Dow strengthens Middle East focus after Oman failure

Epic proportions

22 November 2007 12:00  [Source: ICB]

By Anna Jagger/London

AS RISING construction costs jeopardise Dow Chemical's plans to build in Oman, the group is pressing ahead with a giant investment in Saudi Arabia's eastern province and a smaller project in Libya.

Dow's strategy is quite different from some of the other western players, such as BP, Shell and BASF, which have chosen to invest in petrochemicals complexes in China, observes Paul Hodges, chairman of consultancy International eChem. Dow is instead positioning itself to supply this growth market from advantaged feedstock positions in the Middle East.

The US group is increasing its focus on raw material-advantaged areas such as the Middle East and Venezuela, producing basic products in these regions, through joint ventures to spread risk, and supplying them to downstream processing plants located closer to the market. Dow says its investments in the Middle East will increase in the coming decade, helping to transform the region into a global petrochemicals hub.

"This is understandable," says Hodges, "as Dow has no upstream link into crude oil refining, and so needs to create 'virtual upstream integration' if it is to remain competitive in its downstream business."

Dow's relationships in the Middle East are based on the group's ability to supply technology and global market presence, complementing the Middle East's need to add value downstream and create jobs for the region's youthful populations, he adds.

While Dow's Middle East and North Africa projects are export-oriented in the short-term, in the longer term - as the local markets expand, production is proven and customers invest at the sites - exports outside the region will decline, says John Dearborn, Dow president for India, the Middle East and Africa

Dow's Oman project has been hit by spiralling costs and the group is turning its attention to projects in Saudi Arabia, Libya and Kuwait. The group had also been considering investments in Egypt and Qatar, although no progress appears to have been made in these areas.

In Kuwait, Dow's joint venture with Petrochemical Industries Co (PIC), Equate, is doubling its ethylene capacity by building a new ethane cracker at its Shuaiba site. The expansion is a logical step, says Philip Leighton, director for petrochemicals at Jacobs Consultancy, although further expansions at the site are limited because Kuwait does not have a huge feedstock base. "Hence Dow started looking around for other opportunities."

Dow acquired its stake in Equate when it purchased Union Carbide in 2001, kick-starting its current Middle East strategy. Although the widespread view is that Dow overpaid for Carbide, it did take Dow into the Middle East as a joint venture partner, observes Leighton.

ARABIC ALLURE

Dow's Ras Tanura joint venture with Saudi Aramco, which industry sources estimate will require a $20bn investment, will involve 30 worldscale petrochemical plants at the outset. Based on refinery and gas feedstocks, the complex will have a vast product slate including vinyl chloride monomer (VCM), polyurethane (PU) components, epoxy resins, polycarbonate (PC), amines and glycol ethers.

"One of the very important aspects of that project is that we intend to contribute solidly to attracting some of our customers to come and co-invest next to us to create an industrial park," says Dearborn. Plans to attract downstream producers are part of a government strategy to create jobs and economic diversification away from oil and gas.

The Ras Tanura project represents Dow's third attempt to invest in Saudi Arabia, Leighton notes. Dow was the original partner with SABIC in Petrokemya, but pulled out in the 1980s. The US group had also looked at partnering Saudi Aramco in its PetroRabigh project. Aramco had shortlisted SABIC, Sumitomo Chemical and Dow as potential investors in the project in 2003 but, for reasons that are not clear, Dow pulled out, Leighton says. Sumitomo was selected as the partner in the PetroRabigh refinery and petrochemical project, which is expected to start up in the fourth quarter of 2008.

"For Dow, Ras Tanura is a hugely significant project," says Leighton. "Having walked away from two potential joint ventures in the Kingdom, it's not many companies that get a third chance."

In Libya, Dow is teaming up the National Oil Corp to operate and expand the Ras Lanuf petrochemical complex. With this project, Dow will become the first chemical multinational to make a major investment in Libya since the US lifted sanctions in 2006.

Dearborn is confident in the success of the Ras Lanuf project, which involves upgrading and modernising the existing naphtha cracker and two PE plants, and then building a new ethane cracker with associated PE and PP facilities. The existing assets make the project particularly attractive, he explains. "We don't have to invest from ground zero."

Dow's Oman project - a joint venture with the Oman Oil Co and the Sultanate of Oman - has been postponed indefinitely. In May this year, Dow chairman and CEO Andrew Liveris admitted that the project, which was originally due onstream in 2008/2009, had been delayed because of rising engineering, procurement and construction costs. Now, Dow's official line is that the group continues to evaluate the project, but industry experts do not believe the project will be implemented.

Under its 'asset light' strategy, Dow is embracing both the creation of joint ventures with local companies and project financing, says Leighton. "The projects are so big and capital intensive that even Dow, which has $40bn market capitalisation, doesn't have the capital to undertake them on its own. And if you want to get access to Middle East feedstock resources, you've got to go through a joint venture partnership with a local company."

By splitting the investment cost with a partner, Dow can invest in larger projects than it could alone, thereby adding shareholder value, observes Werner Zesch, a director at consultancy Arthur D Little. "The risk of the investment is shared, and Dow can achieve quicker growth," he remarks.

ASIAN ATTRACTION

Locating projects in the Middle East enables Dow to supply the fast-growing Indian market, as well as China, Zesch notes.

To help expand its customer base in the Indian subcontinent, Dow is building a research and development centre in Chakan, Pune, in the Indian state of Maharashtra. The centre, which will require an initial investment of $100m, will contribute to the transformation Dow is trying to make to grow in the Indian subcontinent, Asia Pacific and China, says Dearborn. "We are in the process of preparing a market for the Middle East projects."

As a lack of engineering resources continues to hit petrochemicals projects globally, industry observers are questioning whether now is a good time to invest in the Middle East. ExxonMobil Chemical has prolonged studies to expand in Saudi Arabia and build a new cracker project in Qatar. Mike Dolan, ExxonMobil's president, says a rise in the cost of materials, base metals, alloys and fabricated goods over the past five years has become a challenge for capital projects.

But companies do not want to miss out on the high-growth period. "On the one hand, there is a booming market in Asia so you want to be out there doing something," says Simon Jones, director responsible for strategic and commercial intelligence for chemicals - Europe at KPMG. "On the other hand, you've got the high cost to put something on the ground and it takes two to three years to get something up and running. So you're in a Catch 22 situation."

By the time the plant is completed the window of opportunity might have gone, which could lead to the capacity being re-directed to Europe or North America, where a number of high-cost plants may be forced to close down, Jones adds.

In the meantime, analysts continue to speculate about whether the group will put its commodity business into a joint venture or divest all or part of it entirely. And there are suggestions that Dow is considering a major deal, possibly a joint venture with a Middle Eastern or raw material-advantaged player.

For more on the Middle East, subscribe to ICIS Insight Middle East, produced in association with International eChem. Contact: Paul Hodges, phodges@internationalechem.com

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