Stretched To Capacity

During the 1980s an American consulting firm was asked to estimate SABIC's long-term prospects. Today, it admits that the leading petrochemical and steel producer in Saudi Arabia is 70 percent bigger than it predicted 20 years ago.

The State-owned Saudi Arabian Basic Industries Corporation (SABIC) was established by royal decree in 1976 and has become the Middle East's largest industrial group, with a production that will reach 60 mtpa (million tons per annum) by 2008.

Nor is SABIC alone, as other players such as Saudi International Petrochemical Company (SIPCHEM) and Saudi Formaldehyde Chemical Company (SFCCL) are fast catching up in both the domestic and international markets.

But what is behind this unforeseen growth, especially in a country renowned for oil wealth, but far down the list of top producers for petrochemicals?

According to Ahmad A. Al-Ohali, president of SIPCHEM, a producer of both basic and intermediary chemicals, the strong performance of the sector is the result of the economic reforms implemented by King Abdullah. “The need to diversify away from oil was recognized as a priority a long time ago, but it hasn't been such an easy mission to accomplish, especially with oil prices soaring so high,” he says.

The World Trade Organization accession certainly had something to do with it. On its path to membership in 2005, Saudi Arabia had to introduce a number of legislations to improve its business environment and boost inward investment.

In the past ten years, more than 40 new laws have been introduced, tax tariffs lowered, red tape reduced and price fixing eliminated, even for gas feedstock used by domestic petrochemical companies.

But Riyadh I. Al-Saad, president of SFCCL, the first privately-owned downstream petrochemical company in the industry, believes the private sector should take full control of the downstream industry in Saudi Arabia. “The revenues downstream have been superior to basic chemicals, and the costs of establishing a plant are also much cheaper,” he says.

“Although oil continues to dominate Saudi Arabia's economy, petrochemicals are a major driving force, employing 20,000 people and contributing approximately 10 percent of GDP,” points out Al-Ohali, who feels that cheap feedstock and a highly developed industrial infrastructure are what are driving the industry forward.

“Sound government policies have also encouraged direct foreign investment. The time needed to acquire a license has now shrunk to a couple of weeks, while foreign firms are finally allowed to own land and to hold majority stakes in almost all the sectors of the national economy, apart from sensitive industries such as upstream oil and military equipment production.

“There are no restrictions on the repatriation of capital either,” adds Al-Ohali, “and the business-friendly environment is exemplified by the large number of foreign companies present in the kingdom. Some of them have been here already for 40 or 50 years”.

For Al-Saad no one in the world “aside from the Chinese, perhaps”, can compete in the long run with Gulf Cooperation Council (GCC) countries in the production of downstream chemicals. “Western companies should be more cooperative instead of competitive,” he says.

New petrochemical projects backed by foreign direct investment are already in the pipeline. Sumitoro Chemical from Japan and Saudi Aramco have agreed to build an oil-refining and petrochemical complex in Rabigh on the Red Sea.

The development, scheduled to begin operation in late 2008, is estimated to cost $8.5 billion and produce 1.2 mtpa of polyethylene, ethylene glycol and propylene oxide. It will become the world's largest integrated refining and petrochemical complex.

American companies are also active in the thriving Saudi market. The Shaw Group, a leading global provider of technology and engineering, based in Baton Rouge, Louisiana, has recently signed a letter of intent with SABIC's affiliate Yanbu National Petrochemical Company (YANSAB). Shaw will provide detailed engineering for the construction of a butane plant and an aromatic plant, both to be located within YANSAB's petrochemical complex at the major Red Sea industrial port of Yanbu on the west coast of Saudi Arabia.

Engineering has already begun and the two plants are scheduled to be completed in 2008. A further $40 billion is expected to pour into the Middle East's petrochemical sector by 2010 and Saudi Arabia will absorb the majority of it.

But the industry faces challenges as well. According to Dr. Robert Eid, CEO of the Arab National Bank, the petrochemical industry is becoming too big for banks to handle. “With interest rates rising, project finance will become more and more expensive and many conservative institutions may look for other ways to invest their money,” he says.

For Al-Ohali it is very important to keep the sector open to the participation of international firms. “They will bring know-how and capital investment,” he says.

SIPCHEM already works with Canadian and French companies in the production of acetic acid and vinyl acetate at plants in Jubail, the industrial capital, which accounts for more than 7 percent of the kingdom's GDP.

SIPCHEM was also the first company to be awarded a plot of land in Jubail II, the eastward extension of the visionary city built during the 1970s. In the initial phase, Jubail II will accommodate nine different industries. SIPCHEM is setting up an acetyl projects complex, scheduled to start commercial production as early as 2009.

Other companies such as SAFRA, a leading supplier of environmental-friendly aliphatic and aromatic solvents for local and international markets, operates from Yanbu. “We are at the top of the industry in terms of environmental protection and community work,” says Khalid Ibrahim Zagzoog, the company's president.

Established in 1986, SAFRA was awarded the King Fahad Award for best industry in 1997. The company has a capacity of 110,000 tons per annum, and two new plants expected to come online in 2008 will significantly increase that output.

As oil prices continue to soar, speculation about the future of petrochemicals is the talk of the day. Supplies are short, prices are high and any output is profitable, but is the market about to pick up? Will demand for bottles, fabric and shopping bags continue to rise on the global market?

The relentless rise of world manufactured output seems to confirm so, but the ethylene boom has not inspired plans for much new capacity in the West. Meanwhile in the oil states of the Middle East it reached almost 13 million tons in 2005, representing 12 percent of world demand.

“End-users in North America tend to be the most sophisticated and they are willing to pay more if they know they are getting a good product,” says Al-Saad, who has recently came back from a business trip to the U.S. and Canada.

Thanks to a booming construction sector, SFCCL's natural market remains in GCC countries, but Al-Saad would like to develop a long-term relationship with American customers as well. SFCCL is also building a methanol plant which will be completed in 2008. “We won't be just a formaldehyde company any longer and the company's name will be changed to Chemanol, which means chemicals from methanol,” explains Al-Saad.

While the science of predicting price fluctuation still needs to be perfected, the World Bank considers that Saudi Arabia has the best overall environment in the region for doing business, outperforming even high-flyers such as Dubai. In the event of a petrochemicals surplus, Saudi Arabia would easily stay ahead in the battle for market share, because of its abundance of natural resources and the newness and efficiency of its production plants.

By Marco Venditti