By Dr. Abdulwahab Al Sadoun
Low oil prices may be tightening profits for producers but it will be an impressive year for petrochemical firms at the other end.
For anyone doing business in the Middle East, the oil price volatility has been arguably the most relevant topic in the last 18 months. Today, crude oil prices are hovering around the $40 mark, a figure that represents more than a 50 percent decline from January 2014.
To suggest development in an energy related field in these challenging times seems like an anathema. The downstream sector, however, is poised for growth and will see an era of impressive diversification, making 2016 a game-changing year for petrochemicals in the Arabian Gulf.
First, let us face the facts. The volatile oil market has also resulted in the GCC’s petrochemical industry reporting lower profits in 2015. In particular, companies with fixed feedstock costs, that is gas and oil derivatives that form the raw materials (commonly referred to as feedstock) to manufacture petrochemicals have seen a decline in margins in the past year.
However, in the grand scheme of things, the GCC’s petrochemicals industry has arguably withstood the volatility better than their upstream counterparts partly because the region’s major players have ramped up production, a move that has offset some of the losses from low commodity prices.
Petrochemicals, the mix of hydrocarbons that make up diverse products such as plastic and fertilisers, is a relatively young industry in this region. Born out of a need to adequately use associated gas, a by-product in the oil production that was previously burned just four decades ago, today, the region’s petrochemicals industry is a multi-billion dollar sector that employs thousands of people. GCC petrochemical sales have declined, but not by much. According to estimates from the Gulf Petrochemicals and Chemicals Association (GPCA), sales dipped by about 2 percent from just under $88bn in 2014, compared to $89.4bn in the previous year. Not bad for an industry that did not
exist in the middle of the 20th century.
From a macroeconomic perspective, the International Monetary Fund forecasts that the coming year will be one of many challenges, where gross domestic product growth for the Arab Gulf states is expected to dip from 3.3 percent this year, to 2.8 percent in 2016.
However, realistic projections from within the GPCA forecast a healthy 4 percent production capacity growth in the next 12 months, indicating that the chemical industry will see a respectable rise in production, while adding numerous new products into its portfolio.
How is this possible, you may ask, during a time of numerous project cancellations and rigorous capital expenditure cuts?
As with the region’s upstream sector, the main players in the GCC’s petrochemical industry are state- owned companies, with long- term development strategies. Projects with sizable lead times like Sadara, the Saudi Aramco-Dow Chemical joint venture, to Maaden’s Waad Al Shamal project, will be launched in 2016. The result is a steady pipeline of new petrochemicals capacity coming on-stream in the region, manufacturing high- quality plastic and fertiliser products respectively.
Along with this growth, the region will also begin manufacturing a new range of products. Of these, 14 will be introduced for the first time in Saudi Arabia, including polyolefin elastomers, isocyanates and polyols plants. Sadara will also produce amines, glycol ethers, polyethylene, and propylene glycol. In fact, Sadara and the expansion of PetroRabigh, the Saudi Aramco and Sumitomo Chemical project, will lead Saudi Arabia alone to a 10 percent capacity growth in the coming year, a figure that is comparable to the bullish rise of the downstream sector between 2003-2013.
Looking to the future, the GCC’s petrochemical industry can certainly continue to grow its global market share, but concerted measures are required to improve competitiveness through a keen focus on partnerships, investments in technology and the development of innovative capabilities. Growth figures for 2016 may seem modest, however, the 4 percent growth rate from current production rates represents a rise that most developed economies would envy. And with the signing of the Paris climate agreement at COP21 on December 12, we are moving into an era where environmentally responsible and sustainable growth across all industries is the norm, rather than
While 2016 may not elicit blind optimism for exponential development in the downstream sector for the GCC’s petrochemical sector, it does, nevertheless, have the right ingredients to propel this industry to grow and diversify, turning it from good to great.
Dr. Abdulwahab Al Sadoun, Secretary General of the Gulf Petrochemicals & Chemicals Association.