Succumbing to Saudi’s charms

25 October 2004 00:01  [Source: ACN]

Saudi Arabia continues to attract investors, despite ongoing political turmoil and threats to security. But given the rise of Iran and other Middle Eastern countries, will the kingdom continue to be the favoured investment destination? Clara Tan finds out

SAUDI Arabia has not lost its charm when it comes to attracting investments, despite the threat of terrorism and possible social and political turmoil. Investors’ confidence in the kingdom can be explained only by the strong projects economics offered by the kingdom.

The security threat came closest to petrochemical players in the kingdom on 1 May, when gunmen attacked the office of ABB Lummus at a petrochemical site in Yanbu and killed five of its expatriate employees. The attack prompted ABB to evacuate its expatriate staff and their families, delaying the completion of a cracker upgrade for Yanpet, a joint venture by Sabic and ExxonMobil.

And then, about a month later, terrorist attacks targeted at western staff working for local oil companies, this time in Khobar, left 22 people dead.

Yet, a few days after the Yanbu attack, Sumitomo Chemical announced that it had signed an MoU with Saudi Aramco for a US$4.3bn refinery-upgrade and petrochemicals complex in Rabigh – a testament, perhaps, to the Japanese major’s confidence in the kingdom.

Following in the footsteps of Sumitomo were Mitsubishi Gas Chemical (MGC), Mitsubishi Corp, and Mitsui & Co. MGC and Mitsui & Co said it was evaluating its next methanol investment in the country.

Mitsubishi Corp is studying building a cracker through its joint venture, Sharq.

‘The [terrorism] threat is very real. I knew people who were murdered in the kingdom,’ says Philip Leighton, a consultant with Jacobs Consultancy. ‘However, the threat is containable and business still goes on.

‘Certainly, the number of western expatriates will be further reduced when employment contracts expire. Replacement by staff from the sub-continent and from Muslim countries will take place.’

The attacks have made western contractors step up security measures or relocate their staff to neighbouring countries. But projects have not been delayed, except the one by Yanpet.

Industry observers do not think security concerns will result in delays to projects or cancellations. In fact, some projects are expected to come onstream ahead of schedule. These include Saudi International Petrochemical Co’s (Sipchem’s) butanediol and methanol projects, for which the contractors are Aker Kvaerner and Chiyoda.

‘I do not believe these [security] issues will result in project cancellations, as the investment decisions are based on the economics of the project,’ says Rizwan Sheikh, a consultant with Nexant ChemSystems.

‘Yes, the hurdle rate for investment appraisal that foreign companies adopt will reflect security concerns. But the sheer cost competitiveness is expected to allow companies to meet any revised benchmarks. Delays can happen for a whole host of reasons that are typical of this industry.’

Investors concede that security is a concern that must be balanced against economics. ‘Security is an important issue, which we hope will be resolved,’ says a Sumitomo source. ‘We will not go ahead with the project if the issue becomes unmanageable. We need a strong guarantee that our investment and staff will be safe.’

The Japanese major and Saudi Aramco have appointed Foster Wheeler to conduct front-end engineering design work on their project in Rabigh. A feasibility study is due to be completed at end-2005.

The Rabigh project could lure Sumitomo away from Singapore, where it was originally considering building its next cracker.

The Sumitomo source explains that Saudi Arabia is attractive because of its competitiveness that is a result of its low-cost gas supplies and ready infrastructure. And Saudi Aramco is a good joint-venture partner with a good human-resource pool.

Another company keen on Saudi Arabia is Mitsui which is mulling building a second methanol plant in the country. The company says it needs more time to evaluate the investment. A key issue here is market demand and not any security threat. Mitsui has already formed a joint venture with Sipchem and other Japanese companies to build a methanol plant in Al-Jubail. The 2900 tonne/day (957 000 tonne/year) project is due onstream later this year.

‘The government has stepped up safety measures, and that has given foreigners a better sense of security,’ says a source from Mitsui & Co who returned to Japan recently after a two-year stay there.

The company is debating whether the market can support one more methanol plant, given the number of projects that have been planned in Saudi Arabia, Iran, Qatar and Oman. All these countries offer similar economics for methanol investors.

‘There would be more than 10m tonne/year of new methanol capacity in the Middle East by 2008,’ the source says. ‘The demand for methanol is growing, but we have to consider the reduced demand from MTBE, which is being phased out in the US.’

Gas pricing

While Saudi Arabia offers the most competitive ethane prices in the region, some companies are wondering how long they will continue to enjoy this cost advantage.

Saudi Aramco has maintained that its cost of production for new gas supplies – including exploration and production costs – is higher than US$0.75/mmbtu, the current ethane price in Saudi Arabia.

One section of the industry believes that ethane prices will remain at this level for a few years, but there is no consensus on how far it will rise after that. Furthermore, gas supplies are not secured on long-term agreements in Saudi Arabia. Therefore, investors are more vulnerable to price hikes.

On the supply side, Saudi Aramco has plans to add 3bn–5bn bbl/day of crude-oil production capacity this decade. This will be linked to the development of new gas-separation plants, which means production of associated gas will also increase. Even if ethane prices were raised, they would still be competitive with prices in the region and in the world. Ethane is priced at US$1.25/mmbtu in Iran.

‘If the cost went up to US$1.25/mmbtu [in Saudi Arabia], the increased feedstock cost would reduce the profitability of the crackers by a couple of percentage points. But for an integrated complex with derivatives, it would probably be by only one percentage point,’ says Andrew Pettman, a consultant with CMAI.

As for extra gas supply, three projects have been planned in the kingdom. They are the expansion of the Hawiyah gas-processing plant, the Hawiyah straddle plant, and the Ju’aymah fourth NGL fractionation train. All the three are due to come onstream by 2008, in time to meet the ethane demand from the next wave of cracker projects.

Another issue is the imminent end of the current price mechanism for liquefied petroleum gas (LPG) supply. In a bid to join the World Trade Organization (WTO), Saudi Arabia has agreed to end a pricing mechanism that allows local companies in the kingdom to buy propane, butane, and LPG at a discount to the Saudi naphtha price (fob Ras Tanurah). The mechanism, which was introduced in 2002, is supposed to be in place until 2011.

The future of propane dehydrogenation (PDH)-PP and mix-feed cracker projects in the kingdom is in doubt once the pricing mechanism on LPG ends. Most of the planned crackers in the kingdom are based on a mix of ethane/LPG feedstocks.

‘There appears to be a deliberate policy of providing ethane/LPG feedstocks to new projects to maximise the production of petrochemicals by blending the more attractive feed (ethane) with the less attractive LPG feed,’ Leighton notes.

‘It is unlikely that 100% ethane crackers will be built in Saudi Arabia in the future. But attractively priced ethane will offset some of the relative cost disadvantage of higher-priced propane and butane for cracking,’ Sheikh points out.

Higher consumption of LPG (butane and propane) in the kingdom means lower exports. It would also enhance the usage of propylene, which can be converted to a number of high-value products. Therefore, the overall scheme (lower LPG exports) can make a lot of economic sense,’ he adds.

But investors are not complaining. Mixed-feed crackers offer more propylene and the chance to build a wider derivatives slate.

The Sumitomo source confirms that the company is interested in producing polypropylene and propylene oxide at Rabigh. And the company is not worried that changes to the pricing mechanism will affect the feasibility of its cracker project.

‘As part of the refinery-upgrade programme, we will be building a fluid catalytic cracking (FCC) unit from which we can get propane,’ the source says. ‘The propane will not be extracted from natural gas and therefore its price will not be determined by the government.’

Whether this reasoning is correct was not immediately clear, as the current price mechanism does not specify if it applies to propane from all sources.

Another investor, Project Management & Development (PMD), which is planning an ethane/butane cracker project, wants to produce phenol and bisphenol A besides the usual ethylene derivatives. PMD is just one of the many private companies coming up in Saudi Arabia. Besides crackers, these companies have also planned PDH-PP projects, the viability of which is in doubt once the price advantage on propane ends in 2011.

‘Beyond 2011, without the price subsidy, these [PDH-PP] projects will lose their competitiveness compared with Asian naphtha-based production,’ Leighton says.

However, Sheikh thinks it is unlikely that Saudi Arabia will raise its domestic prices for LPG after 2011. ‘They [domestic prices] will be more of a business decision for Saudi Arabia, rather than what the WTO dictates.’

Meanwhile, investors in PDH-PP projects are not holding back. There are three PDH-PP projects in the kingdom. A new facility was brought onstream earlier this year.

Some observers point out that it is human resources and not security or gas issues that are likely to delay projects in the kingdom.

The head scientist of Dia Research Martech Inc, Makoto Takeda, thinks the Rabigh project could be delayed because of difficulties in integrating the oil refinery and the gas-based petrochemicals complex and in finding local skilled technicians and workers. The project would have to rely partly on Japanese technicians and engineers, he believes

‘There is little experience in such an integration in Saudi Arabia. The project needs high-quality management. So, we think it will take time,’ Takeda says.

A simple solution would be to import skilled manpower, which is what Saudi Arabia has been doing for a number of years. But this time the problem might be difficult to solve, as Saudi Arabia faces a high level of unemployment. The country has a population of around 24m, but it employs more than 6m expatriates. Furthermore, of the local graduates in the past 20 years, only 5% were engineers and nearly 66.5% majored in non-scientific subjects, such as Islamic studies and social studies.

Rise of its neighbours

Despite the various uncertainties, Saudi Arabia is still the first place to come to mind when investors consider the Middle East. Besides cheap feedstocks, the kingdom also offers soft loans through the Saudi Industrial Development Fund, which can finance up to 50% of a project’s investment cost. There is also the advantage of good infrastructure in Al-Jubail and Yanbu, the two major petrochemical hubs.

But Saudi Arabia’s neighbours cannot be ignored. Qatar surprised industry players when it announced that it would conduct a feasibility study with ExxonMobil on an ethane cracker in Ras Laffan. ExxonMobil also signed an agreement to build a US$7bn gas-to-liquids facility, also in Ras Laffan.

Much has been written about Iran, which is actively seeking foreign investments despite facing possible UN sanctions because of its nuclear programme.

Iran has had an eventful year. In February, the reformists lost their majority to conservatives. In August, hardline lawmakers rejected parts of a proposed reform plan on concerns of foreign dominance of the mainly state-run economy. As a result, foreign oil companies lost their automatic right to explore the oil they had discovered, making it mandatory for them to participate in a state-run tender. And coming up in November, the UN’s nuclear watchdog is expected to provide an assessment of Iran’s nuclear programme, which would determine whether Iran would be subject to sanctions.

Understandably, companies are taking a harder look at the country’s investment environment.

‘The question of where to invest will always be viewed in terms of alternatives. The Saudis realise this and are attempting to tackle issues that will make investment opportunities in the kingdom as competitive as those in Qatar and Iran,’ Sheikh says.

‘Saudi Arabia is in a different league compared with other GCC countries, especially when it comes to natural gas-liquids (NGLs), which are the main driver for petrochemicals. Qatar and Iran may be rich in natural gas, but the use of these reserves for petrochemicals rests on the development of other natural gas-based projects (LNG, methanol, gas-to-liquid) before ethane and propane can be extracted to support petrochemicals,’ he adds.

Iran and Qatar hold mainly dry gas, which has been stripped of LPG and ethane and contains mainly methane. On the other hand, Saudi Arabia processes wet gas to produce dry gas and NGLs. The dry gas is used for power generation and industrial projects, while NGLs are separated into ethane, propane, and C5+ streams for use as petrochemical feedstocks.

While most in the industry are optimistic about Saudi Arabia’s prospects, others caution that the country will find it difficult to compete with its neighbours for investments in the coming years.

A source from a foreign company says: ‘There will continue to be opportunities in Saudi Arabia for only another one to two years.’ He also points out that the country’s top player, Sabic, is increasingly developing projects on its own or only with existing joint-venture partners. These include cracker projects in Al-Jubail through Jubail United Petrochemical, Sharq – a joint venture by Sabic and a Japanese consortium led by Mitsubishi Corp – and in Yanbu through Yanpet, a joint venture by Sabic and ExxonMobil.

In the future, investment opportunities in the kingdom will be available by partnering local private companies, such as Tasnee Petrochemical, Sipchem, and PMD. The companies are seeking foreign equity for their cracker and methanol projects in Al-Jubail. ‘But it is different for Iran. The country is going ahead with its projects and at the same time inviting foreign companies to participate in them. Iran will be a good country for investment in five to ten years. It faces complicated issues, but I believe the country can resolve them,’ the source from the foreign company adds.

"It is difficult to convince a board to invest in Iran now,’ he agrees. ‘Personally, if I had US$100m to invest, I would put US$20m in Iran and US$80m in Saudi Arabia.’

Given the imminent rise of Iran and other Middle Eastern countries, will Saudi Arabia continue to remain the favoured investment destination?

This question was circulated among analysts and petrochemical companies. The consensus is that the kingdom will continue to offer attractive investment opportunities in the short term. Many companies are observing Iran closely, and would start assessing opportunities only when the uncertainties have eased.

MAJOR PROJECTS IN SAUDI ARABIA

 

Company                                                                            Product                                            Capacity (tonne/year)         Location

Ar-Razi                                                                                 methanol (No 5)                                         1.65m                         Al-Jubail

Saudi International Petrochemical Co                          methanol (No 2)                                         1m                              Al-Jubail

                                                                                              acetic acid                                                   460 000     

                                                                                              vinyl acetate monomer                             300 000     

Tasnee Petrochemical/partners                                    methanol                                                     1.8m                           Al-Jubail

                                                                                              acetic acid                                                   460 000     

                                                                                              vinyl acetate monomer                             300 000     

Saudi Aramco/Sumitomo Chemical                              ethylene (ethane/propane-based)         1.3m                          Rabigh

                                                                                               linear low-density polyethylene*           750 000-900 000              

                                                                                               polypropylene*                                         700 000     

                                                                                               other derivatives                                       -                    

Sabic                                                                                     ethylene (ethane-based)                       1.3m                          Yanbu

                                                                                               polyethylene*                                           800 000     

                                                                                               monoethylene glycol*                            700 000     

                                                                                               polypropylene*                                        350 000     

Jubail United Petrochemical Co                                     monoethylene glycol                              630 000                     Al-Jubail

Sharq                                                                                    ethylene (ethane/propane-based)      1.2m                          Al-Jubail

                                                                                               high-density polyethylene*                   400 000       

                                                                                               linear low-density polyethylene*         400 000       

                                                                                               monoethylene glycol*                           700 000     

                                                                                               propylene*                                              200 000     

Tasnee Petrochemical/Sahara Petrochemical/
Saudi International Petrochemical Co                           ethylene (ethane/propane-based)     1m                             Al-Jubail

                                                                                               polyethylene*                                         800 000     

                                                                                               polypropylene*                                      (x) 250 000 #                   

                                                                                                                                                                700 000T   

Project Management & Development                            ethylene (ethane/butane-based)       1.35m                        Al-Jubail

                                                                                               polypropylene*                                      540 000     

                                                                                               ethylene oxide*                                     530 000     

                                                                                               monoethylene glycol*                         475 000     

                                                                                               polyethylene*                                        970 000     

                                                                                               bisphenol A*                                        300 000     

                                                                                               ethanolamines*                                  100 000     

Sahara Petrochemical/Basell                                          propane dehydrogenation-polypropylene                  450 000        Al-Jubail

National Polypropylene Co                                               propane dehydrogenation-polypropylene                  450 000        Al-Jubail

National Petrochemical Industrial Co                            propane dehydrogenation-polypropylene                  420 000        Yanbu

Sadaf                                                                                    styrene                                                   600 000                   Al-Jubail

Jubail Chevron Phillips Chemical                                  styrene                                                   700 000                   Al-Jubail

*part of the complex                                                                                                                                        

# expansion of Saudi Polyolefins Co's plant 

 

SOURCE: ACN                                                                                                                          

     





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