Middle East builds downstream

By Malini Hariharan

After years of making money in basic petrochemicals the Middle East focus has firmly shifted to downstream chemicals, a topic that is being discussed in great detail at this year’s GPCA forum being held in Dubai on 13-15 December.

As highlighted by the blog in previous posts a combination of factors including lack of ethane, the pressure from governments to diversify and add value are behind the drive to invest downstream.

Sadara, the joint venture between Saudi Aramco and Dow Chemical, is representative of the transformation that the region hopes to achieve. The $20bn project with 26 manufacturing units includes a wide range of value-added derivatives such glycol ethers and amines downstream of a cracker. But the project, which has been in the pipeline since 2007, also illustrates the difficulties in venturing downstream.

A partnership with Dow has given Aramco access to technology but for many other smaller companies this is likely to be a key hurdle.

In a report released at the forum consulting firm AT Kearney pointed out that specialty product technologies are controlled by a limited number of players, demanding dedicated marketing and licensing fees and specialist technical services.

One way to increase access for regional companies is to participate in JV partnerships although technology owners might be reluctant to enter joint ventures given the diminishing feedstock advantage in the Gulf Cooperation Council (GCC) countries.

Middle East players could instead look for potential acquisition of chemical companies with specialist knowledge and this might be an easier option as a weakening global company is likely to result in interesting opportunities.

But Paul Harnick, chief operating officer of KPMG’s chemicals and performance technologies practice, pointed out that political issues may prevent transactions if governments decide technology ownership is sensitive.

Also the Middle East faces competition as companies from China and Brazil, which are seeking to build downstream chemicals industry.

“There is evidently a limited number of Western and Japanese partners so Middle East players need to make sure their proposition is more attractive.”

Other challenges include marketing expertise, innovation capacity and investment, and logistics as much production will have to be exported in the medium term.

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