Giant awakening

Is the regional refining and petrochemical industry poised for greatness? Evidence and analysis point to success, if the industry can stay on course.

The Gulf's approach to oil is changing. It is no longer enough just to ship crude overseas and take the money. To develop the petro economy, countries in this region are looking at how they can add value to their natural resource.

State organisations are backing this with cash. Just last year Sabic paid US $11 billion for GE Plastics, turning it into Sabic Innovative Plastics and immediately benefiting from GE's established distribution network and market development systems.

Expansion is going on throughout the value chain and there is stiff competition to attract investment dollars. The key to winning is access to feedstock.

This need is generating investment at the refinery end of the chain. Between 2005 and 2011, OPEC projects, either already under construction, being planned or under consideration, total 5.9 million barrels per day (bpd) of expanded refining capacity.

The accumulated investment required for the realisation of these projects, based on the estimations by a number of unaffiliated secondary sources, would amount to around US $66 billion between 2006 to 2011. OPEC understatement describes this as ‘the market heading into a phase of significant development'.

Saudi Arabia is the Gulf's petrochemical kingpin. The United Arab Emirates, Qatar and Kuwait join the Kingdom to make up a quartet of nations that will dominate the petrochemical industry as the region's players go global.

They are on the hunt for investors to help them do so, but it's not just a question of funding, they want access to technology and expertise.

Joint ventures, such as Borouge - a 60/40 partnership between Adnoc and Europe's Borealis - may demonstrate the model needed in the future, one that joins European expertise with local feedstock availability, to target markets in Asia.

Construction and feedstock"In the long term, there may be constraints on feedstock," said Abdullah Bin Zaid Al Hagbani, secretary general of the Gulf Petrochemicals & Chemicals Association (GPCA).

"In Saudi Arabia, the numbers are impressive in refineries, but we've always believed long term that there may be constraint on feedstocks.

Hagbani believe some of the newcomers in some parts of the Gulf will look to develop new forms of feedstock, but to do that they will need new technology.

Whether they develop these or not, expansion of feedstock supplies and other aspects of the industry will need huge levels of capital investment.

"Everybody recognises that petrochemicals and the associated refining industries are key to growth in the Middle East," said Shaheen Chohan, director of market insights for Contax Group, which monitors large capital expenditure projects in the region.

Between now and 2010 in the Middle East there will be just short of US $1.2 trillion investment in capital projects. A large percentage of that will be spent on infrastructure and the core market of energy.

"So in this period we see an additional US $391 billion dollars worth of energy related projects. The US $391 billion planned capital expenditure in GCC energy-related projects is an 80%, or US $174 billion, growth from the US $217 billion energy-related capital expenditure seen over the 2005-07 period.

"The three biggest growth sectors are refining, power and petrochemicals.

They contribute around 85% of the US $174 billion growth over the 2008-10 period: 44% of growth will come from increased refining project investments, 21% from power sector projects, and 19% from petrochemical projects. 

"Planned refining project investments will grow by an amazing 980% between the 2005-07 and 2008-10 periods. Planned power and petrochemicals capital expenditure will each grow by 80% between the two periods.

Most of that investment - 45% - is happening in the Saudi market, 26% in the UAE and after that it is Kuwait and Qatar. These are the main powerhouses for this investment. "These are mind boggling numbers," said Chohan.

"Just in Saudi Arabia, they have 2600% growth in refining project investment (from 2007-2008). Nearly two-thirds (64%) of planned GCC petrochemical investments during 2008-10 will be in Saudi Arabia.

"You start to see that Saudi Arabia is where the real focus of the petrochemical sector is going to be going forward." Chohan cites access to cheap feedstock as the primary reason for this. In the past the industry has been focused in North America and Europe.

"Now, what we see is a huge global shift away from those mature markets into developing regions," said Chohan. "The reason is feedstock advantage.