INSIGHT: Saudi Arabia’s shift to petrochemicals underscored by Aramco-SABIC merger

LONDON (ICIS)–Saudi Arabia has grasped upcoming trends in the petrochemicals industry and plans to merge its crude oil major Aramco and petrochemicals major SABIC to take advantage of them.

As crude oil demand for road freight and aviation, as well as shipping fuels, is expected to decrease in coming decades, Saudi Arabia now needs to secure markets for its oil before demand declines, and hence be present on segments that will remain viable in the future.

According to the Paris-based International Energy Agency (IEA), petrochemicals are expected to be one of the main sources of oil demand growth until 2040.

One of the Agency’s key findings is that demand for high-value chemicals tracks the trajectory of GDP more closely than primary energy demand and energy-related emissions.

Source: International Energy Agency (2017), World Energy Outlook 2017, OECD/IEA, Paris

Despite a number of uncertainties about the future energy mix, the IEA’s new policies scenario, which is characterised by steady upward pressure on the oil price ($85/bbl by 2025), purports that ethane as a feedstock will expand until the mid-2020s before naphtha regains market share over the longer term.

Even in its alternative sustainable development scenario, the agency forecasts that oil falls in all sectors except petrochemicals, where demand remains mostly unchanged from other scenarios.

Source: International Energy Agency (2017), World Energy Outlook 2017, OECD/IEA, Paris

The IEA also forecasts that the combined demand for naphtha, liquefied petroleum gases (LPG) and ethane will be about 6m bbl/day over the 2016-2040 period.

One reason for the significant growth is that few substitution options from oil are available to the petrochemical industry and, therefore, global feedstock demand is set to increase from 11m to 16m tonnes/year until 2040.

This is, if anything, a market dynamic that Saudi Arabia has well understood.

The country’s chemical industry has come into existence after most of its competitors, mostly because selling unrefined crude in large quantities, even at low margins, had long been a quick path to growth.

However, new projects developed in Saudi Arabia are shifting the paradigm for downstream industries.

The $20bn Sadara chemicals complex in Jubail, which unlike most other chemical facilities was built in a single phase, embodies the drive to attract foreign investment and diversify its portfolio.

In Arabic, Sadara means ‘in the lead’, a meaning that purports to embody the culture and values of the joint venture (JV) between US’ Dow Chemical and Saudi Aramco.

The 26-plant facility uses the first mixed-feed steam cracker in the region, capable to process either ethane or naphtha into a host a specialty chemicals ranging from sweeteners to car parts.

This includes ethylene, the workhorse of the chemical industry.

 Source: Sadara Chemical Company

One advantage of a mixed-feed cracker is flexibility. Ethylene production in Saudi Arabia currently has the advantages of low-cost feedstock, cheap energy, and low-cost capital loans.

Ethane is cheap but with the country’s gas shortage intensifying as gas is also being used for power generation and industry, competing demand on that specific feedstock may increase further.

A heavier feedstock like naphtha will thus take pressure off a limited ethane supply in the region.

The petrochemical industry will be a major consumer of gas in the Middle East going forward and, as a result, several regional producers may gradually favour higher-value petrochemical exports over raw gas exports.

In the meantime, Saudi Aramco will also scale the learning curve by moving research and development (R&D) towards new technologies and industrial processes, including as part of the joint ventures with long-established market players.

Petrochemicals offer a huge scope for technological improvement, notably through material efficiency (reducing the weight of products or ‘light-weighting’) and the minimisation of yield losses during the production process.

France’s Total and Aramco recently signed a memorandum of understanding for the joint development of Amiral, a $9bn petrochemical plant in Jubail that will comprise a $5bn mixed-feed cracker.

The project will be completed in 2023-2024 and is intended to produce 2.7m tonnes/year of chemicals.

The delayed Aramco’s initial public offering (IPO) made the importance of petrochemicals to Saudi Arabia even more conspicuous.

Crown Prince Mohammed Bin Salman made clear that the longer timeframe for the stake sale would give the country enough time to merge Aramco and SABIC into a single entity, rather than having two companies competing in the same downstream segment.

On 23 October, however, Aramco’s CEO said that anti-trust regulations could  mean SABIC’s stake purchase would take time, according to Reuters.

Amin Nasser added that the Saudi Arabian government is still committed to Aramco’s IPO, although its timing would depend on market conditions and other factors.

SABIC was the fourth-largest chemical company in the world in 2017, ranked by sales.

The company was created by royal decree in 1976 to produce high-value products like chemicals, fertilizers and polymers with the intent to establish the Kingdom’s position and, like Sadara, to attract international investors to form joint ventures in Saudi Arabia.

Long before Mohammed Bin Salman proposed his Vision 2030 for Saudi Arabia, the Royal Commission for Jubail and Yanbu had been set up as a precursor in 1975 to help shift the country’s economy away from crude oil dependency.

When it created SABIC in 1976, the commission had two goals in mind: dealing with the high level of flaring as a by-product of oil production, and bridging the considerable distance between the country’s two coasts.

The resulting 1,000-km pipeline across the desert transformed the two small ports of Jubail and Yanbu at either ends into the industrial hubs they are today.

SABIC is currently owned 70% by the Saudi government and 30% by private investors from the six GCC countries.

Given Saudi Arabia’s current refocus on petrochemicals, the prospect of Aramco and SABIC competing head-on on the same industry segment was probably not very appealing to the government.

The merger will therefore allow the kingdom to kill two birds with one stone: it will create a national petrochemical champion with an already-secured international market share while freeing up some capital for Saudi Arabia’s public investment fund.

Source: Saudi Arabian Monetary Agency (SAMA)

In turn, the proceeds may help reduce the country’s deficit and bring its budget closer to balance by providing new sources of revenue not directly related to the exports of raw crude oil.

Pictured: SABIC’s headquarters in Riyadh
Source: Hassan Ammar/AP/REX/Shutterstock

By Julien Mathonniere