Petrochemicals: Leveraging Saudi Arabia’s Sweet Spot

Saudi Arabia’s efforts to broaden its share in the global petrochemicals market since the 1990s are paying off. An early start has given the Kingdom a sturdy foothold to fend off intensifying competition from Asia, the US and Iran in the rapidly-growing segment. Market growth also supports the diversification of Saudi Arabia’s oil-centric economy and broadens the local job market – both cornerstones of the Kingdom’s Vision 2030.

Saudi Arabia’s petrochemical industry posted a 5.8 percent growth rate last year, outpacing the wider GCC’s expansion rate of 3.7 percent, according to the Gulf Petrochemicals and Chemicals Association (GPCA). From 2007 to 2015 alone, the Kingdom’s capacity swelled from 51.2 million metric tons a year to 93.7 million mt/year – an 83 percent rise in eight years.

The country also accounted for 64.8 percent of the region’s production capacity in 2015. In terms of the main petrochemical building block ethylene, Saudi Arabia is the region’s leading producer, with production capacity currently at 17.2 million mt/year according to S&P Global Platts Analytics estimates, more than double the volume of the region’s next biggest player Iran.

In a global context, Saudi Arabia accounts for 10 percent of world’s ethylene production capacity, according to S&P Global Platts data. Add the contributions of the Emiratis, Omanis and other Gulf producers to the mix and it is little surprise that Grand View Research expects the Middle East to be the fastest expanding region for revenue in 2016-2025 with a 9.9 percent compound annual growth rate.

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Saudi Arabia’s growth has been underpinned by the acquisition of assets – GPCA values such acquisitions at $29 billion in 2002-2016 – and steady organic growth through new projects and expansions. In mid-August, for example, the commission of the last of 26 plants at the Sadara Chemical Company was completed.

Sadara is a $20 billion joint venture between Saudi Aramco and The Dow Chemical Company, which was established by the largest ever foreign direct investment in the Saudi petrochemicals industry – a tangible vote of confidence from the global investor community.

It is also the world’s largest integrated chemicals complex ever built in a single phase and will produce more than 3 million mt/year of high-value performance plastics and chemical products on completion. Sadara encapsulates the Kingdom’s proactive attitude, as it followed plans at the turn of the decade to evolve the domestic market beyond ‘basic plastics’ and instead offer an increasingly sophisticated and tailored palette.

Expanded PetroRabigh II

New petrochemical units at the expanded PetroRabigh II complex at Jubail on the Red Sea are also expected to reach full capacity by January. The expansion will add 2.6 million mt/year of capacity to the existing 2.4 million mt/year of chemicals currently produced by PetroRabigh, a joint venture of state-oil giant Saudi Aramco and Japan’s Sumitomo.

Meanwhile, international alliances are extending the Kingdom’s influence. For example, one of the world’s largest petrochemical companies, Riyadh-based Sabic, signed a strategic cooperation agreement with China’s state-owned Sinopec Group in March to explore joint venture petrochemical projects in both countries.

As Saudi Arabia’s expansion plans continue, two points cannot afford to slip from the top of the checklist; continued investment in human capital and innovative research and development (R&D). Quality trumps quantity – an equation that cannot be diluted by market forces, including the fact that the supply of cheap gas feedstock is not as plentiful as it once was.

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The GCC increased its year-on-year chemical R&D spend by 38 percent to $729 million in 2015, versus a 9.5 percent decline in the global market. But the GPCA said the region’s overall contribution to global spending is still just 2 percent.

GCC and global producers could also benefit from deepening their commercial acumen in sales, marketing and management of the supply chain. Consultants BCG estimate that GCC producers’ product value loses 3-5 percent to middlemen due to an over-reliance on off-takers and traders to sell products. This is an unaffordable loss; global jostling for new business means each ton holds more competitive value than ever.

China and India are spearheading Asia’s rapidly growing market, with China potentially moving into Saudi Arabia’s ‘back garden’ if discussions with Egypt to establish a petrochemical industries complex in the Gulf of Suez gain traction.

The shale revolution

In the US, the shale revolution has unlocked huge quantities of cheap natural gas liquids, including ethane, a primary feedstock for ethylene production, and encouraged nearly a decade’s worth of major investment into the country’s industry.

The American Chemistry Council estimates that approximately 15 percent of the world’s chemicals are now produced by the US’ chemical industry, while S&P Global Platts Analytics said 2.7 million mt/year of new ethylene capacity will come online by the end of this year alone, at locations such as Freeport, Baytown and Cedar Bayou in Texas.

According to S&P Global Platts Analytics, the US accounts for 18 percent of global ethylene capacity currently and by 2025, this is expected to increase to 21 percent, if all projects come online as planned.

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Closer to home, the lifting of most of the Western sanctions on Iran in January 2016 has rejuvenated the petrochemical ambitions of a country that is home to the world’s second largest natural gas reserves and which benefits from plentiful feedstock from the giant South Pars field.

Based on projects that are most likely to come online in the next five years, S&P Global Platts Analytics estimates that Iran’s ethylene capacity will climb by 54 percent from today’s 7 million mt/year to 12 million mt/year by 2025. Iran’s ability to source and inject up to $85 billion of the funds required for its petrochemical industry over the coming decade remains to be seen.

Saudi Arabia has long been abreast of the tide of change, embracing it while others shy away and risk being left out in the commercial cold. Such intellectual and operational flexibility will only become more valuable as the Kingdom needs to ringfence market share from well-equipped and ambitious challengers.

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Hetain Mistry manages S&P Global Platts’ petrochemical analytics team. He is responsible for the Global market analysis and weekly, monthly and quarterly polyolefins and aromatics publications. Hetain has close to 15 years’ experience within the oil and petrochemical consulting and analytics industry, working on various multi-client and single client market studies across refinery and various petrochemical value chains. Prior to S&P Global Platts, Hetain worked within consulting and market advisory for oil, gas and petrochemicals.