INSIGHT: Middle East producers will battle for tech advantage

13 December 2011 16:00  [Source: ICIS news]

By Nigel Davis

Petro RabighLONDON (ICIS)--Petrochemical producers in the Middle East are beginning the difficult push downstream in earnest as they attempt to add more value to the oil barrel. And a joint KPMG/GPCA study released on Tuesday pinpoints a key commercial battleground – process technology.

The drive downstream is expected to deliver jobs and the feedstocks for the emerging domestic industries needed to broaden national economies.

The wave of big, cost-advantaged projects in the region has passed, and new capacities are being planned and built to supply different materials.

One example is the second phase of the Sumitomo Chemical/Saudi Aramco joint venture complex, Petro Rabigh in Saudi Arabia. Dow Chemical’s planned Sadara joint venture project with Saudi Aramco, also in Saudi Arabia, is another.

But when it comes to process technology, local producers by no means have access to any significant competitive advantage.

Petrochemical producers globally “share a common and critical need for downstream production technology”, consulting firm KPMG suggests in a publication produced jointly with the Gulf Petrochemicals & Chemicals Association (GPCA). The GPCA began its 2011 annual meeting on Tuesday.

Gulf Cooperation Council (GCC) producers “currently lack the indigenous technology to build downstream facilities on their own in several value chain areas”, KPMG/GPCA say.

Governments and producers might be expected to tackle infrastructure, logistics and raw materials problems effectively, but gaining access to vitally important technologies could prove to be difficult.

Local players are competing against not only US, European or Japanese companies but also those from strong emerging markets such as China. Chinese scientific institutes and firms are developing their own process technologies – new processes to produce purified terephthalic acid (PTA) and olefins from methanol (MTO – methanol to olefins) are examples.

KPMG and the GPCA are right to suggest that developing their own technologies is the least feasible of the options open to the petrochemical industry in the Middle East, even though work to gain competence in catalysis and other important areas of process technology continues.

Of course, cash can speak volumes in more ways than one when it comes to acquiring the means to make some of the petrochemical intermediates identified by planners across the region.

But as Paul Harnick, the chief operating office of KPMG's chemicals and performance technologies practice suggested at the GPCA meeting: “There is evidently a limited number of western and Japanese partners, so Middle East players need to make sure their proposition is more attractive.”

Middle East players with a cash advantage will be in a position to buy-in technologies, in some cases under licence or through acquisition. But certain transactions might be prevented if governments see political risk in technology ownership.

Also, while acquisitions might provide some of the answers, KPMG notes that a large part of the technology and intellectual property (IP) of a company resides with its management teams. You lose those at your peril.

“An advantage GCC producers may have over their competitors in other emerging chemical markets is their long legacy of deal-making in western markets and their ability to move more quickly in M&A [merger and acquisition] auction processes.” KPMG says.

The consultancy also suggests that GCC states could offer incentives to foreign investors, including lower tax rates and tax holidays, favourable expatriate labour conditions, the duty-free import of equipment, and laws that protect IP and also guarantee against expropriation without compensation.

“Given there is a finite amount of investment available to foreign direct investors, these incentives must be designed to compete with countries such as China, which has already been successful in attracting foreign direct investment because of its market size and growth,” it says.

Petrochemical production in the Middle East is expected to increase markedly in this decade, to account for something like 20% of global capacity by 2015, KPMG adds, but the race to move downstream into specialties, or, rather, specialty intermediates, is gathering pace.

Gaining access to the right technology is a vitally important element in the process that will see some of the largest producers in the region becoming more influential global giants.

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By: Nigel Davis
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