March 2020

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Middle East: Saudi Arabia eyes major growth in petrochemicals market

Saudi Arabia aims to become a major player in the global petrochemicals market within the next several years, with plans to increase domestic and foreign production and expand its exports.

Gerden, E., Contributing Writer

Saudi Arabia aims to become a major player in the global petrochemicals market within the next several years, with plans to increase domestic and foreign production and expand its exports.

Implementation of these plans will align with the country’s Saudi Vision 2030, which is a government plan to reduce Saudi Arabia’s dependence on oil, diversify its economy and develop its public service sectors.

A major target of the plan is to create conditions for the development of the Saudi petrochemicals industry and raise its competitiveness in the international arena. These goals will be achieved through a significant increase in exports of Saudi petrochemicals to foreign markets.

Catching up with global petrochemicals

Saudi petrochemicals production has been rapidly growing since the beginning of the 2000s. The country, which has traditionally licensed process technology from Western companies, is working to implement and adapt new technologies.

Khaled Faleh, Saudi Arabia’s minister of industry and mineral resources, acknowledged that the present share of Saudi Arabia and other Gulf states in global petrochemicals production does not exceed 3%, compared to 25% in the case of many Western European states—despite the huge volumes of hydrocarbon reserves concentrated in the Middle East Gulf.

Another subject of concern for Saudi petrochemicals production is the inability of local producers to meet domestic demand. According to data from the Saudi Ministry of Industry and Mineral Resources, local production meets only 18% of domestic demand, with the remaining 82% of domestic petrochemicals demand being met through imports.

A shift from the traditional production of refined fuels to petrochemicals will allow Saudi Arabia to diversify its energy sector and create new jobs. At present, the country’s petrochemicals sector employs approximately 250,000 people. This number is significantly lower than in the EU, where petrochemicals provides direct and indirect jobs to almost 6 MM people.

To level the petrochemicals playing field with Western countries, the Saudi government is implementing a series of measures. One measure involves attracting more investments to the industry and increasing its labor efficiency. At present, operating expenses for Saudi petrochemicals are 15%–20% higher than those in the US and 200% higher than in China.

Saudi petrochemicals M&A

In addition to increasing its overall production of petrochemicals, Saudi Arabia is seeking to raise the technical complexity of its petrochemical product offerings, including those with high added value, to meet growing demand in both domestic and foreign markets.

The first step is the recent greenlight by local regulators for the establishment of a new, large-scale petrochemicals producer in the country. The new company is known as Sahara International Petrochemical Co. and was established with the merger of leading Saudi petrochemicals producers Saudi International Petrochemical Co. (Sipchem) and Sahara Petrochemical.

The new company will have total assets worth more than SAR 22 B ($5.9 B) and will become the second-largest petrochemicals producer in the country after Saudi Basic Industries (SABIC) (FIG. 1). Representatives of Sahara International Petrochemical Co. have already announced plans to target acquisitions and JVs in the U.S. and Asia to expand the company’s market reach.

Fig. 1. SABIC, one of Saudi Arabia’s largest petrochemicals producers, was recently acquired by state-run energy firm Saudi Aramco.

The deal is expected to create a good synergy, since Sahara Petrochemical’s area of specialization is the production of basic petrochemicals and Sipchem traditionally focuses on high-added-value products. The tie-up will expand the combined company’s product portfolio, increase its purchasing power and reduce its raw material costs, thereby boosting its competitiveness and sustainability.

The merger of Sahara and Sipchem is the second major deal in Saudi petrochemicals in recent months. State-run oil giant Saudi Aramco acquired a 70% share in SABIC, another flagship local petrochemicals producer, in a SAR 259.13-B ($69.1-B) deal in March 2019. The acquisition of SABIC makes Aramco the world’s fourth-largest petrochemical firm.

Saudi courts foreign markets

Both Saudi Aramco and Sahara International Petrochemical Co. plan to promote Saudi petrochemical products in key foreign markets, including China and Brazil. Initially, they will increase exports of polyethylene and polypropylene.

The Saudi government also aims to localize the production of certain petrochemicals within key territories. Saudi Aramco recently announced plans to participate in the implementation of at least two major petrochemicals projects in China over the near term. One project involves the construction of an oil refinery and petrochemical plant in Liaoning province in northeast China. The complex will have a refining capacity of 300,000 bpd and produce 1 MM t of petrochemicals, primarily ethylene.

For the second project, Saudi Aramco will take part in the construction of a new petrochemicals facility and 400,000-bpd refinery in Zhejiang province in eastern China. The combined cost of both projects is estimated at $20 B.

Moreover, Saudi Arabia’s government is trying to attract Chinese investors to implement projects within its own borders. To this end, on January 7, representatives of the Saudi government announced that they had reached an agreement with China for the construction of a large-scale petrochemical facility in the western port city of Yanbu. The volume of investment is estimated at SAR 21 B ($5.6 B). Construction work is slated to begin in 1H 2020 and be completed by 2024. The agreement was the result of an MOU signed during a visit to Beijing by Saudi Arabia’s Crown Prince, Mohammed bin Salman, in February 2019.

Domestic production to get a boost

The Saudi government will also increase petrochemicals supplies to the domestic market. The majority of the supplies will come from the Yanbu and Jubail provinces, where a significant portion of the country’s existing petrochemicals capacity is located.

To this end, the government, together with leading local producers, will create conditions for the better integration of the domestic petrochemicals industry within the Saudi economy. The measure will ensure stable petrochemicals demand from major domestic industries, including aerospace, automotive engineering, renewable energies, pharmaceutical, military and others. Additionally, the Saudi government has not ruled out the possibility of protectionist measures for the petrochemicals industry.

Successful implementation of these plans is expected to encourage an increase in the value of the Saudi petrochemicals industry from SAR 500 B ($133 B) to SAR 1.7 T ($452 B) by 2030. HP

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