Rising costs are leading to severe project delays that threaten to undermine Saudi Arabia’s long-term plans to dominate Chinese petrochemicals imports, according to BMI’s latest ‘Saudi Arabia Petrochemicals Report’. With the government preferring joint ventures (JVs) between foreign and local firms, and placing an emphasis on captive use of olefins for derivative production and diversification, it is probable that some projects could be delayed or scrapped. A sign that the development of the petrochemicals was faltering under soaring costs came with the announcement in April 2010, that a petrochemical JV between Saudi Aramco and Dow Chemical will be relocated from Ras Tanura to Al Jubail or Ras Al Zaur to save costs. The project will also be reduced in scale with one instead of two ethylene crackers. The relocation and the overhauling of the project’s configuration make it unlikely that the target completion date of 2015 will be reached. The project costs are likely to fall by US$5bn from the original estimate to US$15bn (more recent estimates put the project at US$27bn, so this represents a US$12bn reduction in costs) with the cost of building a port and other infrastructure removed and Al Jubail’s existing infrastructure used instead, with the possibility of expansion.
It is not the first project to be postponed or cancelled due to costs. The Ineos-Delta project at Jubail, which planned to add 1.2mn tpa of ethylene capacity from 2011, was shelved in Q407 due to feedstock and capital cost restraints. Meanwhile, the Jizan refinery, which was due to be the country’s first 100% privately built refinery with an associated 800,000tpa PP plant, has failed to attract sufficient interest. The completion of the massive Saudi Kayan project is also likely to become fully operational in H212, two years behind schedule – in part due to contractual changes.
On a more positive note, the Eastern Petrochemical Company (Sharq), a 50:50 JV between Sabic and Mitsubishi Motors, began operations in April 2010. The 2.8mn tpa expansion will boost Sharq’s production at the complex to about 5mn tpa of petrochemicals. Ethylene capacity at the complex was expanded by about 1.3mn tpa to 2.46mn tpa; ethylene glycol capacity was expanded by 700,000tpa to 1.38mn tpa and PE capacity was raised by 800,000tpa to 1.55mn tpa.
In the short term, the Saudi Arabian petrochemicals industry is set for a strong recovery in 2010, following an upturn in H209. Performance will vary, with fertilisers expected to revive earlier and at a stronger pace, while engineering plastics will represent the weakest market. The Saudi petrochemicals industry will remain highly exposed to global markets, particularly Asia. Demand growth in Asia, led by the surging Chinese market, has underpinned global petrochemicals growth and is the basis for growth in Saudi output. The Chinese polymer resins market should mirror, if not exceed, economic growth rates of 8.8% in 2010 and 7.5% in 2011, leading to a rise in prices and reversing the temporary drop in profitability seen in 2009. With domestic demand likely to continue to outstrip supply, China will remain a net polymers importer over the medium term and the largest importer in the world. By 2014, China could represent 35% of the global PP market and 20% of global PE demand.
Saudi Arabia will also be able to leverage its advantage in ethane feedstock, with the price differential with naphtha feedstock rising as oil prices climb, while a situation of oversupply restrains polymer prices. Its other strengths are the size of its units and the high level of integration, which make it more economical and competitive. This competitive advantage should ensure that, even in the event that Chinese demand is not as strong as hoped, Saudi production will continue to have a market and operating rates will be maximised.
In BMI’s Middle Eastern Petrochemicals Business Environment Rankings matrix, Saudi Arabia is rated as the most attractive country out of the eight surveyed by some margin, with a score of 74.4 points. Increasing capacity is helping to push up Saudi Arabia’s score, although this is slightly offset by deteriorating external and financial risk scores. The country is placed ahead of Qatar, which is in second place with 63.6 points, and a cluster of other Gulf countries that cannot compete with Saudi Arabia’s feedstock or economies of scale. It is also ahead of Iran, which suffers from poor risk levels.
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