil companies with major
Saudi Arabian petrochemical presence are ExxonMobil, ChevronPhilips, and
Royal Dutch Shell.Despite the government's commitment to reform,
conditions on investment have been imposed and are en- forced through
ethane allocations. The guidelines emphasize diversification, value
addition and Saudization of the work force. The drawback of ethane is
that it only yields a small and low-value slate of products; basic
olefins, such as ethylene. The Saudi Arabian General Investment
Authority (SAGIA) strongly encourages greater captive use of olefins in
petrochemical mega-complexes in order to increase the exportable value
of petrochemical projects and boost local employment. Currently the
petrochemical sector employs just over 43,000 nationals, representing
6.4 percent of the Saudi work force and only 0.6 percent of the total
labor force. Moving further down the product chain into intermediates
and derivatives generates far more employment opportunities.Unfortunately,
according to the NCB report, there are a number of disadvantages to
this conditional approach on investment. Diversification into the
downstream sector requires a great deal of capital, compelling Saudi
investors to seek JVs with foreign firms. Meanwhile, restrictions of
ethane allocations mean that state-owned companies receive higher
priority. Saudization also poses a challenge due to the shortage of
necessary skills needed to cater to the growing demands of the sector.The effect of economic crisisDemand
for petrochemicals and their derivatives generally track global
economic trends given their extensive use in everyday applications.
Thus, global demand for olefins fell 3-4 percent in 2008, and remained
largely flat in 2009. The situation was then exacerbated by destocking
throughout all petrochemical product chains. This caused the price of
polymers - particularly polyethylene - in Asian markets, a key
benchmark, to plummet by 20 percent in 2009.Saudi petrochemical
producers were not immune to the global downturn. Sharp declines in the
price of oil toward the end of 2008 and into 2009 gave naphtha-fed
crackers outside the gulf a boost in competitiveness, undermining the
feedstock advantage of ethane-fed crackers in the Kingdom. The slowdown
also reduced the earnings of domestic producers with the collective net
income of the sector falling to SR273 million in Q4, 2008, down from
SR8.14 billion in Q4, 07. However, this was mainly due to SABIC's (Saudi
Basic Industries Corp.’s) 95.5 percent drop in net profits. Overall,
producers' feedstock advantage and proximity to Asian markets provided a
floor to their earnings. After bottoming out at SR557 million in Q1,
2009, Saudi firms together reported net income of SR8 billion in the
second half of 2009 compared to the net income of SR0.7 billion in the
first half of 2009.
