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Sun 20 Jun 2010 04:00 AM

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Global domination

Companies in KSA have had a massive advantage thanks to the cheapest gas in the world, yet have so far failed to transform that subsidy into world beating production.

Global domination
Petro Rabigh is the first and the largest integrated project in the downstream industry in the Kingdom and in the Middle East, it is also among the 15 largest refineries in the world.
Global domination
The industry has evolved in three phases starting with the establishment of the Royal Commission of Jubail and Yanbu.
Global domination
Integrating petrochemicals plants with refining complex is Saudi Arabia’s new strategy maximise the returns on its feedstock.

Companies in KSA have had a massive advantage thanks to the cheapest gas in the world, yet have so far failed to transform that subsidy into world beating production.

Saudi Arabia downstream industry is booming thanks to its huge oil and gas reserves. It controls more than 260bn barrel of proved crude operated by state controlled company Saudi Aramco, which is the biggest in the world, and the fourth biggest gas reserve of 249 trillion cubic feet, according to the BP annual statistic review.

History

The industry in Saudi Arabia has evolved in three phases. "Phase 1 covers the pre-1983 years when the foundation for the industry was established, starting 1976 with the establishment of the Royal Commission for Jubail and Yanbu to build and maintain a world-class infrastructure in the twin industrial cities at a capital cost of $22 billion," says Dr Abdulwahab Al-Sa'doun, general secretary of the GPCA, and the ex director-general of the energy sector at SAGIA. "This period also witnessed the development of the master gas system (MGS) by Saudi Aramco at capital cost of $12 billion," he adds. The MGS includes gathering systems, processing plants, fractionation plants, storage facilities, transmission pipelines, and an export terminal for NGLs.

In 1976, Sabic, a government-owned enterprise to manufacture basic and intermediate petrochemicals, fertilizers, and metals was established. In 1984, 30% of Sabic's ownership was offered to Saudi and GCC investors.

The Phase 2, between 1983-99, included the start of production of methanol by a Sabic affiliate, Ar-Razi, in 1983. "Two key events occurred during this phase: The first was the commissioning in 1994 of the first flexible feed cracker by Arabian Petrochemical Co. (Petrokemya), a subsidiary of Sabic. This signaled the beginning of mixed feedstock cracking," says Dr Al-Sa'doun. "The second event occurred in 1995, when the petrochemical sector was opened to private investors. This led to the start-up, in 1999, of the Saudi Chevron Phillips Co. plant in Al-Jubail, the first wholly owned private petrochemical venture in Saudi Arabia."

The third phase of Saudi Arabia's petrochemical development was during the period 2000-2005, which witnessed a trend towards globalized production as Sabic acquired DSM Petrochemicals of the Netherland in 2002.

Driving investment

The cost advantage of the Saudi Arabia downstream industry is the main factor behind the success of petrochemicals industry, as Saudi Aramco subsidized ethane feedstock for local companies at a cost of US$0.75 per million btu.

But, due to the limited availability of free gas as huge number of projects announced in the period between 2004 and 2007, Aramco stopped the allocation of ethane feedstock. Saudi International Petrochemical Company (Sipchem) was the last company to receive subsidized ethane gas allocation in 2007. To overcome this situation, Saudi Oil Minister, Ali Al-Naimi, said that his country is taking more initiatives to provide additional supplies of feedstock to the industry. "We are bringing a number of gas facilities into operations, which will have ethane supplies," he said. "Between now and 2014, we will have brought on stream facilities yielding another 400 million standard cubic feet per day of ethane."

The abundance of the feedstock in the Kingdom was the motive for major international technology owners to invest in Saudi Arabia, as a successful petrochemical project requires marriage between cheap access to feedstock and having the right technological know-how.
Another factor behind the booming of the industry in the Kingdom is the easy way to secure finance to construct new projects, as Saudi Arabia government has created financing authorities like Saudi Arabian General Investments Authority (SAGIA), Saudi Industrial Development Fund (SIDF), and Saudi Fund for Development (SFD). "Before the credit crunch, Saudi Arabian companies were able to source loans for their projects just by mentioning the name of the family," says Sayed Rashid Husain, vice president of Al-Azzaz Establishment. "But now, the situation has changed due to the troubles related to Al-Qusaibi and Saad families issues with banks," he adds.

A recent report from the Saudi Faransi Bank revealed that it is plausible for bank lending to private sector to expand by 8% in 2010 as long as a few large financing deals reach fruition this year.

The state is doing the utmost to support the petrochemicals sector as it is the largest non-oil sector in KSA. Saudi Arabia is the world's 11th largest petrochemicals supplier, accounting for 7-8% of total supply, according to SAGIA. While the nation's current strengths lie in the production of basic petrochemical building blocks such as ethylene and methanol, there are plans to diversify its petrochemical portfolio into more complex, distinctive products such as specialty chemicals and engineering thermoplastics. At the same time, Saudi Arabia is investing in raising its global market share profile to 13-14% by 2010.

In this regard, and in order to move more into specialty chemicals product, SABIC acquired GE Plastic unit for US$11.6bn in 2007, this deal allowed the company to acquire many technologies used for the production of specialty chemicals like polycarbonate. Kayan Petrochemical, a subsidiary of SABIC, will be the first company in the kingdom to produce specialty chemical.

Refining crunch

While Saudi Arabia's petrochemical sector is witnessing a bonanza period, the refining sector is still suffering and failing to meet increasing domestic demand. To meet this surging demand, Saudi Aramco plans to boost its 3.7 million barrel a day refining capacity by 1.5 million barrels a day, even as it struggles to find joint venture partners to help build plants. "The development of three new, grassroots refineries at Jubail, Yanbu and Jazan and the large expansion at Port Arthur in the US will raise this refining capacity by about 1.5 million barrels per day," said Khalid al Falih, chief executive officer of Saudi Aramco, in a speech posted on the company website.

Currently, Saudi Aramco operates six refineries. The biggest refinery is Ras Tanura , located on the Eastern cost of the kingdom, with a refining capacity of 525,000 bpd.

"Saudi Arabia's energy demand will rise to 8.3 million barrels a day of oil equivalent in 2028 from 3.4 million barrels in 2009 unless the kingdom becomes more efficient," al Falih said.

The increase in demand may be cut by 50% through improved energy efficiency, he said.  "If no efficiency improvements are achieved and the business is as usual, the oil availability for exports is likely to decline to less than 7 million barrels per day by 2028, a fall of 3 million barrels per day, while the global demand for our oil will continue to rise," he added.

Moreover, Saudi Arabia refineries face a challenge of meeting the Euro5 specification, which dictate the reduction of sulfur content to 10ppm for refined products targeting the Europe.
Integrated solutions

To overcome the difficulties that refining sector faces, and to increase the profitability of the existing refineries, Saudi Arabia has started a program of integrating refineries with petrochemical complexes.

This idea dates back to 1990's, but low oil prices adjourned plans to upgrade existing refineries. The huge windfall generated by high oil prices in 2003 helped Aramco reviving its dream to establish its integrated petrochemical complex. "Petro Rabigh is the first integrated project in the region, which includes a refinery and petrochemical plants," says Zaid Al-Labban, president and CEO of Petro Rabigh.

The project started operation in November 2009, and produce 2.4m t/y of petrochemical products. The capacity of the refinery is 400,000 bpd and accounts 19% of Saudi Arabia refining capacity. "The construction of the project was completed within 30 months," says Al-Labban.

Beside Petro Rabigh, Aramco is upgrading two other refineries, Ras Laffan refinery in joint venture with Dow Chemical, and Yanbu refinery.

Aramco is currently looking for a partner for its Yanbu project. Top management of Saudi Aramco and Sinopec Corp of China met last month in Beijing and the topic of jointly financing and building the 400,000 bpd Yanbu refinery was part of the discussions. "We expect Aramco to choose a new partner for the Yanbu refinery else fund it on its own," says Dr. John Sfakianakis, chief economist at Saudi Fransi Bank.

Sources said that Sinopec may join forces with Aramco to execute the Yanbu refinery. "A 400 000 bpd refinery costs around $4.4 billion in China, but would require $7.32bn investment in Saudi Arabia. We are concerned about the returns on investment," Sinopec Corp chairman Su Shulin told reporters. "We are monitoring the project, but have not entered formal talks."

Challenges

Integrating refineries with petrochemical plant represents big challenge for contractors as well as for project owners. "Integrating refineries with petrochemical plants is very complex and costly project," says Andy Allen, global director of chemicals and petrochemicals division at Foster Wheeler. "Previously, $3bn or $4bn project was seen as mega project. But, with the integration trend, we are talking of $10bn and more," he adds.

Another challenge is related to the supply chain issue, which is considered as a factors of success for the downstream industry. "The supply chain is still in its infancy," says Dr. Abdulaziz Al-Bati, general manager of supply chain at Tasnee Petrochemical complex and also chairman of GPCA supply chain committee. "It may take a while for it to reach its maturity," he adds.

Electricity cost increase is another challenge facing producers, as the Saudi government decided to increase prices destined for industrial usage. The effect of this increase on the cost hasn't been assesed yet, but experts expect that it may have impact production costs.

Going global

The huge amount of capital of companies like Saudi Aramco and Sabic have opened door for these companies to invest outside the Kingdom.  Beside been supplier of over 20% of China's crude imports, Aramco holds a 25% stake in the 240,000 bpd Fujian refinery in the southeastern coastal province of Fujian, in joint venture with Sinopec Corp and ExxonMobil.

Last year SABIC joined forces with SINOPEC in China and established a 50/50 joint venture project to produce 3 million tonnes per year of petrochemical products, operated Tianjin Petrochemical Company (SSTPC). With the new capacities coming on stream in the near future, Saudi Arabia will no doubt swallow up a larger slice of global petrochemical production. Although currently ranked 11th, by significantly increasing its output by 2011, it will be nudging ever closer to the world number one spot. The support to push through this transformation will no doubt come from the grass-roots of Saudi Arabian society, as 14 of its petrochemical companies listed and part-owned by KSA citizens on its stock exchange.