Middle East petrochemical players focus on expansions, downstream activities and M&A

After the wave

30 November 2009 00:00  [Source: ICB]

Middle East majors look to go beyond borders and petrochemicals as the last batch of expansion projects nears an end
Malini Hariharan/Mumbai

WITH THE Middle East nearing the completion of a major wave of investments, it is time to look ahead to see what more can be expected from this region.

Rex Features/Chris Eyles

After many delays, four of the six cracker projects that were due in 2008 have been commissioned, while the remaining two - Saudi-Japanese joint venture (JV) Eastern Petrochemical (SHARQ), in Saudi Arabia and Qatar-based Ras Laffan Olefins, in Qatar - are scheduled to start next year.

Including Abu Dhabi-based petrochemical firm Borouge's new cracker, which is due in mid-2010, around 8.5m tonnes/year of cracking capacity is expected to be brought on stream during the 2008-2010 period.

Work on the next investment wave started a few years ago, but progress has been slow; feedstock availability was an issue in a few countries as ethane supplies had already been allocated to existing projects.

There was also the high cost of construction and scarcity of engineering resources and skilled labor, especially during the economic boom years of 2005-2008.

And then there was the global economic crisis, which forced companies to hit the pause button to reassess the world. The crisis also raised doubts on whether funds would be available to finance mega projects.

But the past few months have seen a recovery in economic conditions and sentiment revitalizing the projects environment.

"For countries with significant cost advantages and adequate funding and/or continuing high demand, like Saudi Arabia, India and China, continued investment in major petrochemical projects at improved construction costs is likely to continue," says Rob Meek, CEO of UK petrochemical consultancy Impact Solutions. He adds that the current cycle is both good and bad for investment but rationalization is also likely as new global players from the East become stronger.

"The industry always clears out and reassembles stronger during recessionary cycles. This will be no exception. But expect the continuing shift to the East and strengthening of GCC [Gulf Cooperation Council] positions locally and with partners in attractive higher growth markets, especially China and India," he adds.

There are clear signs that China is catching the attention of the GCC players.

Saudi Arabia's SABIC, the largest petrochemical producer in the Middle East, will see its $2.7bn (€1.8bn) cracker JV with Chinese state-operated energy and chemical giant Sinopec in Tianjin, China, start operations in the first quarter of 2010.

Kuwait Petroleum Corp. (KPC) has formed a JV with Sinopec for a refinery and petrochemical complex at Zhanjiang, China, for start-up in 2013. And Qatar Petroleum International (QPI) is partnering with Anglo-Dutch energy and chemical major Shell for a feasibility study on a 20m tonne/year refinery and 1.2m tonne/year cracker at Taizhou, China.

M&A AND JOINT VENTURES
The desire to go beyond the Middle East has prompted more Middle East players becoming active in mergers and acquisitions.

International Petroleum Investment Co. (IPIC), the investment arm of the Abu Dhabi government, has said that it would like to be a global petrochemical leader in the next five years. With stakes in Borealis (Austria), OMV (Austria) and CEPSA (Spain), and full ownership of NOVA Chemicals (Canada), IPIC wants more assets and has said it expects to buy a major European petrochemical company by the first quarter of 2010.

And QPI recently extended its reach by setting up a JV with Shell that would own 50% of Petrochemical Corp. of Singapore (PCS) and 30% of The Polyolefins Co. (TPC) - also based in Singapore. "I expect more investments of this type as newer players with upstream oil and gas strengths and capital seek strategic partnerships with larger scale petrochemical manufacturers closer to the larger and more mature markets," says Meek.

ABU DHABI AND SAUDI ARABIA LEAD
This global thrust is taking place in parallel to expansions at home. The number of projects planned for beyond 2012 may have been scaled down but those with firm feedstock guarantees and strong sponsors are moving forward. The major ones are in Abu Dhabi and Saudi Arabia.

Borouge has awarded contracts for its third cracker and derivatives project at Ruwais, while Abu Dhabi National Chemicals (ChemaWEyaat), a JV between the Abu Dhabi Investment Council, IPIC, and Abu Dhabi National Oil Co. (Adnoc), has started preliminary work on a $10bn olefins, aromatics and ammonia complex - the first of many projects that it has planned for the long term. It is unlikely to face problems implementing them, given the backing of its sponsors and majority owner IPIC's move to acquire companies with a strong technology portfolio.

In Saudi Arabia, activity at Ras Tanura, where state energy firm Saudi Aramco and US-based Dow Chemical have planned a mega $20bn investment, has picked up in recent months. The engineering and design phase is due to be completed in 2010 with start-up planned for 2015 - a delay from the original schedule of 2012-2014.

Aramco's JV with Japan's Sumitomo Chemical, Petro Rabigh, has also started work on a second phase, which will see it move into production of a wider range of derivatives, including specialty chemicals.

The completion of these projects will see the GCC countries diversify and move beyond upstream petrochemicals, as governments look to generate more employment opportunities for a growing population and capture greater value addition.

But it is still too early to say whether these countries will succeed in developing a large plastics processing industry. In Saudi Arabia, the 2.4m m2 (25.8m ft2) Rabigh Conversion Industrial Park has room for up to 50 processing units, but is reported to have attracted only eight plastics firms so far. More processing zones have been planned on the east and west coasts of the Kingdom. Abu Dhabi Polymers Park, launched in 2008, will see its first tenant start operations in December. The plan is to have up to 70 units and reach full capacity by 2015.

Governments are hoping that proximity to polymer resin suppliers, world-class infrastructure, shared utilities, soft loans and a strategic location that offers easy access to European and Asian end-markets will attract processors. But concerns about availability and the cost of skilled manpower and a limited home market have hindered investments. "Cost bases in GCC, particularly in polyolefins, are favorable if resin transfer prices to converters are made attractive. Processors face challenges of competing on a level playing field with Chinese and Indian converters who have sizeable local markets and competitive resin positions," says Meek.

LIMITED ADVANTAGES
A large processor with plants in the region says there are limited advantages. "Everyone feels that it is good to be near a raw material supplier. But polymers are a global market and there is no big advantage on the raw material front," he says. "Middle East polymer producers can service Asia and Europe and so they are not compelled to sell cheap."

SABIC is reported to offer a discount of $10-30/tonne for only sales in the Kingdom, and these discounts are withdrawn when supplies are tight. A regional polymer producer says European and American plastics processors are evaluating the region but are in no rush. "They do not just want to put their foot in and face difficulties later. They can pay $20-30 more for polymers [in their countries] but save through other means, especially if they don't have to pay huge allowances to top managers," he says.

The dynamics of the downstream business are different, but this has not stopped the GCC countries from pursuing their plans. The next investment wave will see not only more of the same petrochemicals but also a new set of products emerging from this part of the world.

Read Malini's posts on the Asian Chemical Connections blog

By: Malini Hariharan
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