Discounted feedstock will boost petchems industry

21 January 2008 15:13  [Source: ICIS news]

DUBAI (ICIS news)--The Gulf Cooperation Council (GCC) countries should look at discounting feedstock prices to promote petrochemicals projects, said an industry consultant on Monday.


“Feedstock discounting is justified if the primary driver is to add economic value downstream through investments enabled by this discount,” said Philip Leighton, director of petrochemicals at Jacobs Consultancy.


Speaking at the GCC 11th Industrialists' Conference here, he said Saudi Arabia had successfully explained its discount structure for feedstock to the World Trade Organisation (WTO).


"The WTO requires that feedstock transfers are made on the basis of full cost plus reasonable profit. Full cost is the total cost of production including depreciation and financial charges,” he said.


“The GCC has the lowest hydrocarbon production costs in the world and hence can provide feedstocks to petrochemical facilities on a full cost plus reasonable profit basis that can be well below international export price levels,” he added.


To examine to what extent feedstock discounts create value Jacobs compared the net present value (NPV) of the revenue foregone by the discount with the economic value added by the downstream investment. The analysis assumed a 20-year project life and crude oil prices at $60/bbl.


The analysis of propane to ethylene/propylene in Saudi Arabia showed that as long as the cost of capital was less than 12% it was sensible to discount propane, said Leighton


The Saudi domestic price for propane has an approximately 30% discount over the international export price.


Naphtha to aromatics would also generate significant value addition with a price discount of 30%, he added.


If the aspiration was to diversify, create jobs and have a deeper petrochemicals industry it is economically sensible to discount feedstocks, he said.


The GCC 11th Industrialists' Conference, organised by the Gulf Organization for Industrial Consulting, concludes today.


Saudi Arabia was a prime mover in setting up the Gulf Cooperation Council in 1981. Other members are Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates (UAE).

By: Malini Hariharan
+65 6780 4359

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