Saudi Arabia's petrochemical industry faces new challenges

Higher hurdles

05 May 2010 00:00  [Source: ICB]

The investment case for Saudi Arabia is no longer as compelling as it once was. But can the new feedstock, engineering and logistics challenges be met?
Prema Viswanathan and John Richardson/Singapore


Rex Features

IF YOU had driven across the Saudi desert in the early 1970s, the investment case for petrochemicals would have looked overwhelming. Natural gas was being flared as a waste product, creating perhaps the biggest competitive opportunity in the history of the industry.

The rest, as they say, is history, through the construction of some 60m tonnes/year of petrochemical capacity, most of which is based on ethane feedstock priced at just 75 cents/MMBtu.

But now everyone – consultants and companies alike – admits that the supply of ethane will be tight in the medium and possibly the long term, although state-owned oil and gas major Saudi Aramco is making massive investments in gas exploration in an attempt to rectify the problem.

It is not just the future price and availability of ethane that is a challenge to the growth of petrochemicals in Saudi Arabia, but also the pricing for propane and butane. These other natural-gas streams have become crucial for the kingdom's diversification away from a dominant focus on ethylene derivatives.

According to company sources and consultants, next year will see important announcements by the government on future pricing for ethane, propane and also naphtha feedstock. Naphtha is becoming a much more important raw material for the manufacture of petrochemicals in Saudi Arabia, as a result of both the more limited availability of natural gas and the desire for greater downstream diversification.

A further challenge appears to be executing projects on schedule, although whether this is mainly a temporary problem created by the escalation of costs a few years ago remains to be seen.

Resolving logistical difficulties, though, might well prove to be something that takes longer to fix.

Ethane gas feedstock shortages have become so severe that private companies will receive no further allocations in the foreseeable future, claims an industry consultant. "It's only going to be for Saudi Aramco and SABIC from now on," he says.

Saudi Aramco and its joint-venture partner, Japan's Sumitomo Chemical, have received one of the few ethane allocations left for a 30% expansion of the ethane cracker at the Petro Rabigh complex. The second-phase expansion at Petro Rabigh also includes plans to make use of 3m tonnes/year of naphtha available at the site for aromatics and derivatives production.

Ethane is so tight that even the state-owned giants will struggle to obtain supplies for new projects, according to another industry consultant.

A decision is expected next year on the future price of ethane and naphtha for petrochemicals, say two industry sources.

The formula that sets the pricing of propane and butane is going to be revisited by the government next year, according to Jamal Malaikah, president and chief operating officer of Saudi polypropylene (PP) producer National Petrochemical Industrial Company (NATPET).

Malaikah told ICIS in an interview on April 20 that he hoped the formula - which is currently set at a 29% discount to prevailing Japan naphtha prices less freight costs - would be reset because of the risk to competitiveness that would be created by a sharp fall in PP pricing.

"Currently, there is a big difference on the discounts offered on ethane and propane gas," he said.

NATPET operates one of several propane dehydrogenation-to-PP complexes that have been brought on stream in Saudi Arabia over the past few years as part of the country's petrochemical diversification strategy.

The Saudi hope is that by producing a broader range of petrochemicals, downstream manufacturing industries will similarly broaden, which will create more jobs for a highly youthful population. Naphtha as a feedstock would help fulfill this goal. And, unlike natural gas, availability is not an issue.

Most of Saudi Arabia's naphtha is exported to feed steam crackers elsewhere, but more domestic uses are being evaluated as refinery capacity is ramped up.

Along with the phase two expansion of Petro Rabigh, Saudi Aramco and France's energy major Total are planning paraxylene (PX) capacity downstream of a refinery they are building at the Al-Jubail industrial city on Saudi Arabia's east coast.

Aramco and US-based Dow Chemical's giant petrochemical project - whose location might be shifted from Ras Tanura to the second industrial city being built at Al-Jubail - would also use naphtha feedstock.

And Aramco is also planning to build a refinery and naphtha cracker at Jizan in the south of Saudi Arabia close to the border with Yemen.

"On a straightforward cost-competitive basis, it doesn't make much sense to build a naphtha cracker in Saudi Arabia," says the second petrochemicals consultant. "It makes more sense just to export the naphtha."

Others disagree. If naphtha becomes a major feedstock - along with success by Aramco in finding more natural gas for petrochemicals - opportunities may increase for private companies.

"Private companies see a bright future for themselves through investing in more differentiated downstream products," says a Middle East-based financial analyst. "You don't necessarily have to build a cracker as differentiated petrochemicals such as acetyls tend to be smaller in scale than your standard polyethylene [PE] and monoethylene glycol [MEG] plants. Even today, before any more crackers are built, there is spare ethylene within the Saudi system."

Last month, NATPET's Malaikah said: "There was a lot of pressure on services, engineering, procurement and construction contractors, on vendors, on engineering manpower [before the global economic crisis]. The pressure caused some vendors to produce more than their capacity at the expense of quality."

A local industry source adds: "There have been a lot of project delays in Saudi Arabia due to the shortage of contractors and skilled workers."

The good news from a global petrochemical perspective is that numerous start-up delays across the Middle East have led to a steadier introduction of new capacity than had been expected.

But from a Saudi perspective, while project costs have fallen from their peak as the pressure on contractors has eased, sourcing sufficient manpower remains difficult, according to industry sources.

"A lot will depend on the success of local efforts to train staff," says the second petrochemicals consultant. "Aramco and SABIC have put a lot of resources into improving domestic skill sets, but some labor will always have to be imported. The global labor market for petrochemicals will stay tight."

Logistics are another challenge. Ports need to be developed, including the one at Yanbu, which would provide easier access to Egypt, Syria, Jordan and Turkey, says a local industry source.

Huge investment in infrastructure is taking place, underpinned by Saudi Arabia's vast funds. This includes the Saudi Landbridge Project - upgrading and building new railways linking Al-Jubail, Dammam, Riyadh and Jeddah.

"This will enable polymers to potentially be transported across the country from east to west," says a UK-based petrochemical logistics consultant. "This will save on the cost and risk of shipping to European and other Western markets via the Gulf of Somalia. Insurance premiums have gone up as a result of piracy on this route."

It all sounds a lot to contend with. But Saudi Arabia has already risen to the challenge of building a worldscale petrochemical industry from scratch, suggesting these difficulties will be tackled.

For the time being at least, though, the investment case is no longer as straightforward as it was back in the early 1970s.

Prema Viswanathan has been reporting on the Asian and Middle East chemical industry and markets from Singapore for 11 years. She is currently deputy managing editor for Asia with ICIS, covering the polymer markets in the Middle East and South Asia, and is also the global coordinator for the ICIS chlor-alkali portfolio.

By: Prema Viswanathan
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