SAUDI PETROCHEMICALS - conclusion: Five strategies drive Saudi Arabia’s petchem industry growth

Jan. 9, 2006
Saudi Arabia, a significant global producer of commodity petrochemicals, will increase its position in the global market during the next 5 years due to five growth strategies: diversifying the product portfolio, establishing more joint ventures with industry majors, placing greater emphasis on research and development, endorsing a larger role for private sector, and diversifying into downstream.

Saudi Arabia, a significant global producer of commodity petrochemicals, will increase its position in the global market during the next 5 years due to five growth strategies: diversifying the product portfolio, establishing more joint ventures with industry majors, placing greater emphasis on research and development, endorsing a larger role for private sector, and diversifying into downstream.

Part 1 (OGJ, Jan. 2, 2006, p. 52) of this two-part series discussed the historical development of the Saudi petrochemical industry, its current status, and plans for future petrochemical production capacity.

Part 2 will discuss the five growth strategies and the effects of Saudi Arabia’s entry into the World Trade Organization (WTO).

Growth strategies

In the short to medium term, the petrochemical industry in Saudi Arabia is taking several steps to enhance its global competitiveness and ensure its long term-health. These strategies include: diversifying the product portfolio, establishing more joint ventures with industry majors, placing greater emphasis on research and development, endorsing a larger role for private sector, and diversifying further downstream.

Product diversification

Investments in the Saudi petrochemical industry have so far been heavily concentrated in the methanol and ethylene product chains. The primary reason is that petrochemical producers in Saudi Arabia have access to low-cost feedstocks (methane and ethane), which provides them with a substantial cost advantage; this makes them highly competitive in export markets.

Although increased demand for methanol, ethylene, polyethylene, and ethylene glycol continues unabated in Saudi Arabia, there is mounting pressure on petrochemical producers to consider new products.

Before 1994, all the steam crackers in Saudi Arabia were fed with 100% ethane. Thereafter and due to limited ethane availability, most cracker projects have been allocated mixed feedstock (ethane-propane, ethane-butane, and ethane-light condensates).

A substantial volume of basic petrochemicals other than ethylene will become available in Saudi Arabia, resulting therefore in a more diversified set of chemical streams that will, in turn, assist in developing the respective secondary derivatives.

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Table 1 shows the product mix generated from different feeds. Compared with an ethane-fed cracker, the yield from heavier feeds is more high-molecular-weight products.

For heavier feedstocks, there is a significant increase in the yield of propylene and pyrolysis gasoline (pygas). The pygas stream is rich in benzene. Its extraction should bring opportunities for Saudi petrochemical companies to develop the aromatics value chain.

In conjunction with the processing of heavier feedstocks, the Saudi government has modified the feedstock allocation process to extend the petrochemical value chain further into secondary and tertiary products. This will increase the industry’s cost competitiveness in the primary petrochemicals through back-integration.1

This trend is creating a conversion industry and industrial clusters. This is bringing a radical transformation to the basic structure of the petrochemical industry in Saudi Arabia.

This is evident by petrochemical projects under development, which would have been difficult to imagine in the last decade, primarily because they were more specialized. Some of these include:

• The PetroRabigh (Saudi Aramco-Sumitomo Corp. joint venture) project includes propylene production from a new FCCU. The propylene will be used for producing polypropylene and propylene oxide. Propylene oxide is an intermediate product that is not currently among the industry’s products. This could stimulate a set of downstream derivatives including: polyether polyol (the precursor for polyurethane) and propylene glycol.

• Two acetyls (acetic acid and vinyl acetate monomer) projects are being developed by Saudi International Petrochemical Co. (Sipchem) and a Tasnee Petrochemicals Co. and Celanese Corp. joint venture. This may provide more opportunities for conversion of these intermediate products into their respective derivatives for the domestic and regional markets.

• Saudi Basic Industries Corp.’s (Sabic) alpha olefins project is another milestone in the diversification drive.

Companies will use new polyethylene processes, which will result in products different from the gas-phase Unipol polyethylene grades currently used by all of Sabic’s affiliates in Saudi Arabia. Basell BV will license the Holsaten slurry process to Sabic’s affiliate, Yanbu National Petrochemicals Co. (YanSab).

The Saudi Chevron Petrochemical joint venture, in its planned olefin complex, will use the Chevron Phillips Chemical Corp. slurry process. Sumitomo’s linear, low-density polyethylene solution technology will be used at the Rabigh project to produce new grades of the polymer.

Each of these processes will bring products with properties that will spur competition and innovation in Saudi Arabia’s domestic market.

More joint ventures

Since its early beginnings, the petrochemical industry in Saudi Arabia sought business partners that could provide technology and a market for its products (OGJ, Aug. 16, 1999, p. 65). The industry’s adopted business model, therefore, entailed setting up joint ventures with leading global players.

About 70% of the existing petrochemical projects in Saudi Arabia are joint ventures with industry majors including: ExxonMobil Corp., Royal Dutch Shell PLC, Mitsubishi Corp., Hoechst Celanese Corp., Neste Oil Corp., Ecofuel, and Chevron Phillips.

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Fig. 1 shows the distribution of foreign direct investment (FDI) by major foreign companies in Saudi Arabia.2 To date, chemical and petrochemical companies have contributed 60% of the total FDI. ExxonMobil is the largest foreign investor in Saudi Arabia, accounting for 23% of the total FDI with a total cumulative investment exceeding $14 billion.

With the exception of Sabic’s projects, almost all the current petrochemical projects in Saudi Arabia are joint ventures with major chemical companies. New foreign partners includes: Basell, Sumitomo, Acetex, and Huntsman Corp.

Research, development

R&D is recognized as a source of competitiveness and a key to maintaining future growth in the increasingly competitive environment of the petrochemical industry. A successful R&D program is therefore crucial to a successful business strategy.

Sabic has demonstrated this strategy: In 1991, it launched its state-of-the-art R&D center in Riyadh. More recently, Sabic has opened four external R&D centers in Jubail, Houston, India, and the Netherlands to supplement the research activities of the Riyadh center (OGJ, Nov. 13, 2000, p. 52).

This R&D effort has currently led to the development and commercialization of several indigenous technologies, including:

• IFP-Sabic technology for butene-1 production, developed jointly between Sabic and Institute Français du Petrole. It is licensed to more than 19 chemical companies in 11 countries.

• Acetic acid technology is a locally developed route to acetic acid from direct oxidation of ethane, commercialized in 2005 by Sabic affiliate Ibn Rushid.

• Linear alpha olefin technology (α-Sabline), developed jointly by Sabic and Linde AG. Al-Jubail United Petrochemical Co., a wholly owned affiliate of Sabic, is building a linear alpha olefin production facility.

In support of this R&D effort, Sabic has recently acquired Scientific Design Co. Inc., in partnership with Süd-Chemie Inc. Scientific Design is a research company in the field of industrial catalysts.

Larger role for private sector

Primarily due to the lack of expertise in developing large-scale petrochemical projects, private sector petrochemical investments were previously concentrated in projects downstream of steam crackers. Sabic therefore was the sole company in the upstream petrochemical sector until 1995, when the cabinet liberalized the sector and invited local and foreign private investors to invest in the industry.

This led to the start-up, in 1999, of the Saudi Chevron Phillips plant in Al-Jubail, the first wholly owned private petrochemical venture in Saudi Arabia. From then on, several private investors have ventured into the industry.

Currently, the private players involved in the Saudi petrochemical industry include Tasnee, Sipchem, Saudi Chevron, Sahara Petrochemical Co., Lujian Industrial Co., Kayan Petrochemical Co., National Polypropylene Co., and Saudi Formaldehyde Co.

The private sector is actively developing large-scale petrochemical projects in Saudi Arabia. The share of private investment in the planned basic petrochemical projects outlined in Table 3 of Part 1 stands at 53% of added capacity and accounts for 51% of the total capital investment planned for 2004-09.

Future developments regarding the involvement of the private sector in the petrochemical industry may be in the form of:

• An acceleration of the privatization process, resulting in the transfer of some of the state shares in Sabic to the private sector.

• Partnering between the private companies in developing upstream petrochemical and refinery projects. This is exemplified by the Sahara cracker project owned by Sahara, Sipchem, and Tasnee Petrochemicals.

• The formation of marketing alliances between petrochemical producers to increase market share and geographical spread. Sabic has signed an off-take agreement to market 50% of Lujian’s polypropylene output.

Downstream expansion

Current investments in the Saudi petrochemical industry are heavily concentrated in the upstream segment due to the fact that petrochemical producers at this level benefit from low-cost feedstock, which provide them with a significant cost advantage at the primary and secondary level.

These economic benefits are not currently shared with highly developed downstream industries, such as the plastic conversion plants; current transfer pricing for polymers is set in accordance with global market prices. Conversely, however, the plastic conversion industry in Saudi Arabia has maintained steady growth during the past three decades.

This growth was achieved despite the fact that the plastic conversion industry is fragmented and caters mainly to local demand and exports limited amounts to regional markets. The government is eager to develop the Saudi plastic conversion industries to compete globally and, by doing so, stimulate more extensive investment and employment in this industries.3

Saudi Arabia currently exports substantial quantities of polyethylene resins to China, which are then processed into films, roll stock, and plastic bags for export to the US and European Union. It is logical that Saudi Arabia is exploring the prospects for serving the export markets directly from the country, thereby capturing more of the value chain.

We have developed a strategy to achieve substantial growth in plastic conversion industries through export. The target is to increase Saudi Arabia’s share of the global processed plastics market to 15% by 2020 from 1% currently.

The main challenge in achieving this objective is establishing a plastic conversion industry that derives its global competitiveness from a competitive resin’s transfer pricing mechanism. This may happen as a result of the increasing number of local resin suppliers coupled with the tariff-reduction on imported resins, which is expected to spur a competition that will eventually drive resin prices down.

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Fig. 2 shows the short-term target for the market segmentation of the plastic conversion industry in Saudi Arabia. The largest growth is projected to be in the export share, growing to more than 25% by 2010 from less than 9% currently.

The enabling environment

The Saudi government has made a significant effort to speed up the implementation of structural and institutional reforms needed for a sustained increase in private investment, including FDI, to help diversify the national economy and create job opportunities.

Since 2000, Saudi Arabia has taken significant steps towards improving the investment environment including the introduction of a new tax system in 2004, which reduces the tax on profit made by foreign investors to 20% from 45% with the provision of transferring losses to the following years, and the introduction of a new legal code in 2005 which entails the formation of independent commercial courts.4

Regarding the petrochemical industry, Saudi Arabia offers the best current and future investment environment; its government actively endorses industrial expansion and investment inflows.

This commitment includes maintaining a competitive feedstock pricing formula and expanding the industrial infrastructure in the industrial cities of Jubail and Yanbu. Collectively, the planned Jubail-II and Yanbu-II projects will add more than 100 million sq km of serviced industrial land at a combined price of $40 billion.5

The added area is more than double the existing area of the two cities; this indicates the sizable expansion needed to meet the growth in the petrochemical industry. The land in those two cities is offered to investors at a nominal rental rate of 0.26¢/sq m/year, which is competitive compared to international benchmarks such as Jurong Island, Singapore, where the land rental rate is $7-18/sq m/year.

All utilities and support facilities are provided at attractive rates compared to international benchmarks.

In addition, Saudi Arabia is strategically located close to regional markets in the Middle East, with 270 million inhabitants, and the burgeoning Asian markets. Existing and planned logistics capabilities, which include underutilized port facilities close to maritime shipping routes, render Saudi Arabia a favorable launch pad for the outlined markets.

Accession to the WTO

The recent accession of Saudi Arabia to the WTO was a result of 12 years of extensive negotiations that led to the introduction of 42 bylaws in the last 4 years or so.

Overall, adopted measures in the WTO membership provide for a lower tariffs and subsidies on a wide range of goods and services, strengthening of the protection afforded to intellectual property rights, and measures for a speedier resolution of all trade grievances and disputes thereby providing extra assurance to foreign investors.

The accession of Saudi Arabia to the WTO will further enhance the competitive advantage of the Saudi petrochemical industry and strengthen its international market position. By being export-oriented, the Saudi petrochemical industry stands to gain from most of the outlined measures.

In addition to tariff reduction, the extension of the WTO to services, particularly to finance, insurance, and transportation, may lower significantly their prices. These services are acquired in fairly large amounts by the Saudi petrochemical industry and the resulting reduction in costs may further add to the competitive advantage of the industry.6

In addition to the benefits, WTO membership will have potential challenges for Saudi petrochemical producers. Benefits include trade-barrier removal, as stipulated by the WTO bylaws, which will allow Saudi petrochemical producers to have lower landed price access to tariff-protected markets such as the EU, US, and Japan.

The tariff reduction in those economies will induce a sizable increase in Saudi petrochemical exports, the extent of which will depend on how supply and demand in those economies respond to lower prices resulting from tariff reduction. In this environment, the high-cost producers in those economies will find it difficult to meet the lower market prices resulting from the tariff reductions.

They may reduce their production levels and possibly sell at a lower profit margin or at a loss. The petrochemical output in those economies may therefore decline less than prices in the short term.

In the long term, it will become imperative that the industry undergo a restructuring, pushing the high-cost producers out of business and thereby reducing the number of producers. On the demand side, petrochemical buyers will tend to increase their purchases in the short and long runs, to the benefit of the Saudi petrochemical producers. In return, Saudi Arabia will lower its own tariffs and open its market to imported petrochemical products.

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Table 2 shows that the tariffs on key commodity petrochemicals such as polyethylene, polypropylene, polystyrene stand currently at 12% with a provision to reduce it to 8% in an interim period ending by 2008, followed by another interim period ending by 2010 when the tariff will decrease to 6.5%.

Despite the fact that the volume of imported polymers is small and may remain so in the foreseeable future for reasons other than prices, the tariff reduction may create strong competition among petrochemical producers to maintain a sizable share in the domestic market. This may result in lower prices, leading to a narrow profit margin on local sales.

In this environment, the Saudi petrochemical producers may need to focus their attention further on continually reducing their production costs and ensuring that the technical support rendered to their local customers matches world standards.

The downstream industries and particularly the plastic conversion industries in Saudi Arabia stand to benefit from open markets because the prices of petrochemical resins will decline. Saudi Arabia, however, is committed to lowering the tariff on processed plastic imports to 6.5% from a ceiling of 20% during an interim period ending by 2010.

This may increase the influx of imported finished plastic products from low-cost Asian suppliers. The WTO, however, allows for import restrictions for developing countries to protect their infant industries and in particular if imports from particular countries have increased “disproportionately.”

In this environment, the plastic conversion industries will have to go through a restructuring that will push the small players towards consolidations and mergers to achieve a critical mass needed for competitiveness in domestic and global markets.

Perhaps the key accomplishment relevant to the petrochemical industry in the accession of Saudi Arabia to the WTO is the fact that it has been achieved without compromising on the current feedstock pricing formula, which represents the key competitive advantage for the petrochemical producers.

The EU claimed that the double pricing of NGLs conflicted with the WTO guidelines. This claim has no ground in view of the fact that price support for using NGLs as a feedstock for petrochemicals was determined considering its alternative use-exports.

The cost of developing the infrastructure and shipping NGLs to major export markets was the alternate cost. The logistics cost was about 30% of the Saudi export price. If the NGLs were consumed domestically for petrochemicals, therefore, the price was 30% less than the export price, reflecting the logistics savings.

Because of this, and also because this facility is available to anyone willing to invest in Saudi Arabia, the Saudi negotiating team proved that it is in full compliance with WTO rules and regulation, and does not fall in the area of the WTO concerns regarding preferential treatment (OGJ, Aug. 16, 1999, p. 65).

Although the argument is convincing, the issue will still receive continued scrutiny in the EU and US even after Saudi Arabia achieves membership in the WTO. This issue may be among others that will catalyze future reconsideration of the current pricing formula.

This interpretation is based on a clause outlined in the accession documents which reads, “Saudi Arabia will ensure that its producers and distributors of natural gas liquids (NGLs) will operate on the basis of normal commercial considerations, based on the full recovery of costs and a reasonable profit.”

Given that NGLs are primarily extracted from associated gas, which is a byproduct of crude production, its production cost is modest. It is likely that the feedstock prices in the kingdom will therefore remain competitive on regional and global levels.

This accomplishment is by far more important to the petrochemical industry than the impact of tariff-reduction in protected economies for two main reasons. First is the fact that more than 50% of the Saudi petrochemical exports are destined to nontariff-protected Asian markets. Second is the fact that the competitiveness of Saudi petrochemical producers is primarily derived from the competitive feedstock cost, which represents as much as 60% of the integrated cash cost in the petrochemical industry.


1. Al-Falih, K., “Quest to Maximize Value Addition,” presented to the Opportunities in Saudi Arabia’s Petrochemicals Sector conference, Strategic Forum, London, Sept. 29, 2005.

2. “Saudi Arabia’s FDI Survey Report,” Saudi Arabian General Investment Authority, May 2005.

3. Al-Sadoun, A.W., “Developing the Saudi Plastic Conversion Industry-Opportunities and Impediments,” presented to the Sabic Plastics Seminar 2004, Riyadh, Sept. 28, 2004.

4. “Annual Investment Performance Report 2004,” Saudi Arabian General Investment Authority, September 2005.

5. Al-Jurais, M., “New Expansion Drive in Al-Jubail Industrial City,” presented to the Opportunities in Saudi Arabia’s Petrochemicals Sector conference, Strategic Forum, London, Sept. 29, 2005.

6. Zind, R., “Al-Tawon Al-Sinae in the Arabian Gulf,” No. 61, July 1995, pp. 3-18.