HOUSTON (ICIS)--Saudi Arabian companies could acquire companies such as LyondellBasell, Westlake Chemical and the materials company of DowDuPont to meet their goals to expand capacity, an analyst said on Monday.
State energy producer Saudi Aramco plans to nearly triple its petrochemical capacity by 2030, said Hassan Ahmed, head of research at Alembic Global Advisors. He made his comments in a research note.
If the company plans to build those plants in Saudi Arabia, it could have trouble finding low-cost feedstock.
Already, Saudi Arabia is consuming nearly all of the ethane that it produces, Ahmed said.
In addition, much of the gas being discovered in the country is dry, so it has only small amounts of ethane and other natural-gas liquids (NGLs).
Any new capacity in Saudi Arabia will likely rely on heavier feedstock, which costs more than ethane, Ahmed said.
In fact, the new Sadara petrochemical complex relies on a mix of heavy and light feedstocks.
The alternative to building new plants in Saudi Arabia is pursuing mergers and acquisitions (M&A) in parts of the world with cost advantages, Ahmed said.
"This inorganic growth route, in our view, would make much more sense than greenfield build-outs, particularly in light of the extreme capital cost inflation the global chemical industry has faced in recent years," he said.
"We believe overseas petrochemical companies looking to access advantaged shale gas in the US via M&A may become one of the key themes in the near-to-medium term with commodity chemical companies like LyondellBasell, the soon-to-be spun-off Materials Co at DowDuPont and Westlake Chemical as particularly ripe targets," Ahmed said.
LyondellBasell, DowDuPont and Westlake did not immediately respond to requests for comments.
In general, companies typically decline to comment about speculation about M&A.
Ahmed added that Arabian companies could later use the intellectual property acquired by these deals to build facilities in Saudi Arabia.
He did not explain how this construction strategy would overcome the costlier feedstocks in Saudi Arabia. However, these could be plants that produce higher margin chemicals and specialty products, which would make them less sensitive to raw-material costs.
Ahmed did not discuss this technology in his research note. However, if it is successful, it could provide Saudi Arabia with a cost advantage.
The acquisition strategy outlined by Ahmed is one that Saudi Arabia has used in the past.
Over the years, SABIC has been acquiring businesses to give it a global presence and the technological know-how to make higher value petrochemicals.
In 2002, it bought the petrochemical business of DSM for €2.25bn.
In 2007, it acquired GE Plastics for $11.6bn.
This year, SABIC became Clariant's biggest shareholder with a 24.99% stake.
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The expansion plans could help Saudi Arabia meet the goals that it outlined in its Vision 2030 plan, which seeks to diversify the nation's economy beyond crude oil and to find jobs for its young population, Ahmed said.
The table below provides a summary of the goals of the plan.
These goals imply that Saudi Arabia will diversify away from upstream energy while also maximising the value of the upstream energy it is currently producing, Ahmed said.
To reach these goals, Ahmed said that Saudi Arabia will need to concentrate investment in non-associated gas production. This, in turn, will require the nation to support oil prices to provide it with the money and the ability to borrow to fund its gas development.
Saudi Arabia will also need to raise gas prices to attract foreign companies to invest in its fields.
The kingdom has talked about diversifying its economy in the past. However, the recent decline in oil prices provided urgency to the plans.
Crude oil represents more than 80% of Arabia's revenue, and the decline in prices caused the country's fiscal balance to deteriorate.
The combination of lower oil prices and higher capital spending caused Saudi Arabia's budget deficit to approach 25-year highs, as measured as a percentage of GDP, Ahmed said.