Market intelligence: Sadara Chemical joint venture suits ambitions of Dow and Saudi Aramco

01 August 2011 00:00  [Source: ICB]

Aramco's Al-Falih and Dow's Liveris unveil historic deal
The $20bn Dow Chemical and Saudi Aramco joint venture has been reconfigured and realigned to meet the ambitions and objectives of both companies

US-based Dow Chemical and state-run oil company Saudi Aramco aim to earn $500m (€350m) annually each within five years of start-up of their $20bn ­Sadara Chemical joint venture in Al-Jubail, Saudi Arabia.

The companies have planned a greatly reconfigured and realigned project focused on emerging market growth, but also on product lines hugely important to Saudi Arabia's industrial development.

The critical feedstock options appear to have been addressed following the hiatus the project suffered after the 2008-2009 financial crisis - although perhaps not the relationship with the Aramco/Total (Satorp) Al-­Jubail refinery.

The downstream product slate fits clearly with Dow's modified portfolio, following its acquisition of US specialty chemicals giant Rohm and Haas in 2009, as well as the technology goals of the Saudi partner.

Making all of this work was never going to be easy, but the companies have produced an impressive plan and a timeline that sees the cracker and first polyethylene (PE) unit coming on stream in 2015.

Dow says the complex, which is designed to produce close to 3m tonnes/year of chemicals, will be ramped up to full production in 2016.

Dow has negotiated a deal that should satisfy ­investors. And with Sadara, Aramco takes another step towards adopting a leadership role in chemicals in Saudi Arabia.

"This enterprise will play a key role in the Kingdom's industrial and economic diversification, while contributing to the creation of thousands of high-quality jobs," Aramco CEO Khalid Al-Falih said last Monday, when the final investment decision on Sadara was officially announced.

"It will enable significant development in the country's conversion industry, thereby supporting Saudi Arabia's ambition to be a magnet for downstream manufacturing investments that add significant value to the Kingdom's hydrocarbon resources," he added.

Dow chairman, president and CEO Andrew Liveris called the agreement the "right economic ownership model with the right partner. It is designed to capture growth in the rapidly growing sectors of energy, transportation and infrastructure and consumer products, by creating a manufacturing hub that will provide a differentiated product slate and an advantaged cost position," he said.

The companies look on this as the world's largest chemical project - it's one of the largest integrated production complexes and the largest to be completed in one go - and not surprisingly the pair have worked long and hard to get it right.

Back in 2006, Aramco was keen to add joint venture petrochemical capability downstream from its refineries. Its Petro Rabigh project with Japan-based Sumitomo Chemical was taking shape, and it was also talking to Dow about an even bigger mixed-feed chemical complex adjacent to the Ras Tanura refinery.

A new refinery and petrochemical complex at Ras Tanura was not to be, however, given the uncertainties that the global financial crisis and recession introduced into the thinking of both companies.

But emerging from the plans for this giant project - which envisaged a liquids and a gas cracker at its heart - the Al-Jubail complex outline appears more suited to the current ambitions of the partners.

It will include a 1.5m tonne/year mixed feed ethane/propane cracker and 25 other units.

An initial public offering (IPO) of 35% equity in the venture is planned from 2013-2014 to mitigate some of the project risk.

This is not just a question of getting the feedstock slate, technology, product plan and engineering right - the partners have to be clear in what they expect from the deal.

The companies are targeting average earnings before interest, tax, depreciation and amortization (EBITDA) margins of more than 40%.

The average equity earnings for each partner are said to be achievable in the first 10 years after start-up. Dow expects to reach cash flow breakeven within five years of start-up.

To capture growth for the building block chemicals (amines, glycol ethers, propylene glycol, polyether polyols and isocyanates), the plastics packaging materials and the products from the envisaged "value park," Dow will market products outside the Middle East, while Sadara itself will be responsible for marketing in a local zone of eight countries. Analysts have largely viewed the agreement ­positively for both partners.

Global credit ratings agency Moody's Investors Service, for instance, sees no reason to change its outlook on Dow's debt rating, despite the draw on the company's resources alongside its other planned commitments.

US-based research firm Alembic Global Advisors ­analyst Hassan Ahmed said the joint venture will "benefit Dow by improving its margin profile in a capital-­efficient manner."

"[The project will be] serving Aramco in achieving its desire of delving into the specialty chemical arena and attaining profitable job creation in Saudi Arabia. Additionally, we believe this announcement should not be viewed as Aramco competing with SABIC, but rather clearly defining roles," he added. "SABIC will be the leader in commodity chemical production, while Aramco will grow the specialty industry in Saudi Arabia."

For Dow, Ahmed sees the deal as being accretive to Dow's value by $3/share in net present value terms.

Credit Suisse sees the announcement as signaling confidence from Saudi Aramco in its ability to be able to deliver non-associated gas feedstock for the project, and output from the Karan, Wasit and Shaybah fields.

"This is positive for the entire sector's long-term operating rates," it says, reducing the risk of raw material price inflation. It notes that the project economics look good, and that Aramco is embarking on the establishment of a new intellectual property platform that includes polyurethanes (PU), composite carbon fiber and photovoltaic encapsulent films.

"With guidance of EBITDA margins at [around] 40%, we believe that the feedstock mix is likely to be of the order of 40% ethane and 60% of propane and other NGLs [natural gas liquids] by volume," it suggests.

Alembic's Ahmed says 40% EBITDA margins "point to a feedstock slate similar to mixed feed facilities like Yansab in Saudi Arabia - 35% ethane and 65% heavier feeds."

Sadara is a significant development by any measure, and a project critical to the future development of the chemical industry in Saudi Arabia, as it sees Aramco take a firmer grip on the Kingdom's integrated hydrocarbons upgrading potential.

Additional reporting by Joseph Chang in New York

By: Nigel Davis
+44 20 8652 3214

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