Although the statement by the Saudi Basic Industries Corp. (SABIC) that it plans to invest in the US shale gas is not new, it made headlines.
The combination of Saudi Arabia and shale oil continue to attract attention for a variety of reasons.
Saudi Arabia is the last resort for world oil and that is why shale oil becomes a new player in the game.
In fact SABIC CEO Mohamed Al-Mady revealed the company’s plans and its serious efforts to tap the US booming shale gas market back in October.
He went a step further this time while attending Davos as officials held talks with four US big names in the business on potential investment opportunities.
SABIC has been in the petrochemical business for more than three decades.
It came out of a vision to tap the country’s abundant hydrocarbon resources, make use of that competitive edge, bring in new investment and technology to the field and help meet market needs with more, better and reasonably priced products.
However, there are two issues that affect SABIC performance: The availability of gas, which is the feedstock used in the downstream petrochemical production. At the same time, there is also the issue of having that feedstock at a reasonable price to ensure the company’s competitive edge.
The Kingdom is known to have gas reserves amounting to 288 trillion cubic feet. This places Saudi Arabia in fifth rank worldwide, but those reserves have one main constraint — the bulk of the Kingdom’s gas is associated. It is available only after crude oil is pumped out.
At a point, if the Kingdom decides for whatever reason to curtail its oil production, gas supplies might be affected.
And that is why the Kingdom has started an ambitious program to tap non-associated gas reserves.
The decision to tap the US market and its shale gas can help in this endeavor.
The technology through horizontal drilling and hydraulic fracturing could provide an opportunity to venture into some gas fields in the country’s northern parts.
Another factor is pricing.
SABIC was able to put its mark on the international market, helped, to a large extent by making use of its competitive edge of having enough gas supplies at a reasonable price. That was at one point constitute fraction of what its European and Asian competitors were paying for the feedstock.
The shale gas boom in the US has led to a remarkable change in the price equation sending it to more than five years low from $13 for every one million British Thermal Unit (BTU) back in 2008 to $3.75 for one million BTU now.
That has its impact on the downstream products sold to the consumers like the ethane price, for instance, that declined by almost one third to $0.30 from $0.90.
SABIC is already well established in the US market with its commercial and research centers, which can help it meet new challenges and make use of business opportunities.
Products such as fertilizers, polyolefins to monoethylene glycol and methanol are not needed in the US market only, but across the Atlantic in Europe where old and decaying plants are not meeting the growing and expanding markets demand.
This move by SABIC builds on decades of a track record, which enables it to move its management and resources to where the market needs and can accept.
More significant, the move shows clearly an ability to play in the global field with confidence.
The shale oil and gas revolution in the US was seen by many as a threat to the Kingdom.
It improves domestic production of the US that has been depending on foreign supplies for decades.
So far the best performance has been in the gas, not the oil field.
However, the best input in all this is the new technological breakthrough, or what is called fracturing. This is more significant than the actual supplies added.
Technology after all could be used by anyone in a conducive environment, planned priorities to make better use of this innovation.
SABIC’s move is in its early stages yet, but it provides a better reading of changes taking place in the market and taking necessary measures to adapt to new realities.
