The Saudi Feedstock Debate Intensifies

By John Richardson

NatpetCEO.bmpTHE debate about the future competitiveness of Saudi petrochemicals versus the US is heating up.

In January, we reported that Jamal Malaikah (see picture), the president of Saudi polypropylene (PP) producer National Petrochemical Industrial Co (NATPET), had warned about an eroding Middle East advantage as a result of US shale gas. And he added that this was the “wrong time” for the Saudi government to be evaluating – as is widely thought to be the case – an increase in the country’s natural-gas pricing.

Earlier this month, in a real “scoop” of an interview with ICIS at the Gulf Petrochemicals & Chemicals Association (GPCA) Plastics conference in Dubai, Malaikah put a price on his concerns. He said that ethane gas feedstock costs for new crackers in the kingdom will be around $6/MMBtu – much higher than the current $4/MMBtu in the US, he told my colleague, Muhamad Fadhil.

Of direct relevance to NATPET, a 400,000 tonnes/year propane dehydrogenation-to-PP producer, are concerns over the current competitiveness of Saudi propane prices versus those in the US.

Propane prices in the kingdom are pegged to naphtha prices – at about a 28% discount to Japan naphtha.

“With oil prices prevailing at high levels, especially in relation to US natural gas, this puts propane-based chemical production at a disadvantage as well,” wrote my colleague Joe Chang, in this article.

Malaikah added that propane costs in the US in 2012 were 23% lower than those for Saudi propane.

The NATPET president is even calling for a ban on propane exports from the kingdom, just as US petrochemical producers, led by Dow Chemical’s Andrew Liveris, are calling for restrictions on liquefied natural gas (LNG) exports.

And the shortage of ethane in Saudi Arabia also means that that some of the future investments in Saudi Arabia are based on naphtha, most notably the Saudi Aramco/Dow, which will be based on 70% naphtha feedstock.

The second phase of Saudi Aramco and Japan-based Sumitomo Chemical’s Petro Rabigh project will use some ethane, but also 3m tonnes/year of naphtha as feedstock.

The crucial issue here is: Will the cost of naphtha be significantly discounted into these projects at the expense of the refining arm of Aramco, given that naphtha/gasoline can make good returns elsewhere?

An industry source, when it comes to comparisons between ethane and propane costs, begged to differ.

He said that Saudi Arabia has zero taxes, which are worth around $3/MMBtu in ethane prices versus the US. Even if future ethane supply in the kingdom was priced at $6/MMBtu, he therefore thinks that the kingdom will remain competitive.

Saudi Arabia would also have to fall from a great height in order to end up worse-off than the US, he claimed.

“LyondellBasell’s US olefins business earns an EBITDA margin of 20%, and Westlake’s US olefins business an EBITDA margin of 25%,” he said.

“By comparison Yansab – a Saudi mxed-feed cracker [ethane and propane] earns 45%. Even Saudi Kayan, a mostly heavy cracker in Saudi, earns en EBITDA of 20%.

“This all before taxes, of course, and so these margins are just based on feedstock costs.”

This is a hugely important debate, given all the investment excitement sweeping through the US at the moment.

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