Domestic consolidation and international partnerships provide support to Saudi Arabia's petrochemicals industry

Saudi Arabia is making efforts to consolidate and expand its petrochemicals industry through a series of new mergers and partnership deals. By far the biggest development in the sector was the finalisation of an agreement in March 2020 for the purchase by Saudi Aramco of a 70% stake in SABIC. The proceeds from the deal, which stand at $69bn, will go to the Kingdom’s sovereign wealth fund, the Public Investment Fund (PIF). This comes in conjunction with the $25.6bn the PIF is set to receive from the launch of Saudi Aramco’s initial public offering in November 2019. This combined $94.6bn windfall will enable the PIF to support a plethora of Vision 2030 initiatives, while Saudi Aramco and SABIC push on in tandem to further develop the country’s petrochemicals industry, which is the largest source of non-oil exports.

Heavyweight Players

Founded in 1976, SABIC has grown into one of the world’s largest petrochemicals manufacturers, utilising the Kingdom’s feedstock price advantage and availability of capital resources to become a global conglomerate employing approximately 33,000 people in 50 countries. Meanwhile, Saudi Aramco, one of the world’s biggest crude oil exporters, has widened its operations to become an integrated energy business with interests in natural gas, renewables and petrochemicals, employing a global workforce of 70,000. The combined weight of these two multinationals, along with that of their subsidiaries and joint ventures (JVs), provide the backbone of the country’s non-oil revenue. Indeed, in December 2018 the activities of the two companies accounted for 67.2% of non-oil revenue, with a combined value of SR13.7bn ($3.7bn) in that month alone.

Testing Times

However, the two conglomerates’ consolidation came at a testing time in the world’s petrochemicals market. By December 2019 the contribution of petrochemicals to the Kingdom’s non-oil exports had fallen to 56.9%, with their combined value declining by 20% to SR10.9bn ($2.9bn). This came amid the slowdown of the Chinese economy – whose rapid expansion played a decisive role in the rise of Saudi Aramco and SABIC – and increased competition in the global petrochemicals market, which exerted downward pressure on the prices of key products. As a result of these factors, SABIC experienced falls in both revenue and profit throughout 2019. Indeed, in the final quarter of 2019 the company’s petrochemicals and speciality chemicals segment recorded a loss of SR341.3m ($91m), with this contributing to an overall loss by SABIC of SR1.5bn ($400m). For 2019 as a whole, the company made a profit of SR8.5bn ($2.3bn), a 73% decline from the SR31.9bn ($8.5bn) recorded in 2018, according to SABIC’s 2019 financial statements. Further contraction is expected in 2020, as the global outbreak of Covid-19 shuttered factories around the world and dampened demand.

Expansion

In the face of challenging market conditions SABIC has sought to diversify its production base and expand operations. In 2018 SABIC acquired a 24.99% equity stake in Swiss chemical company Clariant. The two firms also signed a memorandum of understanding (MoU) to consider merging SABIC’s future specialities business with Clariant’s additives and high-value master batch divisions. However, the implementation of this merger was delayed in July 2019 due to unfavourable market conditions.

On the domestic level, SABIC merged two of its wholly owned subsidiaries, Saudi Petrochemical Company and Petrokemya, in October 2019, in a move to increase efficiency. In the same quarter SABIC announced a deal to increase its shareholding in the Saudi Arabian Fertiliser Company (SAFCO) to 50.1%, while SAFCO acquired the SABIC Agri-Nutrients Investment Company, which had been formed by SABIC in 2018 to consolidate all of its equity shares and assets in the segment. SABIC owns a 50% stake in both the National Chemical Fertiliser Company (Ibn Al Baytar) and Al Jubail Fertiliser Company (Al Bayroni), as well as 33.33% of the shares of Gulf Petrochemical Industries Company. This followed an agreement in December 2018 by SABIC to increase its stake in the JV Ar Razi – the world’s largest methanol complex – to 75% by purchasing 50% of the shares held by its partner, the Japan Saudi Arabia Methanol Company, while also agreeing to extend the partnership another 20 years.

Additionally, in 2019 SABIC and its JV partner, US energy giant ExxonMobil, broke ground on the Gulf Coast Growth Ventures project, a plastics manufacturing facility in San Patricio County, Texas. The complex is set to include specialised production units for ethylene, monoethylene glycol and polyethylene production. Operations at the plant are expected to begin in 2022.

Crude to Chemicals

Prior to Saudi Aramco signalling its intent to acquire the majority stake in SABIC, the two companies had already been collaborating on a number of projects. Most notably, in October 2018 the two companies announced the final stage of preparations for the construction of a crude oil-to-chemicals facility in Yanbu. Upon becoming fully operational in 2025, the plant is expected to produce 9m tonnes per year of chemicals from 400,000 barrels per day. 

Global Links

Saudi Aramco first entered the chemicals market in 1998 and currently operates a number of JVs with international partners in the Kingdom and abroad. In Jubail, the Saudi Aramco Total Refining and Petrochemical Company refines heavy Arabian crude, but also produces the aromatics paraxylene and benzene. On the Red Sea its Petro Rabigh JV with Japan-headquartered Sumitomo Chemical produces petrochemicals that are used to make detergents, resins, auto interiors, glue, household appliances, toiletries and artificial fibres. Saudi Aramco’s most ambitious project in the segment to date is the $20bn Sadara Chemical Company (Sadara) industrial facility in Jubail Industrial City, a JV with US company Dow Chemical. The original front-end engineering and design for the project was commissioned in 2007, and in 2011 Saudi Aramco and Dow Chemical announced the formal launch of a JV. The facility was designed to be the largest single-site integrated refining and petrochemicals complex in the world, with a 1.5m-tonne-per-year capacity mixed-feed cracker capable of using ethane and naphtha to produce a range of chemical products.

Coming on-line in stages, the mixed-feed cracker began production in 2016 and the last of the Sadara complex’s 26 plants became operational in August 2017. This final unit produces toluene diisocyanate, a product used in the manufacture of foam for mattresses and automotive upholstery.

Currently, the site provides products for around 600 customers in 70 countries and employs 4100 members of staff, most of them Saudis. Efforts have also been made to cluster downstream industrial activities around the facility in order to develop local value chains. These include the establishment of PlasChem Park, a 12-sq-km industrial park built adjacent to the Sadara facility that provides a site specialising in chemical and conversion businesses. The project was formed through a collaboration between Sadara and the Royal Commission for Jubail and Yanbu.

Nevertheless, in a difficult year for the petrochemicals industry, Petro Rabigh had a loss of SR603m ($160.8m) in 2019 compared to a profit of SR658m ($175.4m) in 2018. Meanwhile, Sadara reported a loss of SR4.87bn ($1.3bn) in the first nine months of 2019, 158% higher than a loss of SR1.89bn ($503.9m) made during the same period of the previous year.

Despite these losses, a number of deals have been signed that are expected to support the continued expansion of chemicals capacity and production. In November 2019 Sadara signed a deal with US services firm Baker Hughes to pipe ethylene oxide and propylene oxide to its facility in PlasChem Park for a period of 20 years. In the same month the Saudi Arabian General Investment Authority – the Kingdom’s investment licence provider – signed MoUs with a combined value of $2bn with the international chemicals companies BASF, Anglo Dutch Shell, Mistsui, SNF and AMG Advanced Metallurgical Group for the development of new projects in Jubail Industrial City.