Gas production in Saudi Arabia is the key to further economic development of its petrochemical sector.
Two world-scale gas processing plants developed by Saudi Aramco (in 2001 and 2003) process new fields of non-associated gas to complement continuing but oftentimes declining production of associated gas from oil fields.
Associated gas production depends on international demand for oil and thus varies in quantity available for petrochemicals and utility use according to oil production cycles. Therefore, the need for new developments of non-associated gas underway in the kingdom. One such example is a new world-scale turbo-expander producing ethane and natural gas liquid (NGLs) being directed to the needs of the domestic petrochemical industry while expanding the export potential for Aramco.
Gas continues to increase its role relative to oil in the kingdom, moving rapidly from 35 per cent in 1990 to 41 per cent by 2003 and projected to 51 per cent by 2008. However, energy demand for electricity and water serving the basic needs of the population compete for increasingly scarce gas resources for the petrochemical industry. On a per capita basis, the kingdom has one of the highest gas consumption rates in the world, for utilities, growing at more than 5 per cent annually. Meanwhile, Saudi Arabia’s industrial fuel and feedstock requirements for petrochemicals grow at more than 7 per cent annually.
With petrochemical and downstream plastic plants in Saudi Arabia currently estimated at more than 500 and with investments exceeding $20 billion currently in expansion phase, increasing demand for gas feedstock is expected to continue. Conceived petrochemical projects in the development pipeline are waiting allocations of feedstock developed from gas. Thus demand for gas in the petrochemical industry is outpacing supply.
Due to projected shortages in gas relative to increasing demand, Saudi Arabia by 2003 opened up gas exploration to international investors with modest upstream gas investment agreements (four) in the Rub’Al-Khali basin for exploration and development with first gas availability not expected before 2011. Thus, between now and 2011 there will be shortages in gas feedstock for planned petrochemical projects in Saudi Arabia.
Meanwhile demand for sales of gas is forecast by Aramco to reach 12 to 14 billion standard cubic feet per day (bscfd) by 2025. The kingdom’s strategy is to increase the share allocated to petrochemical products derived from gas. Ethane and NGL feedstocks for olefins more highly leverage economic returns. But practically, domestic utility demand will probably take first priority to keep up with expected population growth and urbanisation.
Investor View
International investors view Saudi Arabia’s oil and gas reserves most favourably being well located relative to faster growing markets and having low extractive cost, thus providing opportunities for comparative advantage of low-cost feedstock for production, distribution and sales of petrochemical products. Oil and gas internationals, petrochemical companies, global banks and financiers – all seeking investment opportunities in the kingdom’s petrochemical industry, currently see strong continued investor interest.
However, such investment depends upon timely allocation of feedstock from gas reserves currently under exploration than development. In fact, when examining the ratio of gas to petrochemical project investments underway, it can be seen in Table 1 that primarily private sector-led petrochemical investments are 2:1, exactly opposite of public sector investment-led gas development necessary to catch up to demand. A liberal selection of gas development projects that could impact on early availability of gas feedstock production indicates approximately $8 billion investments underway. This is only 1/2 of what is being invested currently in petrochemicals at $16 billion or 2/3 of total investment. This imbalance in investments between public sector-led gas development addressing shortages in feedstock and private-led petrochemical development addressing global market opportunities bodes ill for meeting government targets of economic development.
Petrochemical Developments
There is no doubt that past public sector-led investments have resulted in phenomenal growth in the petrochemical industry in the kingdom. Its significant comparative advantage in available feedstock continues until this day and into the future. Petrochemical industries based on methane, ethane and NGLs currently allow production of approximately 28 million tonnes per year of primary and secondary olefins, plastics and base chemicals, fertilisers, methanol and fuel additives. Methane-based petrochemicals utilise 22 per cent of the gas demand. Domestic produced ethylene, ammonia and methanol provide major feedstock for added-value petrochemical products.
Aramco is taking on two transformational initiatives – Rabigh Refinery’s expansion into petrochemicals, and the Fujian Petrochemical Complex. The company also plans to integrate Ras Tanura Refinery and Ju’aymah Gas Plant. During 2006, the company also plans to execute four mega-projects, seeking new business opportunities in petrochemicals and other derivative products to further develop the kingdom’s industrial base.
NBD (New Business Development) is Aramco’s focal point for developing new ventures. It is the organisation tasked to create and invest in new businesses through leveraging its distinct assets and capabilities. NBD is responsible for identifying, receiving, evaluating, shaping and closing new business deals which will create value for both Aramco (new revenues, strategic benefits) and for the kingdom (economic growth, increased private sector participation, job creation). Saudi Arabia Basic Industries Corporation (Sabic), still having majority public sector-held stock, could be viewed as a public sector-led significant investor in petrochemicals integrating globally through purchase and joint venturing. Sabic and the Saudi Arabian General Investment Authority (Sagia) have announced more than $25 billion in new petrochemical projects under various consortia of these public-led institutions together with foreign investor groups. Thus, the public-led investment avenues of Aramco, Sabic and Sagia could have undue influence in obtaining allocation of scarce feedstock for petrochemical development. Especially in view that allocation of feedstock has shifted from basic producers Aramco and Sabic to that of the Ministry of Petroleum and Minerals.
Nevertheless, as indicated in Table 1, the private sector-led investments lead the public sector led investments by 2:1. This occurs in spite of increasing global volatility in the price of basic feedstock indicated in Table 2. Increasing volatility is evidenced by monthly decrease as great as $52 and $55 per tonne to increase of +$78 & +$80 per tonne within the past year. Private sector led investors have great comparative advantage in managing price risk volatility over public institutions not actively engaged in the market while having authorities to regulate.
SWOT Analysis
STRENGTHS : Most certainly the greatest strength for petrochemical sector development in Saudi Arabia is the vast reserves of gas indicating future opportunities once private sector-led investment flows allow their development into usable feedstock for the industry.
Secondly, continued strength in the oil and gas market provides extensive capital resources for allocation to further development of gas resources to eliminate projected short-term shortages in feedstock.
WEAKNESS: Public sector-led investment in gas exploration, development and allocation has not kept up with demand of private sector-led investors.
OPPORTUNITIES: Large numbers of private sector-led investors are examining opportunities in the petrochemical sector. Together with recent high oil and gas revenues, capital will not be in short supply.
Secondly, a more level playing field between public sector investors and private sector investors in the development process, especially in allocation of feedstock, will assure continued development in the petrochemical industry.
Threats: The greatest threat for Saudi Arabia is to not recognise that greater/faster change is required moving from plan and control to facilitate and support private-led petrochemical sector investors who have intimate knowledge of global drivers of the industry. Secondly, to trust that oil and gas prices will continue their upward trend indefinitely. Price cycles can be anticipated although not often predictable in timing and duration. However, it is most certain that during lower prices production will be cut, thus associated gas reductions can adversely affect feedstock availabilities for petrochemicals.
* The content and representations herein are solely those of the author, and are not purported to be in any way associated with polices of the Petroleum Projects Development Company (PPDC), of which he is the CEO.
By Dr Thomas Cox
