Saudi Petrochemical Report

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					                                                                                                                     September, 2011

 The Kingdom’s Comparative Advantages
Propel its Global Position in Petrochemicals

 Saudi Petrochemical Sector Review

Contents                                            Executive Summary

                                                    •   Saudi Arabia’s vast reserves of cheaply extractable feedstock, proximity to
2   Introduction                                        Asian markets, and supportive government policies give its Petrochemical
                                                        sector a competitive advantage in the global market.
2   What are Petrochemicals?                        •   The global economic crisis reduced the global demand for all petrochemi-
                                                        cals and their derivatives, thereby causing prices to plummet. High-cost pro-
                                                        ducers around the globe were squeezed out.
3   Petrochemical Prices and                        •   Domestic producers were not immune to the economic crisis. The decline in
    Applications                                        global demand and oil prices lead to reduced earnings. The crisis also
                                                        showed the growing dominance of Saudi producers as their margins allowed
                                                        them to ride out this period of weakness relatively comfortably.
3   The Saudi Petrochemical
                                                    •   The slowdown has also created a supply glut with large scale capacity ex-
    Sector                                              pansions in 2009 and 2010 from the Middle East and Asia, expected to
                                                        come onstream post 2012.
4   The Effect of the Economic                      •   Global olefin and derivative consumption is forecast to have recovered in
                                                        2010 as demand from Asia, particularly China and India, accelerates. This
    Crisis                                              resulted in the expansion of production in 2010, thereby raising exports by
                                                        13% to 31 million tonnes Furthermore, political turmoil in the MENA region is
5   Market Size and Trends                              expected to increase oil and petrochemical prices in the short term.
                                                    •   By 2015, we forecast Saudi petrochemical production will expand by 32%
                                                        from 2009 levels of 53.2 mntpa to reach 70.2 mntpa, accounting for 9.2% of
8   Current Petrochemical                               global supply.
    Projects                                        •   The capacities of ethylene and polyethylene are forecast to grow by 45.6%
                                                        and 11.2%, respectively, to reach 17.38 mntpa and 5.45 mntpa by 2015.
10 Petrochemical Leaders and                            Meanwhile, the capacities of propylene and polypropylene are expected to
                                                        expand by 44.6% and 118.7%, respectively, to reach 5.09 mntpa and 7.92
   Financing Structures                                 mntpa by 2015. Although there are no plans to increase the methanol ca-
                                                        pacity of 5.36 mntpa, investments have been made to diversify into its de-
11 Petrochemical Outlook and                            rivatives.
                                                    •   There are currently 62 projects ongoing in the Saudi petrochemical sector
   Future Challenges                                    valued at roughly SAR236 billion (USD63 billion). The highest value and
                                                        volume of forecasted petrochemical contract awards is in 2011 at SAR124
12 Conclusion                                           billion (USD33 billion) and 23 projects; implying faster industry growth and
                                                        project development post 2014.
                                                    •   Projects are funded through a variety of debt and equity combinations; in-
                                                        cluding loans from domestic and international banks, the Saudi Industrial
                                                        Development Fund (SIDF) and Public Investment Fund (PIF), export credit
                                                        agencies as well as sukuks.
    Said A. Al Shaikh                               •   The sector is likely to face a few challenges in the medium term: (1) short-
    Group Chief Economist |
                                                        age of skilled labor force; (2) scarcity of ethane; (3) sustainability of demand
                                                        recovery in the Chinese market; and (4) anti-dumping duties.
    Paulina Chahine
    Senior Economist |         •   However, the benefits of the Kingdom’s sustained expansion and diversifica-
                                                        tion of its petrochemical output far outweighs the industry’s challenges.

Introduction                                                    supply and demand for refined products leads to sur-
                                                                pluses of some hydrocarbons. These surpluses are the
Saudi Arabia is becoming a leader in the petrochemical          raw materials or “feedstocks” for the petrochemical in-
industry. Its substantial reserves of cheaply extractable       dustry (Chart 1). On average, only 5% of oil and gas
feedstock give domestic producers a cost advantage              products are used in the production of petrochemicals.
over their global competitors. Meanwhile, strong infra-
structure, low energy costs and a supportive government         The principal component of natural gas is methane, the
policy continue to encourage large inflows of investment        simplest aliphatic hydrocarbon used as a fuel feedstock.
into the sector.                                                Natural gas liquids (NGLs) are higher hydrocarbons in
                                                                natural gas that are separated from the gas as liquids
The Kingdom holds a considerable market share of sup-           through the process of absorption, condensation, or
ply for basic petrochemicals and their intermediaries.          other methods in gas processing or cycling plants. Gen-
However, Saudi petrochemical producers were not im-             erally NGLs consist of ethane, butane, isobutene, pro-
mune to the global downturn of 2008. The collapse in            pane and natural gasoline. Despite being an NGL, eth-
global demand for petrochemicals impacted profitability,        ane is in fact a gas that can also be extracted from asso-
while tight credit conditions led to a number of project        ciated gas, which is a byproduct of the crude oil produc-
delays. At the same time, the crisis showed the growing         tion process. The final liquid feedstock is naphtha, de-
dominance of Saudi producers in the industry as their           rived directly from crude oil.
margins allowed them to ride out this period of weak-
ness relatively comfortably. Thus, the recovery of global       These feedstocks are then cracked to produce primary
olefin and derivative consumption in 2010 saw the ex-           petrochemicals; that is their long chain of hydrocarbon
pansion of domestic production and the return of pre-           molecules is broken down to produce a small number of
crisis profit levels.                                           basic commodity chemicals. Olefins such as ethylene,
                                                                propylene and butadiene are produced by steam crack-
An analysis of the Saudi petrochemical industry and its         ing NGLs. Meanwhile, aromatics such as benzene, tolu-
long term role towards the economic diversification of          ene and xylene are produced by catalytically reforming
the Kingdom is included in this report. We will examine         naptha. The most important basic petrochemical is ethyl-
the key value chain markets in which domestic produc-           ene, accounting for roughly 40% of basic chemicals
ers cater to, as well as address a number of ongoing            global capacity.
projects. All in all, a bright future for the sector will be
illustrated, albeit with concerns over a few challenges to      Olefins and aromatics are the building blocks of petro-
be faced in the medium term.                                    chemical intermediaries, as well as more complicated
                                                                derivative products (Chart 2). The downstream chemical
What are Petrochemicals?                                        products and their chemical processes include, but are
                                                                not limited to, the following:
The petrochemical industry lies downstream of the oil
and gas industry. Crude oil and natural gas are ex-             Polymers: are natural and synthetic compounds made
tracted from the earth and shipped to refineries for proc-      up of chains or rings of linked, simple monomers. Poly-
essing to produce hydrocarbons. The mismatch between            mers’ high molecular weight accounts for their high melt-
                                                                ing and boiling points, thereby rendering them useful in
                 Chart 1: Production of Feedstocks              plastics and rubber industries. Major products include
                                                                polyethylene (PE), polypropylene (PP), polyvinyl chloride
      Process                                    Feedstock      (PVC), and polystyrene (PS).
     Natural Gas                                     Methane
                                                                Oxygenates: are chemical compounds that have been
                                                                combined or infused with oxygen. They mainly consist of
                                                     Ethane     alcohols and ethers, and include ethanol, methanol and
                                                                methyl tertiary butyl ether (MTBE).
                                                                Polyesters: is a category of polymers that contain the
       Crude Oil 
                                                     Butane     ester functional group in their main chain (esters are
                                                                chemical compounds formed by condensing an acid with
                                                 Condensate     an alcohol). They are synthetic fibers that are light,
                                                                strong, and weather-resistant and are therefore used to
                                                     Naphtha    make textiles. A major product is nylon, which is derived
                                                                from benzene.
     Oil Refining                                     Gasoil

    Intermediates: are compounds produced during the                                            Meanwhile, water conservation and hygiene has im-
    conversion of some reactant to a product. Chemical in-                                      proved dramatically due to plastic water pipes and bot-
    termediates include caustic soda, linear alkyl benzene                                      tles. Thus, the petrochemical industry takes the residu-
    (LAB), phenols, ethylene oxide and vinyl acetate mono-                                      als of the oil and gas industry and turns them into useful
    mer (VAM). These have a wide range of derivatives, in-                                      products that sustain and enhance life.
    cluding textiles and soaps. Fiber intermediates include
    monoethylene glycol (MEG), diethylene glycol (DEG),                                         The Saudi Petrochemical Sector
    triethylene glycol (TEG), and purified terephthalic acid
    (PTA). These are used in the manufacture of antifreeze,                                     The Saudi Arabian petrochemical industry is the most
    detergents, paints and polyester.                                                           attractive in the Middle East, promising a long-term path
                                                                                                towards economic diversification. This is due to the stra-
                         Chart 2: Petrochemical Industry                                        tegic advantages Saudi producers enjoy compared with
       Methane          Methanol           Intermediates 
                                                                                    Resins      their global competitors. The most prominent advantage
                                            (Ethylene,                                          is the Kingdom’s substantial reserves of cheaply extract-
                                            Propylene)                              Fibers 
                                                                                                able feedstock. Crude oil reserves amount to 264 billion
         LPG                                                     (LDPE, PP)        Plastics     barrels – the world’s largest reserve base -, while natural
                                                                                                gas reserves amount to 279.7 trillion cubic feet. The
        Gas Oil         Methanol             Methanol 
                                                                                                government offers ethane-rich associated gas to domes-
                       (Ethylene,          (Styrene, ACN, 
                       Propylene)         Ethylene Glycol)                         Solvents     tic producers at a subsidized rate of USD0.75 a mnbtu
                                                              (Polystyrene, AB 
                                                                                                through state-owned oil giant, Saudi Aramco. However,
                                           (Phenol, PTA,                           Coatings 
                    (Benzene, Xylenes)       Styrene) 
                                                                 PET, PVC)                      globally, producers procure this commodity at spot mar-
                        Methanol             Methanol                                           ket prices that currently stand at USD5 a mnbtu.
     Feed stocks    Petrochemicals        Intermediates         Polymers          End Uses 
                                                                                                                       Chart 3: Downstream of Ethane

    Petrochemical Prices and Applications                                                       Associated Gas 
                                                                                                                                                                           Ethylene Glycol 
    Feedstock prices vary according to their drivers. Crude                                                                                                                Styrene
    oil prices set the cost of refinery operation, as well as the                                                 Ethane         Steam Cracker         Ethylene
                                                                                                                                                                           Vinyl Chloride
    bottom end of the naphtha price band. The top end is set                                                                                                               Alpha Olefins
    by premium gasoline prices; a downstream product                                                                                                                       Others
                                                                                                 Natural Gas
    formed when naphtha is placed into a reformer (an ap-                                                                                                Fuel 

    paratus that reforms the molecular structure of hydrocar-
    bons to produce richer fuel). The regional differences in                                   As the price of oil increases, the relative feedstock cost
    naphtha prices are the result of differing freight costs                                    advantage rises. The Kingdom’s competitive cash point
    when the raw material is exported. For example, West                                        position serves as an incentive for foreign petrochemical
    European naphtha prices have averaged USD10 per ton                                         companies to invest in the industry, while its accession
    lower than in the U.S. On the other hand, the price of                                      to the WTO in 2005 has eased market entry. Saudi Ara-
    ethane varies entirely with location. In the U.S., ethane                                   bia has opened its market by lowering import tariffs: PE,
    is linked to the market price of natural gas as well as                                     PP and PS tariffs were reduced to 8% from 12% in
    extraction costs, while in Saudi Arabia it is set by a                                      2008, and have been brought down further to 6.5% at
    Royal decree at the cost of extraction.                                                     the end of 2010. However, in the WTO agreement,
                                                                                                Saudi Arabia was able to maintain its feedstock pricing
    The price of refined products varies throughout the world
    due to (1) differences in market structure; (2) political                                                         Chart 4: Downstream of Propane
    influences; (3) product quality specifications; (4) environ-
    mental legistlation; and (5) supply and demand imbal-                                                                                                   Ethylene        Ethylene 
    ances. The regional differences of a particular product                                     Associated Gas                      Steam Cracker                Fuel 

    are once again attributed to differing freight costs. Unfor-
                                                                                                                                                           Propylene        Polypropylene
    tunately, petrochemical prices in general are not very                                                                                                                  Oxo‐alcohols 
    transparent. The larger a congregation of buyers and                                                                               Propane 
                                                                                                                                                                            Propylene Oxide 
    sellers, the more liquid the market is and therefore the                                                                                                                Cumene/Phenol 

    more reliable the prices are.                                                                Natural Gas          Propane                                               Iso Propanol 
                                                                                                                                                                            Acrylic Acid 
                                                                                                                                    Ammoxidation          Acrylonitrile     Acrylonitrile 
    It is undeniable that petrochemical derivatives have a
    vast range of uses in the economy. The safety and com-
    fort of automotive transportation has been possible
                                                                                                 Oil Refinery                           Cyclar             Aromatics 
    through the presence of plastics, fibers and elastomers.

comparative advantage by indicating that ethane is a         2009. The situation was then exacerbated by destocking
natural resource that is not being exported. The argu-       throughout all petrochemical product chains. This
ment was also extended to naphtha and other liquids,         caused the price of polymers – particularly polyethylene
arguing that because these liquids are used for domestic     – in Asian markets, a key benchmark, to plummet by
purposes and require no investment in export terminals       20% in 2009.
or marketing, they can be sold to domestic customers at
a discount on export prices. Naphtha receives an 11%         Saudi petrochemical producers were not immune to the
discount on its export price and NGLs garner a 30% dis-      global downturn. Sharp declines in the price of oil to-
count on the export price of naphtha. This will allow do-    wards the end of 2008 and into 2009 gave naphtha-fed
mestic producers to offer competitive prices to tariff-      crackers outside the gulf a boost in competitiveness,
protected markets – such as the EU, U.S. and Japan –         undermining the feedstock advantage of ethane-fed
and lead to sizable increases in Saudi petrochemical         crackers in the Kingdom. The slowdown also reduced
exports, particularly for polymers.                          the earnings of domestic producers with the collective
                                                             net income of the sector falling to SAR273 million in 4Q
These comparative and policy drivers are encouraging         08, down from SAR8,142 million in 4Q 07. However, this
the inflow of capital. The Kingdom’s lucrative crude oil     was mainly due to Sabic’s 95.5% Y/Y drop in net profits.
reserves allow for the world’s lowest project energy         Although Sabic attributed the result to the declining pet-
costs, while its supportive government provides some of      rochemicals and plastics markets, the sharp drop was
the lowest taxes and property registration costs. Large      probably related to a goodwill writedown on the com-
economies of scale and proximity to European and             pany's 11 billion-dollar 2007 acquisition of the US firm
Asian markets have also encouraged foreign invest-           GE Plastics.
ment. For example, three international oil companies
with major Saudi Arabian petrochemical presence are          Overall, producers’ feedstock advantage and proximity
ExxonMobil, ChevronPhilips, and Royal Dutch Shell.           to Asian markets provided a floor to their earnings. After
                                                             bottoming out at SAR557 million in 1Q 09, Saudi firms
Despite the government’s commitment to reform, condi-        together reported net income of SAR8 billion in 2H 09
tions on investment have been imposed and are en-            compared to the net income of SAR0.7 billion in 1H 09.
forced through ethane allocations. The guidelines em-
phasize diversification, value addition and Saudiasation     The global slowdown may create a supply glut with large
of the work force. The drawback of ethane is that it only    scale capacity expansions in 2009 and 2010 from the
yields a small and low-value slate of products; basic ole-   Middle East and Asia, expected to come onstream post
fins, such as ethylene. The Saudi Arabia General Invest-     2012. The bulk is targeting the ethylene chain, with an
ment Authority (SAGIA) strongly encourages greater           additional 15 mntpa capacity expected to come on-
captive use of olefins in petrochemical mega-complexes       stream in the Middle East by 2012. This may represent a
in order to increase the exportable value of petrochemi-     challenge to Saudi Arabia, as the additional capacity is
cal projects and boost local employment. Currently the       intended for exports. Thus, projects were initially being
petrochemical sector employs just over 43,000 nation-        delayed due to slowing demand.
als, representing 6.4% of the Saudi workforce and only
0.6% of the total labor force. Moving further down the       However, in the medium term, high-cost producers in
product chain into intermediates and derivatives gener-      other parts of the world will be squeezed out, and petro-
ates far more employment opportunities.                      chemical prices are likely to come under pressure from
                                                             extra supply. It will take time for the market to absorb
Unfortunately, there are a number of disadvantages to        this new capacity and reach a new pricing equilibrium.
this conditional approach on investment. Diversification     The resulting price trough will demonstrate the growing
into the downstream sector requires a great deal of capi-    dominance of Middle East producers as their margins
tal, compelling Saudi investors to seek JVs with foreign     will allow them to ride out this period of weakness rela-
firms. Meanwhile, restrictions of ethane allocations mean    tively comfortably.
that state-owned companies receive higher priority.
Saudiasation also poses a challenge due to the shortage      Another upside of the crisis for Saudi producers was the
of necessary skills needed to cater to the growing de-       declining cost of petrochemical plant construction, which
mands of the sector.                                         had rapidly accelerated from 2002 to 2008 amid the con-
                                                             struction boom in the Kingdom. A scarcity of raw materi-
The Effect of the Economic Crisis                            als, labor, and engineering expertise was leading to pro-
                                                             ject schedule slippages. The downturn of the construc-
Demand for petrochemicals and their derivatives gener-       tion sector during the crisis freed up resources and gave
ally track global economic trends given their extensive      the petrochemical industry more negotiating leverage
use in everyday applications. Thus, global demand for        over the costs of planned projects.
olefins fell 3-4% in 2008, and remained largely flat in

Market Size and Trends                                                barrel. The buoyant energy market has subsequently
                                                                      pushed up petrochemical prices, allowing Saudi produc-
Saudi Arabia currently accounts for 7% of global supply               ers to enjoy stronger first quarter earnings. This positive
of basic and intermediary products, and 50% of GCC’s                  trend is set to continue in the short-term as increased
105.7 million tonnes of total petrochemical capacity in               production capacity comes onstream. Although 2011
2009 (Chart 5). The Kingdom has gone from being a net                 petrochemical prices will remain above initial estimates,
importer to a leading net exporter in the petrochemical               they are unlikely to maintain their upward momentum.
sector, supplying over 100 countries.
                                                                      (1) Ethylene
           Chart 5: Gulf Petrochemical Capacities, mntpa
                                                                      Ethylene is an olefin produced by steam cracking ethane
                                                                      and naphtha. It is an important feedstock for various pet-
         1.4                                           Iran           rochemical derivatives, mainly polyethylene and ethyl-
               7.1                                                    ene oxide (Chart 6). Saudi Arabia’s ethylene capacity at
 2015           8.3                                    Bahrain
                                                                      the start of 2010 was 11.94 mntpa, representing 8.94%
                                                70.2   Oman
                                                                      of global capacity. Roughly 4.75 million tonnes came
                                                                      onstream in 2009 alone. Investments made by Saudi
                           28.4                                       Kayan and National Chevron Philips are forecast to ex-
         1.4                                           Qatar
           5.1                                                        pand domestic ethylene capacity by 22.1% to reach
 2009      4.8                                         Saudi Arabia
          3.4                                                         14.58 mntpa by 2012. Meanwhile, joint ventures be-
              9.4                                                     tween Saudi Aramco/Total and Saudi Aramaco/Dow
                                                                      Chimical will increase this total to 17.38 mntpa by the
                                                                      end of 2015. Thus, the Kingdom’s contribution to global
Source: GPCA, NCB Estimates
                                                                      ethylene capacity is expected to rise to 11.1% by 2015
                                                                      (Table 1). The Kingdom is set to emerge as a global hub
In 2009, the export volume rose to 27.57 million tonnes,              of ethylene and its derivatives given the capacity addi-
an 11.14% rise Y/Y. However, the dramatic fall of prices              tions that are expected to become operational from 2012
across the petrochemical spectrum during the crisis                   onwards.
caused the value of exports to fall by 14.94% settling at
SAR52.67 billion, slightly below its 2007 level. Petro-                                Chart 6: Applications of Ethylene
chemical imports represent a smaller share of the mar-                                               LLDPE
ket, catering mainly to downstream producers. In 2009,                                                16%
the sector’s import volume and value fell by 1.78% and
3.60%, respectively, to reach 3.31 million tonnes valued                        16%                                   Ethylene
at SAR41.22 billion, largely attributed to the dominant                                                                Oxide
share of derivatives.                                                                                                   15%

Global olefin and derivative consumption is forecast to
have recovered in 2010 as demand from Asia, particu-
larly China and India, accelerates. Domestic export vol-
umes increased by 13.31% to 31.24 million tonnes.                                                                      Ethylene
Meanwhile, the recovery of oil prices also ensured a                                                                      12%
significant growth in export value, with total level rising                    HDPE
by 56.34% to reach SAR82.34 billion. Based on the                               28%
monthly averages of 1H 2011, the value of petrochemi-                                                  Others   Benzene
cal exports is forecast to reach SAR99.48 billion by the                                                6%        7%
end of 2011.
                                                                      Source: NCB Estimates
The global landscape of the industry is set to radically
change over the next 5 years as demand and supply                     Capital Expenditure from Saudi firms accounts for al-
shift eastwards. By 2015, we forecast Saudi petrochemi-               most 50% of the USD250 billion committed to petro-
cal production will expand by 32% to reach 70.2 mntpa,                chemical projects in the Middle East. This large percent-
accounting for 9.2% of global supply (Chart 5). The ex-               age is due to the significantly lower share of the cost of
pansion and further specialization of domestic produc-                raw materials per unit faced by Saudi producers. The
tion will continue to diminish the percentage of imports.             discounted price of ethane results in the ethylene pro-
                                                                      duction cost of ethane-fed Saudi plants to average
Recent political turmoil in the MENA region has boosted               USD160 per tonne, versus the USD380 per tonne faced
oil prices. Our estimate for the average 2011 price of                by producers using naphtha-fed crackers (Chart 7).
Arab Crude Light has risen by 18.75% to USD95 per

                      Chart 7: Global Feedstock Plant Costs                                                                               Chart 8: Applications of Polyethylene
120%                                                               Fixed costs      Utilities       Raw materials

                                                                                                                                                                             Blow molding

 20%                                                                                                                                                                                 applications
 0%                                                                                                                                                                               Painting
       South Korea China (N/E) NW Europe NW Europe       US Gulf     US Gulf   W.Canada         KSA (E)    KSA (P)                   Films &                                      materials
          (N/E)                 inland (N) coastal (Na) Coast (E/P) Coast (NG)    (N)                                                sheets                                         3%

Source: MEED
Ethylene demand closely tracks economic cycles, given
the wide range of products its derivatives find application                                                                Source: NCB Estimates
in: paints, pipes, films and sheets. The Middle East
emerged as the leader of ethylene consumption growth,                                                                      (Chart 8). The ethylene derivative has three forms: high
with a CAGR of 7.7% during 2003 – 2008. However,                                                                           density polyethylene (HDPE), low density polyethylene
North America and North-East Asia remain the largest                                                                       (LDPE), and linear low density polyethylene (LLDPE).
consumers of ethylene, accounting for 26% and 25% of                                                                       HDPE has a higher density and melting point than the
the 111 mntpa consumed in 2008. Demand for the olefin                                                                      other two forms, and its higher crystallinity (the degree to
slumped in during the crisis, and only slightly rebounded                                                                  which the compound is a crystalline) makes the com-
in the 2H 09. Estimates show that demand remained                                                                          pound relatively more rigid. Thus, HDPE is used for wa-
muted in 2010 on the back of slow recovery and weak                                                                        ter pipes and detergent bottles, while LDPE and LLDPE
consumption in developed countries. Sluggish demand                                                                        are used for plastic bags, foils and protective coating on
and new capacity additions is likely to restrict the global                                                                textiles. Also, LLDPE is steadily eroding the LDPE mar-
utilization rates in the medium term. However, Saudi                                                                       ket share as it allows lower thickness films that can re-
Arabia is expected to continue operating higher rates                                                                      duce costs for many applications while retaining a higher
than its Western and European counterparts given its                                                                       tensile strength.
proximity to the North-East Asian market.
                                                                                                                           Saudi Arabia’s current polyethylene capacity is 4.90
Ethylene prices averaged USD832 per tonne in 2009,                                                                         mntpa and has the following breakdown: HDPE at 1.1
falling 28.8% Y/Y. The majority of ethylene production is                                                                  mntpa, LDPE at 1.55 mntpa, and LLDPE at 0.75 mntpa.
based on naphtha or ethane procured at spot market                                                                         Aggressive capital expenditure over the coming 5 years
prices, thus oil prices largely govern the olefin’s price                                                                  will increase domestic capacity of HDPE, LDPE and
movement. As oil prices are forecast to rise in 2011 to                                                                    LLDPE by 113.6%, 35.4% and 33.3%, respectively.
average USD95 a barrel, ethylene is expected to rise to                                                                    From 2012 onwards, the Kingdom’s polyethylene capac-
USD1,320 per tonne. This growth may subdue in the                                                                          ity will settle at 5.45 mntpa, accounting for roughly
long-run as oversupply begins to weigh heavily on the                                                                      4.82% of global capacity (Table 1).
Kingdom’s price competitiveness (Chart 9).
                                                                                                                           North America, North-East Asia and Western Europe are
(2) Polyethylene                                                                                                           the largest consumers of polyethylene, together ac-
                                                                                                                           counting for 62% of global consumption in 2008. How-
Polyethylene is a flexible, durable and chemically inert                                                                   ever, once again the Middle East was leading in terms of
compound that finds applications in films and packaging                                                                    consumption growth. This can be clearly demonstrated
Table 1: Saudi Basic Petrochemical Capacities, mntpa
                                               2009                              2010                           2011                  2012            2013                2014                      2015
Ethylene                                      11.94                         13.41                             14.58                  14.58            14.58               15.88                     17.38
Polyethylene                                    4.90                             4.90                               5.45              5.45             5.45                5.45                      5.45
HDPE                                            1.10                             1.50                               2.35              2.35             2.35                2.35                      2.35
LDPE                                            1.55                             1.55                               2.10              2.10             2.10                2.10                      2.10
LLDPE                                           0.75                             0.75                               1.00              1.00             1.00                1.00                      1.00
Propylene                                       3.52                             4.15                               4.59              4.59             4.59                4.59                      5.09
Polypropylene                                   3.62                             7.12                               7.52              7.52             7.52                7.92                      7.92

Source: NCB Estimates, MEED Projects, Company Announcements

        Chart 9: Price of Ethylene, Propylene and their Derivatives                                                                                                                                                   Chart 10: Applications of Propylene

                                                                                                          Propylene                                      Polypropylene
2,000                                                                                                     Ethylene                                       Polyethylene                                       PP, 67%
1,400                                                                                                                                                                                                                                                   Propylene
1,200                                                                                                                                                                                                                                                   Oxide, 8%
  400                                                                                                                                                                                                                                                           Acry
                                                                                                                                                                                                                                                             Nitrile, 7%
                                                                                                                                                                                                                                                             Acid, 4%

                                                                                                                                                                                                                                                Others, 14%
Source: Bloomberg, NCB Estimates
                                                                                                                                                                                                  Source: NCB Estimates

in the HDPE market, where a CAGR of 13.8% was re-                                                                                                                                                  growth of PP tracks that of propylene, albeit at a faster
ported between 2003 - 2008 in the region, compared                                                                                                                                                 pace: by 2015 capacity will increase by 118.7% to reach
with the 3.5% observed in North-East Asia. Although we                                                                                                                                             7.92 mntpa, accounting for a projected 10.8% of global
expect global consumption of polyethylene to continue                                                                                                                                              capacity.
rising in the medium-term, the growth will be at a slower
pace than witnessed historically given the anticipated                                                                                                                                             Demand for propylene and its derivatives are largely
slow recovery and demand weakness of developed                                                                                                                                                     driven by North America, North-East Asia and Western
countries.                                                                                                                                                                                         Europe. Consumption growth in the Middle East out-
                                                                                                                                                                                                   paced all other geographies, reporting a CAGR of 11.5%
The prices of HDPE, LDPE and LLDPE have risen be-                                                                                                                                                  between 2003-2008. A greater shift in demand towards
tween 44-77% since the start of 2009. This is due to the                                                                                                                                           the East will be witnessed in coming years, restricting
rising oil and ethylene prices. Moving forward, polyethyl-                                                                                                                                         the detrimental effect slow recovery in developed coun-
ene will continue to track ethylene prices with HDPE and                                                                                                                                           tries will have on demand. Furthermore, propylene
LDPE expected to grow at a CAGR of 2.6% and 3.3%,                                                                                                                                                  prices peaked in 2008 at USD1,748 per tonne. Reces-
respectively, during 2009-2015.                                                                                                                                                                    sionary pressures pushed prices down in 2008 and into
                                                                                                                                                                                                   2009. Currently, pricing has recovered to USD1,510 per
(3) Propylene & Polypropylene                                                                                                                                                                      tonne and is expected to grow at a CAGR of 4.9% dur-
                                                                                                                                                                                                   ing 2009-2015. PP will track propylene price and is cur-
Propylene is another commonly used olefin with a higher                                                                                                                                            rently at USD1,880 per tonne (Chart 9).
density and boiling point than ethylene due to its great
size. As such, the compound finds applications in blow                                                                                                                                             (4) Methanol
and injection molding, as well as fiber manufacturing
(Chart 10). The Kingdom’s propylene capacity currently                                                                                                                                             Methanol is a colorless, toxic liquid alcohol used in di-
stands at 3.52 mntpa, thereby accounting for 4.02% of                                                                                                                                              verse applications, such as an antifreeze, fuel and gen-
global capacity. In the coming years, Saudi Arabia’s con-                                                                                                                                          eral solvents. The liquid is primarily used as a feedstock
tribution is expected to rise given the growing number of                                                                                                                                          in the production of derivatives; including formaldehyde,
propylene projects being announced. This is because                                                                                                                                                acetic acid, and dimethyl ether (Chart 11). Saudi Ara-
domestic producers are also able to procure propane                                                                                                                                                bia’s current methanol capacity is 5.36 mntpa, repre-
(the feedstock of propylene) at a discounted rate to the                                                                                                                                           senting roughly 7.54% of global capacity. Sabic is the
naphtha export price. Although, the advantage is less                                                                                                                                              world’s second largest producer of methonal, with 4.123
lucrative than that of ethylene, it keeps production costs
below that of global peers. Key projects being under-                                                                                                                                                                 Chart 11: Downstream of Methane
taken include those being developed by Sahara Petro-
chemical and Saudi Aramco. By the end of 2015, 1.57                                                                                                                                                                                               Ammonia
mntpa of propylene capacity will be added in the King-                                                                                                                                                                                                               Urea       Melamine
dom (Table 1).
                                                                                                                                                                                                                                                                     Acetic Acid 
Roughly 67% of propylene is used to produce its deriva-                                                                                                                                             Natural Gas       Methane      Synthesis      Methanol           DMT 
tive polypropylene (PP). The compound has a higher                                                                                                                                                                                                                   MMA
boiling point than the polyethylene derivative, and is
therefore used in producing a wide array of home appli-
ances and automotive parts. The Kingdom’s capacity

mntpa on-stream. However, while Sabic tries to offer a                                         current if it is tangible and will materialize in 3 years.
broad range of petrochemical products, Sipchem is pre-                                         Projects with the following statuses are classified as cur-
dominately focused on methanol producing 1 mntpa;                                              rent: Planned, Study, FEED (Front End Engineering and
thereby becoming one of its lowest-cost suppliers in the                                       Design), EPC Bid (Engineering, Procurement, Construc-
world.                                                                                         tion), EPC PQ (Engineering, Procurement, Construc-
                                                                                               tion), Execution, On Hold and Retender.
Although no further projects are expected to be under-
taken to increase domestic capacity of methanol, Sip-                                          Roughly 21% of the sector’s projects value is in the exe-
chem is investing in the expansion of its Jubail Petro-                                        cution phase, where actual construction commences
chemical Complex to diversify into methanol derivatives                                        and extends for 2 to 3 years. However, projects in the
and move up the value chain. The Phase 2 expansion                                             study phase represent a significantly higher 33% (Chart
was completed in late 2009, with the new facility produc-                                      12), and 18% of projects currently undergo bidding. This
ing carbon monoxide (0.345 mntpa), vinyl acetate mono-                                         indicates that although capacity expansions are already
mer (VAM) (0.3 mntpa) and acetic acid (0.46 mntpa).                                            being undertaken, larger industry growth and project
Moreover, Phase 2 has an operating structure that per-                                         development will be onstream post 2015. Projects On
mits 50% of acetic acid produced to be used as a feed-                                         Hold also represent a significant share at 14.5%. This
stock for the production of VAM. This ensures an in-                                           relatively high number is due to logistical issues rather
house supply of feedstock at cost price.                                                       than shortage of funding sources.

Global demand for methanol slowed in 2008, bottoming                                           The value and volume of forecasted petrochemical con-
out at the start of 2Q 2009. Demand is estimated to have                                       tract awards are significantly higher in 2012 than in pre-
decreased at an annualized rate of roughly 37 million                                          vious years, at SAR124 billion (USD33 billion) and 23
tonne, leading to dramatic increases in inventory. De-                                         projects (Chart 13). These capacity additions will be-
mand is expected to recover in the medium term, grow-                                          come operational from 2015 onwards, thereby asserting
ing at a CAGR of 9.4% between 2009-2014. This surge                                            that the Kingdom will not only ride out the environment
in global demand will be driven by Asia, particularly                                          of overcapacity in the medium term but also become the
China’s need for fuel and methanol across the core de-                                         primary centre of global production over the long-term.
rivative slate.
                                                                                                      Chart 13: Value and Volume of Forecasted Contract Awards
The poor demand of late 2008 also brought about a                                              Budget Value
sharp decline in methanol prices. Prices averaged                                                (USD bn)
                                                                                               40.0                 Budget Value (USD bn)                           25
USD232 per tonne in 2009, falling 37.47% Y/Y. As new
derivative demand options offer a positive demand out-                                                                                                              20
look, prices are expect to have risen to USD330 per
tonne in 2010. However, a new wave of low-cost metha-                                                                                                               15

nol production across the Middle East and Asia will re-                                        20.0
sult in softer prices over the medium term.
Current Petrochemical Projects
                                                                                                0.0                                                                 0
At the time of writing this report, the value of the 62 cur-                                               2009       2010         2011     2012         2013

rent petrochemical projects in the Kingdom exceeds                                            Source: MEED Projects
SAR236 billion (USD63 billion). A project is defined as
                                                                                               Petrochemical Leaders and Financing Structures
         Chart 12: Share by Petrochemical Project Status

35.0%             32.9%                           Share of Value      Share of Volume
                                                                                               Sabic, established in 1976, is the market leader in the
                                                                                               Saudi petrochemical industry and currently ranks among
                                                                                               the world’s top six producers. In the past, Sabic’s cost
                                                                                               advantage and superior economics gave it a relatively
                                                                                               well position to survive the difficult market conditions of
                                              16.1%                                   16.1%
                                                                                               the global petrochemical sector. With 70% government
                                          12.1%           12.9%                                ownership, SAR50 billion in equity on hand, and strong
10.0%                       8.7%                                                               free cash flow generation, Sabic remains one of the re-
        5.1%         4.8%
                                                       5.6%                                    gion’s most creditworthy companies.

 0.0%                                                                                          Sabic formed a joint venture, known as Saudi Kayan,
        Planned    Study     FEED          EPC (BID)   EPC (PQ)     Execution      On Hold
                                                                                               with privately-held Al Kayan Petrochemical company (Al
                                                                                               Kayan). The project will consist of an ethylene cracker
Source: MEED Projects

and units producing ethylene glycol, HDPE, LDPE and            cracker and araomatics complex, as well as 15 down-
PP. The project is valued at approximately SAR37.5 bil-        stream chemical production plants. Financial closure on
lion (USD10 billion) and is being financed by a mix of         the USD2,000 million project is excepted to be reached
debt & equity in the ratio of 62:38. Financial closure was     by early 2013.
achieved by means of equity including IPO (USD3,998
million), term loan (USD727 million), Islamic loan             The increasing scarcity of ethane has encouraged the
(USD1,676 million), export credit debt (USD2,000 mil-          integration of refining and petrochemical plants in Saudi
lion) and government loan (USD1,599 million). The              Arabia. Integration allows for improved risk manage-
Kayan project is part of Sabic’s plan to raise the propor-     ment, the reprocessing of off-gas streams and greater
tion of specialty chemicals to 30% of total sales by 2020.     feedstock flexibility. Furthermore, to strengthen their
                                                               global position, Saudi producers must aggressively in-
Other Sabic affliates are increasing the production of         vest in diversifying their product portfolio, and a refinery
polyolefins and polymers in the Kingdom. For example,          establishes the platform to do so.
the Yanbu National Petrochemical Company (Yansab)
has begun commercial operations at its Yanbu petro-            Saudi Aramco and Total are planning a Saudi Aramco
chemical complex, which has capacities of 1.3 mntpa of         Total Refinery and Petrochemical Company (SATORP)
ethylene, 0.4 mntpa of propylene, and 0.5 mntpa of poly-       at Jubail Industrial City 2. The refinery will be one of the
ethylene (Appendix A.2, A.3). The project was funded           most advanced in the world, processing Arab Heavy
by means of term loan (USD1,700 million), export credit        crude and fulfilling stringent product specifications for
debt (USD700 million) and government loan (USD1,067            environmentally friendly fuels. The full conversion refin-
million).                                                      ery will maximize the production of diesel and jet fuels,
                                                               as well as produce paraxylene (0.7 mntpa), benzene
Saudi International Petrochemical Company (Sipchem)            (0.14 mntpa) and polymer grade propylene (0.2 mntpa)
is a similar major project, but with the complex located in    (Appendix A.2, A.3). Financial closure for the USD8,500
Jubail. The facility will comprise an ethane/propane           million project was achieved in mid-2010. Commitments
cracker providing feedstock for the production of a vinyl      were received from the Public Investment Fund
acetate monomer (0.3 mntpa) unit, which will be used           (USD1,300 million), direct export credit agency loans
wholly or partially to make polyvinyl acetate (0.125           (USD490 million), local bank facility (USD2,090 million),
mntpa), polyvinyl alcohol (0.04 mntpa), polyvinyl bu-          commercial facility provided by international banks
tyrate (0.015 mntpa) and ethylvinyl alcohol (0.015             (USD1,485 million), and a bridging loan from the spon-
mntpa) (Appendix A.4). Phase III of the project is cur-        sors (USD955 million).
rently in execution, with roughly 40% of the engineering
work complete. The project will be financed through            SATORP’S export refinery will also provide the feed-
70:30 debt-equity ratio, and has obtained a USD533 mil-        stock for the new Jubail Petrochemical Complex, owned
lion Islamic working capital facility from five regional       and operated by Sadara Chemical Company. This joint
banks (Riyad Bank, Saudi British Bank, Al Rajhi Bank,          venture between Saudi Aramco and Dow Chemical
Bank Al Jazira and Arab Investment Company).                   Company was originally to be located in Ras Tanura,
                                                               where the integrated complex was to produce an exten-
National ChevronPhillips Company (NCP) is a joint ven-         sive and diversified slate of plastics and petrochemicals.
ture between Saudi Industrial Investment Group (SIIG),         Issues related to the site forced the project to be relo-
Arabian ChevronPhillips Petrochemical Company and              cated and reduce the scope of production. The complex
public shareholders. The company plans to build a large-       will be now fed entirely by ethane gas - rather than the
scale petrochemicals complex at Jubail. The project,           gas and petroleum mix initially planned for - and will pro-
which will be ChevronPhillips' third in Jubail, will produce   duce 8 mntpa of petrochemicals and gasoline products.
1.165 mntpa of ethylene, 0.1 mntpa of hexane-1, 0.4            Fortunately, the shift in location will allow Sadara to save
mntpa of propylene, 0.4 mntpa polypropylene (PP), 1.1          up to 40% in costs as the Royal Commission for Jubail
mntpa polyethylene (PE), 0.2 mntpa of polystyrene and          and Yanbu (RCJ&Y) will provide the basic infrastructure
styrene (Appendix A.2, A.3). The project financing was         needed for the complex, including utilities such as power
arranged in a mix of debt & equity in the ratio 53:47. Fi-     and water. The project is valued at USD15,000 million
nancial closure was achieved by means of equity                and is set to be completed by 3Q 2014.
(USD1,633 million), term bank loan (USD1,870 million),
                                                               Saudi Aramco has also aligned with China Petroleum &
export credit debt (USD590 million) and government
                                                               Chemical Corporation (Sinopec) to develop a 400,000
loan (USD1,120 million).
                                                               barrel a day, full conversion refinery in Yanbu. The pro-
                                                               posed refinery will be designed to process Arabian
The joint venture of Saudi Aramco and Sumitomo
                                                               Heavy Crude and produce high-quality, ultra-low sulfur
Chemical has opened up the bidding to Phase II of its
                                                               refined products. The project is one of two new facilities
Petro-Rabigh refinery and petrochemicals complex. The
                                                               that will substantially increase the Kingdom’s supply of
project entails the expansion of the existing ethane

    petroleum products to the international market. How-                                               The second and most important challenge of the sector
    ever, financing for the USD10,000 million dollar project                                           is the scarcity of ethane. Saudi Aramco has allocated
    has been stalled since the departure of ConocoPhilips,                                             the totality of its ethane reserves and is currently making
    the original international party involved in the joint ven-                                        concerted efforts to bring more gas online. With no guar-
    ture.                                                                                              antee of finding additional sources, policy makers are
                                                                                                       turning to liquid fuels. Naphtha is a more versatile feed-
    Petrochemical Market Outlook and                                                                   stock, whose production opens up a broader range of
    Future Challenges                                                                                  aromatics and intermediates, and involves more man-
                                                                                                       power (Chart 14). The hydrocarbon is derived from
    The Saudi Petrochemical sector will continue to hold a                                             crude oil and is therefore in abundance in the Kingdom.
    considerable market share of product categories that lie                                           However, the feedstock is higher in cost than the tradi-
    not too far downstream of its pronounced feedstock ad-                                             tional heavily subsidized ethane, and may constrain
    vantage. Producers’ low cost margins and recent profit                                             profit growth. Furthermore, the additional labor costs and
    growth will allow them to stay afloat during the supply                                            expensive maintenance of naphtha fed crackers make
    glut and squeeze out higher-cost producers in Europe                                               the rate of return on its products lower than those of eth-
    and North America. This will open up acquisition oppor-                                            ane-based products.
    tunities for Saudi producers, and encourage diversifica-
    tion into more sophisticated derivatives production. At                                            The recent surge in petrochemical prices and subse-
    this point, distribution channels will become imperative.                                          quent growth of domestic producers’ profits will offset
    Although the Kingdom possesses feedstock, utilities and                                            the higher cost of naphtha in the short term. However, in
    a strong infrastructure, it does not have access to mar-                                           the long-term a more sophisticated feedstock mix involv-
    kets of specialized products. Thus, distributors in the                                            ing both ethane and liquids will be required to encourage
    mature markets of Asia, Europe and the U.S. will be-                                               further foreign investment. This is why the trend towards
    come more attractive opportunities for acquisition.                                                refinery and petrochemical plant integration is on the
    Although the future of the Saudi petrochemical sector is
    bright, the following challenges are expected in the me-                                           Another feedstock solution would be to increase the pro-
    dium term: (1) shortage of skilled labor force; (2) scarcity                                       duction of non-associated gas. Saudi Arabia is raising
    of ethane and rising feedstock prices; (3) sustainability                                          gas production from non-associated gas fields to cater
    of demand recovery in the Chinese market; and (4) anti-                                            for rising domestic demand, which has been growing at
    dumping duties. A key challenge is the need for a well                                             7% annually in recent years. Saudi Aramco is currently
    trained and flexible labor force further down the product                                          developing Karan, its first offshore non-associated gas
    chain. Hydrocarbons extraction and basic petrochemical                                             field project, which is expected to produce 1.8 billion
    production is heavily capital-intensive and is able to pro-                                        standard cubic feet per day (cf/d) of gas. The project is
    vide employment to only 0.6% of the total labor force.                                             valued at USD3,375 million and is expected to be com-
    However, downstream production requires skilled techni-                                            pleted in 2013. Saudi Aramco is also forging ahead with
    cal and craft personnel. The Kingdom’s shortage of                                                 the development of two other offshore non-associated
    skilled personnel, particularly in petrochemicals, will not                                        gas fields, Arabiyah and Hasbah. Total production from
    be remedied overnight, and will require the import of ex-                                          the two fields is expected to rival with the Karan devel-
    patriate workers. This will create a long-term constraint                                          opment, flowing at 1.8 billion cf/d.
    on Saudi Arabia’s capacity rollout and hinder its goal of
    creating sustainable job opportunities for Saudi nation-                                           However, a burden facing the industry is the rising price
    als.                                                                                               of exploration and production for non-associated gas.
                                                                                                       The mounting costs are due to increases in the global
                                 Chart 14: Downstream of Naphtha                                       demand on offshore oil riggers and seismic survey com-
                                                       Ethylene     Ethylene Derivatives               panies, as well as the additional processing units
                                                       Propylene    Propylene Derivatives              needed to reduce the high-sulphur count of the non-
                                                                     Styrene Butadiene Rubbers
                                                                     SB Latex                          associated gas fields. Consequently, the Kingdom’s do-
                                                                     Butadiene Rubber
    Natural Gas                       Steam Cracker 
                                                       Butylenes     Acrylonitrile Butadiene Styrene
                                                                                                       mestic sale price of USD0.75 per mnBTU is expected to
                                                                     HMDA                              come under review in the medium term. Despite this im-
                    Condensate                                                                         pending rise, domestic gas prices will still lie below their
                                                                                                       global competitors. Thus, low cost feedstock, higher
                                                                    Cumene                             economies of scale and logistical advantages will con-
                                                       Benzene      Nitrobenzene 
                                                                    Cyclohexan                         tinue to give Saudi Arabian producers a competitive ad-
    Oil Refinery 
                                        Reformer        Toluene     TDI                                vantage in the petrochemical market.
                                                                    Para‐xylene     PTA 
                                                                                                       The third challenge to producers is the sustainability of
                                                                    Meta‐Xylene        IPA             recovery in the Chinese market. China is Saudi Arabia’s

largest importer of petrochemicals, and acts as a proc-       ene and its derivatives. Furthermore, producers’ close
essing center for European and U.S. demand. However,          proximity to dominant Asian markets not only allows
rising Chinese petrochemical capacities threaten to re-       them to capture a greater share of demand, but also en-
duce its demand for foreign imports. China is now estab-      courage foreign investment. Thus, domestic producers
lished as the world’s principle manufacturing location for    will be able to ride out the supply glut and be in a strong
low-cost plastic products due to its low cost labor force,    supply position when the market absorbs the new ca-
significant government support and large domestic mar-        pacity and prices reach a new equilibrium.
ket. Roughly 11.95 mntpa of ethylene capacity is fore-
cast to come onstream in China over the next five years,      The capacities of ethylene and polyethylene are forecast
leading a steady decline in its import demand.                to grow by 34.7% and 11.2%, respectively, to reach
                                                              16.08 mntpa and 5.45 mntpa by 2015. Domestic produc-
The final challenge facing the sector is the accusation       ers are also able to procure propane at a discounted
that Saudi producers exporting petrochemicals are earn-       rate to the naphtha export price, thereby making propyl-
ing high dumping margins on their products. Acting on         ene a commonly used olefin. Projects by Sahara Petro-
these claims, India recently imposed an anti-dumping          chemical and Saudi Aramco will expand propylene and
duty on Saudi exports of polypropylene in a move to pro-      polypropylene capacities by 44.6% and 107.7%, respec-
tect its own producers of the chemical. The tariff will be    tively to reach 5.09 mntpa and 7.52 mntpa by 2015. Al-
levied for a period of 5 years from the start of the provi-   though there are no plans to increase the methanol ca-
sional anti-dumping duty imposed on July 30 of last           pacity of 5.36 mntpa, Sipchem is investing in diversifying
year, and ranges from USD28.49 to USD323.50 per               into its derivatives.
tonne. The duty will hinder Saudi producers’ ability to
expand sales in India’s lucrative petrochemicals market;      There are currently 62 projects ongoing in the Saudi pet-
where polypropylene is used to make finished goods            rochemical sector valued at roughly SAR236 billion
and make woven sacks needed to carry cement, food             (USD63 billion). The majority of projects, 33%, are in the
grains, sugar and fertilizers. Manufacturers affected by      study phase indicating that greater capacity additions
the duty include Saudi Yanbu Petrochemical Company,           and industry development will be observed post 2015.
Saudi Polyolefins Company and National Industrializa-         This notion is further enforced by the significantly higher
tion Company.                                                 volume and value of forecasted contract awards in 2012;
                                                              23 contracts amounting to SAR124 billion (USD 33 bil-
Trade representatives in Saudi argue that the Indian de-      lion).
cision will not have a great financial impact on the King-
dom’s producers, as total petrochemical exports from          Current projects in the sector are, for the most part, the
Saudi Arabia to India amount to a modest USD200 mil-          result of joint ventures. Sabic formed a joint venture,
lion a year. Suppliers can also easily shift their exports    known as Saudi Kayan, with privately-held Al Kayan Pet-
to other Asian markets to avoid such losses. Neverthe-        rochemical company (Al Kayan) to build an ethylene
less, concerns over encouraged future dumping claims          cracker and units producing ethylene glycol, HDPE,
are being raised following the decisive move of the In-       LDPE and PP. National ChevronPhillips Company
dian government.                                              (NCP) is a joint venture between Saudi Industrial Invest-
                                                              ment Group (SIIG), Arabian ChevronPhillips Petrochemi-
Conclusion                                                    cal Company and public shareholders, aimed at con-
                                                              structing a large-scale petrochemicals complex at Jubail.
Global demand for olefins and polymers is forecast to         Financing of these projects, among others, was pro-
have recovered in 2010 as consumption in China and            cured through a variety of debt and equity combinations.
India accelerated. The global market for basic petro-         These included loans from domestic and international
chemicals is forecast to remain in oversupply in the me-      banks, the Saudi Industrial Development Fund (SIDF)
dium term due to large capacity additions coming on-          and Public Investment Fund (PIF), export credit agen-
stream by Middle Eastern and Asian producers. High-           cies as well as sukuks.
cost producers in other parts of the world will be
squeezed out, and petrochemical prices are likely to          The Saudi Petrochemical sector will continue to hold a
come under pressure from extra supply in the medium           considerable market share of ethylene and propylene
term.                                                         product categories. However, domestic producers may
                                                              need to acquire the units and complexes of higher-cost
Fortunately, Saudi Arabian producers benefit from the         producers squeezed out of the market in order to diver-
lowest cost margins in the world and a supportive gov-        sify into more sophisticated derivatives production. The
ernment determined to diversify its economy and expand        sector is also likely to face a few challenges in the me-
its petrochemical sector. The abundance of ethane-rich        dium term. Most importantly is the scarcity of ethane and
associated gas allowed the launch of a series of projects     the need to diversify into more versatile feedstock, such
that are set to put the Kingdom as a global hub of ethyl-     as naphtha. The recent surge in petrochemical prices

will enable Saudi producers’ to purchase the heavier
feedstock without constraining profit growth. Further-
more, a more sophisticated feedstock mix of gas and
liquids has begun to encourage the integration of refiner-
ies and petrochemical complexes, and act as another
incentive for foreign investment. Saudi Arabia is also
raising gas production from non-associated gas fields to
cater for the insufficient supply of gas. However, the in-
creased cost of exploration and production of these
fields will put upward pressure on the gas price of the

The second significant challenge for Saudi producers is
the sustainability of recovery in the Chinese market, as
rising Chinese capacities threaten to reduce the volume
of Saudi exports entering the market. The final chal-
lenge, that is of less importance to the industry, is the
legal accusations stating that domestic producers ex-
porting petrochemicals are earning high dumping mar-
gins on their products. This has propelled countries like
India to enforce antidumpting duties.

The benefits of the Kingdom’s sustained expansion and
diversification of its petrochemical output far outweighs
the industry’s challenges. Furthermore, the significant
cost advantages that Saudi producers are entitled to
have ensured that project financing is of no issue. Thus,
a bright future as a leading exporter lays ahead for the
Saudi Petrochemical sector.

Table A.1: Saudi Petrochemical Capacities, mntpa
Petrochemicals                                      2009         2010             2011   2012    2013     2014        2015

Ethylene                                           11.94        13.41          14.58     14.58   14.58   15.88       17.38
Polyethylene                                        4.90         4.90             5.45    5.45    5.45    5.45        5.45
Propylene                                           3.52         4.15             4.59    4.59    4.59    4.59        5.09
Polypropylene                                       3.62         7.12             7.52    7.52    7.52    7.92        7.92
Polystyrene                                         0.17         0.17             0.37    0.37    0.37    0.37        0.37
HDPE                                                1.10         1.50             2.35    2.35    2.35    2.35        2.35
LDPE                                                1.55         1.55             2.10    2.10    2.10    2.10        2.10
LLDPE                                               0.75         0.75             1.00    1.00    1.00    1.00        1.00
Methy Tertiary Butyl Ether (MTBE)                   3.33         3.33             3.33    3.33    3.33    3.33        3.33
Polyvinyl Chloride (PVC)                            0.42         0.42             0.42    0.42    0.42    0.42        0.42
Benzene                                             0.54         0.65             0.65    0.65    0.65    0.65        0.65
Butadiene                                           0.12         0.12             0.12    0.12    0.12    0.12        0.12
Styrene                                             1.82         1.82             1.82    1.82    1.82    1.82        1.82
Methanol                                            5.36         5.36             5.36    5.36    5.36    5.36        5.36
Vinyl Chloride Monomer (VCM)                        0.43         0.43             0.43    0.43    0.43    0.43        0.43
Ethylamines                                         0.00         0.00             0.14    0.14    0.34    0.54        0.74
Vinyl Acetate Monomer (VAM)                         0.30         0.30             0.30    0.30    0.30    0.30        0.30
Ethylene Vinyl Acetate (EVA)                        0.00         0.00             0.00    0.00    0.00    0.20        0.20
Formaldehyde                                        0.00         0.22             0.22    0.22    0.22    0.22        0.22
Epoxy Resins                                        0.27         0.29             0.29    0.35    0.35    0.35        0.35
Carbon Monoxide                                     1.33         1.33             1.33    1.33    1.33    1.33        1.33
Acetic Acide                                        0.46         0.46             0.46    0.46    0.46    0.46        0.46
Polyvinyl Acetate                                   0.00         0.00             0.00    0.00    0.00    0.13        0.13
Polyacetal                                          0.00         0.00             0.00    0.00    0.00    0.05        0.05

Source: NCB Estimates, MEED Projects, Company Announcements

Table A.2: Ethylene Projects in Saudi Arabia
Announced Project                         Capacity Addition, mntpa      Completion
Sabic                                              7.185                Onstream
Sharq (Eastern Petrochemical)                       1.2                 Onstream
PetroRabigh                                        1.25                 Onstream
SEPC (Tasnee)                                        1                  Onstream
Yansab                                              1.3                 Onstream
Saudi Kayan                                        1.478                  3Q 10
National Chevron Phillips (SIIG)                   1.165                  3Q 11
Sadara (Saudi Aramco/Dow Chemical)                  1.3                   3Q 14
SATORP (Saudi Aramco/Total)                         1.5                   4Q 15

Source: MEED Projects

Table A.3: Propylene Projects in Saudi Arabia
Announced Project                       Capacity Addition, mntpa     Completion
PetroRabigh                                            0.9           Onstream
Yansab                                                 0.4           Onstream
National Chevron Phillips (SIIG)                   0.145             Onstream
SEPC (Tasnee)                                      0.285             Onstream
APPC                                               0.455             Onstream
Sahara Petrochemical                               0.46              Onstream
Saudi Kayan                                        0.63                   3Q 10
National Chevron Phillips (SIIG)                   0.445                  4Q 10
SATORP (Saudi Aramco/Total)                            0.5                4Q 15

Source: MEED Projects

Table A.4: Methanol and Derivative Capacities, mntpa
                                                2010               2011
Methanol                                        5.36               5.36
Vinyl Acetate Monomer (VAM)                     0.30               0.30
Ethylene Vinyl Acetate (EVA)                    0.00               0.20
Formaldehyde                                    0.22               0.22
Carbon Monoxide                                 1.33               1.33
Acetic Acide                                    0.46               0.46
Polyvinyl Acetate                               0.00               0.13
Polyacetal                                      0.00               0.05

Source: NCB Estimates, MEED Projects, Company Profiles

                                     Economics Department

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