Mega-complexes and mutual agreements to help develop petrochemicals production in Saudi Arabia

In four decades the natural gas in Saudi Arabia’s oil fields has been transformed from an inconvenient by-product into essential feedstock for an industry that supports thousands of jobs and generates 15% of the country’s export revenues. Since its creation in 1976 by royal decree, Saudi Arabia Basic Industries Corporation (SABIC) has grown into the largest non-oil industrial company in the Middle East with 40,000 employees worldwide.

As SABIC has expanded, so have many other petrochemicals companies in the Kingdom, with many of them making significant plans for further development. The government has also been exploring new ways to generate wealth and jobs by utilising the National Transformation Programme (NTP) 2020 and Vision 2030 as vehicles to diversify the economy and increase investment in the sector.

Firm Foundations

The petrochemicals industry has been aided by the Kingdom’s abundance of hydrocarbons deposits, especially as plants have been supplied local feedstock at well below normal market prices. Associated petroleum gas produces ethane and methane; liquid petroleum gas contains propane and butane; and naphtha is produced during the crude oil refining process.

In a 2016 special report on the industry, Jadwa Investment estimated that from 2010 to 2014 Saudi petrochemicals companies enjoyed a cost advantage over Asian competitors of almost $1000 per tonne in the production of ethylene. Over that same period, growing demand for ethylene in China helped the net income of Saudi-listed petrochemicals companies rise from SR5bn ($1.3bn) in the first quarter of 2006 to SR9.5bn ($2.5bn) in the third quarter of 2014. From 2005 to 2015 the country’s chemicals production capacity increased by 116%.

Challenging Times

However, when petrochemicals prices fell in tandem with global crude oil in mid-2014, the Kingdom’s producers saw not only their margins and their cost advantages diminishing, but also feedstock prices simultaneously rising. In December 2015 the government announced the country’s producers would be required to pay $1.75 per million British thermal units (Btu) for ethane, up from $0.75 per million Btus.

A number of petrochemicals producers issued statements through the Saudi Stock Exchange ( Tadawul), with Yanbu National Petrochemical Company (YANSAB) estimating that its production costs would rise by 6.5% resulting from increases in costs of inputs as well as electricity tariffs.

In the event, YANSAB fared better than many, seeing annual net profits grow by 90.7% from SR1.2bn ($319.9m) to SR2.3bn ($613.2m) from 2015 to 2016, and reporting even higher sale prices for its products in 2017. Mid-2017 results saw other players also growing. SABIC increased its share price by 1%, ethylene producer National Petrochemical rose by 3.2%, Petro Rabigh had 6.9% growth and Nama Chemicals share price increased by 9.9%.

Ambitious Plans

All but two of those listed companies had recorded a net profit in 2016, and many have ambitious plans for expansion or diversification both in Saudi Arabia and overseas. In addition, the realisation of two petrochemicals mega-complexes created through joint ventures (JVs) with state-owned oil giant Saudi Aramco in 2017 boded well for growth going forward. It is expected that these large-scale projects will act as catalysts to further downstream diversification.

The Sadara Chemical Company (SCC) mega-complex in Jubail Industrial City is a SR75bn ($20bn) JV with Dow Chemical, and the largest integrated petrochemicals producer in the world. With the start-up of its final polyethylene unit in April 2017, the Sadara Petrochemicals Complex became fully operational, composed of 26 manufacturing units with a capacity of 3m tonnes per annum (tpa).

Meanwhile, the SR34bn ($9bn) Petro Rabigh Phase II project on the Red Sea is the expansion of a combined refinery and petrochemicals compound that has been developed since 2005 with Japan’s Sumitomo Chemical. Both Saudi Aramco and Sumitomo Chemical hold a 37.5% share. The project commenced operations in July 2017 and was expected to be fully operational in the fourth quarter of that year with the capacity to produce 2.4m tpa of ethylene and propylene-based derivatives.

At the end of 2016 the GCC had 150m tonnes of petrochemicals output capacity, some 99.1m tonnes of which was in Saudi Arabia, according to the Gulf Petrochemicals and Chemicals Association.

Speciality Products

While the combined production at the Sadara and Petro Rabigh mega-complexes may constitute 5% of total output in Saudi Arabia, the greater significance of the two developments is the introduction of new manufacturing methods to produce a range of speciality products, some of which are new in the Middle East. Furthermore, they are simultaneously feeding a portion of their output to newly established businesses developing in adjacent industrial parks.

Although these newer speciality chemicals are produced in smaller volumes, they have higher value and are less influenced by fluctuations in the price of crude oil, according to Jadwa Investment. It found that the Tadawul All Share Index prices of commodity chemicals had a strong tendency to mirror Brent crude values from December 2014 to December 2016, while the Standard & Poor’s 500 Speciality Chemical Index was on a predominantly upward trajectory over that same period.

Of SCC’s 26 manufacturing plants, 14 of them will make products in Saudi Arabia for the first time, and the Sadara complex in Jubail is the only petrochemicals site in the GCC with a naphtha cracker, which will constitute 9% of Saudi petrochemicals feedstock, with methane, butane, propane and ethane accounting for 7%, 12%, 26% and 46%, respectively.

Naphtha is also in plentiful supply, with Saudi Aramco producing 124,000 barrels per day (bpd) in 2015. Although it is a more expensive feedstock than ethane, production of the latter has reached a plateau as a result of crude oil output reductions under the 2016-17 agreement by the Organisation of the Petroleum Exporting Countries, which has seen Saudi Aramco producing around 10m bpd. The 2017 Saudi fiscal budget included a commitment that prices of ethane, liquid petroleum gas and natural gas will not increase before 2020.

National Significance

The importance of the petrochemicals segment as a key driver of non-oil exports is recognised in both Vision 2030 and the NTP. Petrochemicals products accounted for 60% of non-oil exports in 2016, valued at SR106bn ($28.3bn) out of total non-oil exports, worth SR176bn ($46.9bn). The Royal Commission for Jubail and Yanbu (RCJY) is the governing body responsible for encouraging growth of petrochemicals and downstream energy companies. As such, the NTP has tasked it with completing SR41.6bn ($11.1bn) in initiatives, including SR2.9bn ($773.1m) to develop an industrial cluster in Yanbu Industrial City and expand Saudi Aramco’s refinery.

Part of this development involves a Saudi Aramco and SABIC initiative to create an oil-to-chemicals complex, which would involve steam-cracking crude oil and turning it directly to light olefins, which would render the refining process obsolete. The feasibility of the venture is being studied by Saudi Aramco and SABIC following the formation of a JV in 2016. The use of this could potentially save a reported $200 per tonne of ethylene produced.

US Sabic Partnerships

The Kingdom is also looking abroad. During his state visit to Saudi Arabia in May 2017, President Donald Trump and King Salman bin Abdulaziz Al Saud signed an agreement between SABIC and ExxonMobil to conduct a study on building a jointly owned petrochemicals complex in San Patricio County, Texas. A final decision on the project is due to be made in 2018.

The proposed plant would use an ethane cracker with the capacity to produce 1.8m tpa of ethylene to feed a monoethylene glycol unit and two polyethylene units. Following the signing of the agreement, Prince Saud bin Abdullah bin Thenayan Al Saud, president of the RCJY and chairman of SABIC, told local media, “This is one of the most important agreements signed during the US President’s visit. In line with Saudi Vision 2030, it is intended to open avenues to supply new markets.”

The two companies already operate domestic JVs: the Saudi Yanbu Petrochemical Company (YANPET) and the Al Jubail Petrochemical Company (KEMYA). YANPET began operations in 1985 and its two 800,000-tpa crackers produce polyethylene, ethylene glycol, polypropylene and pyrolysis gasoline. Production of ethylene, propylene and low-density polyethylene began at KEMYA in 1984. The location has the capacity to produce 700,000 tpa of ethylene and 1.1m tpa of polyethylene. KEMYA is also the site of the $3.4bn Saudi Elastomers Project, which has the capacity to produce 400,000 tpa of synthetic rubber, as well as the High Institute of Elastomer Industries, which was established in 2012 to educate and train Saudi technicians.

Meanwhile, in January 2017 SABIC acquired Shell’s 50% stake in its JV, the Saudi Petrochemical Company (SADAF), for $820m. SADAF has six petrochemicals plants with a production capacity of 4m tpa.

SABIC is also working with Chinese partner Shenhua Ningxia Coal Industry Group to assess the feasibility of building a coal-to-chemicals cracker in the Ningxia Hui region, which is already a significant coal producer. The two firms will conduct a three-year study before submitting an application to the Chinese government to build the plant.

Value Parks

Forging international links with large multinational companies is expected to encourage Saudi petrochemicals businesses to open new markets and drive innovation, but there is a significant challenge in creating a chemicals conversion industrial base within the Kingdom itself.

The Petro Rabigh Phase II expansion at Yanbu and SCC’s PlasChem Park – located adjacent to the Sadara Petrochemicals Complex, the largest petrochemicals facility in the Kingdom – has been established to attract both international and domestic investors, in order to not only better take advantage of the new products being produced in the Kingdom, but also to create jobs for citizens.

SCC directly employs more than 4300 staff, but it is hoped 15,000 local people will find work at PlasChem Park businesses as they are established.