INSIGHT: Support chemicals or reach for the sky

30 January 2008 16:56  [Source: ICIS news]

By Malini Hariharan

Chemicals need private sector interestMUMBAI (ICIS news)--With the petrochemicals spotlight in the Gulf Cooperation Council (GCC) countries firmly focused on the next decade, questions are being raised on whether the industry can repeat the success of the past two decades.  

However, vision 2020 is still hazy with governments struggling to find lasting solutions to diverse problems ranging from finding sufficient feedstocks to building an adequately diversified downstream industry that can provide employment opportunities for a growing local population.

The lack of clarity was clearly evident at last week’s 11th Industrialists Conference in Abu Dhabi, organised by the Gulf Organization for Industrial Consulting.

Government ministers from across the GCC, which includes Saudi Arabia, Qatar, the United Arab Emirates, Kuwait, Oman and Bahrain, were convinced that value addition was the key to future prosperity. While they wanted the private sector to be closely involved in this initiative, success so far has been limited, especially outside Saudi Arabia.

“There is a call to the private sector but for certain reasons companies are refraining [from investments],” said a minister from one of the GCC countries.

The reasons were not hard to find. Firstly, many private companies prefer the lucrative real estate sector to manufacturing.  

“How do we get out of the mentality of building high rise buildings?” questioned one delegate.

A second minister admitted that industrial awareness in the Gulf area was still limited.

“We want to divert attention from real estate to manufacturing,” he stressed.

The lack of interest might surprise those from outside the region given the extensive government support – not only in words but also in the form of ready infrastructure and financial assistance.

Abu Dhabi, for instance, has the  for medium and small enterprises. And Saudi Arabia has offered cheap land, utilities and funding to the plastics processing sector.

But private companies are looking for more incentives to compensate for the weaker economics of derivatives production when compared with olefins and polyolefins production.

One private player pointed out that governments had provided substantial support to state-owned companies in the initial stages of the development of the petrochemical industry in the Gulf.

Given the risky nature of some of the derivative projects, governments should look at promoting partnership with state-owned companies rather than leaving projects entirely in the hands of the private sector, he said.

Others argued that the downstream strategy had many missing links. For instance, plastics processing companies need a robust support structure that includes machinery and mould manufacturing and trade associations.

In the long run, merely encouraging manufacturing activity will not be sufficient given the small markets in region. Greater access to international markets through free trade agreements (FTAs) was a an often heard demand last week.

The GCC ministers acknowledged that there had been delays in signing FTAs with the EU, China and India, but they remained optimistic of finalising these in 2008.

Even if the GCC succeeds in gaining access to international markets a few more problems need to be resolved at home.

“Vision 2020 needs capital, human resources and technology. We have the capital but what are the plans for human resources and technology?” asked a second delegate.

Governments in the GCC are aggressively promoting derivatives production to boost employment opportunities but companies are currently forced to import talent as required skills are not available locally, he pointed out. 

Saudi Arabia is probably the only exception with many companies having successfully achieved 60-70% Saudisation of manpower.

But other GCC countries still have to put in place a systematic plan that will adequately address the education and training requirements of the jobs that the private sector will create in the future. And in the short term, enough labour needs to be made available to ensure timely completion of ongoing projects.

In the area of technology, most GCC companies may have no choice but to rely on imports and partnerships.

But as these companies expand the petrochemicals portfolio, arranging access to diverse technologies from multiple companies will be a challenge. This was seen in Saudi Arabia where the Saudi Kayan project, which has an impressive derivatives list, gained traction only after Sabic took a stake in 2006. The project, which was first mooted by Project Management & Development Co in 2003, is now slated for completion in 2010.

On the feedstock front, it has been widely acknowledged that the era of cheap ethane is most likely over.

Saudi Aramco has reportedly stated that the growth of ethane supplies in Saudi Arabia would be slower in the next decade as new oil investments would yield lower associated gas and new non associated gas projects would have lower ethane content. Additionally, existing gas fields were either at plateau or in decline. As a result, cracker projects in the Kingdom were likely to be more spaced out.

Qatar has plenty of gas but is currently carrying out an extensive study of its North Shelf gas fields and this has restricted the development of new projects.

But the region has a healthy surplus of propane, butane, condensates. The future of petrochemicals [in the GCC] is in heavier feeds, said Philip Leighton of Jacobs Consultancy. Refineries too would emerge as a major source of feedstocks for petrochemicals.

While moving away from ethane gives companies a chance to fulfil the government objective of a wider derivatives slate, it also results in greater complexity and higher capital costs that will test organisational skills and financing capabilities.

Clearly, the next decade will prove to be a challenging one. Vision 2020 may not be attractive as one would like but the GCC still ranks ahead of most other parts of the world when it comes to petrochemical investments.

By: Malini Hariharan
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