Fast and Faster: The Growth Of The Chemicals Industry In The Gulf
At long last the economic miracle of the Arab states of the Gulf is blossoming. Saudi Arabia is now producing over 50 million tons of energy based products, whether chemicals, fertilizers or metals. Bahrain is home to the largest Aluminum plant in the world. Qatar produces 27 million ts/y of LNG, slated to increase to 72 million ts/y by 2015, and has a booming petrochemical and fertilizer industry. The growth in Gulf energy-based productions is accelerating exponentially and is likely to reach 150 million ts/y of products by 2015. This dramatic growth is happening along two tracks, one fast, one faster. What differentiates the fast from faster track is the ability of the local ventures to access large volumes of capital in a reasonable time frame and with varying interference from the central governments.
The fast track is followed by Qatar, Kuwait and the UAE. All three countries are developing large plants making basic petrochemicals [Ethylene, EG, HDPE, Ammonia, MTBE, etc.]. These plants are always established in joint venture between state entities and very large foreign [mostly American] firms. The foreign firms provide the technology, supervise the construction, the startup and manage the marketing of the products. The advantage to the foreign firms is that the Gulf states provides them with very low cost feedstocks [$0.83/million BTU in Qatar], which allow them to gain market share in the Far East and make money on their portion of the sales and on fees for management and technology. Most of the products are based on gas feedstock, which indeed provides the most efficient conversion possible. For example, Q-Chem in Qatar is in joint venture with ChevronPhillips makes 450,000 ts/y of Ethylene and a suite of downstream products, expected to triple in the very near future. Kuwait has a joint venture with Dow Chemicals called Equate, which produces 850,000 ts/y of Ethylene and downstream products, expected to double capacity in the medium term. The UAE owns with OMV of Austria a huge 600,000 ethylene complex called Borouge, which makes, also expected to increase capacity very shortly.
The faster track is found in Saudi Arabia. The Kingdom seems to have started a new, unusual, but quite potent approach to industrialization. It is now following a two-pronged approach to growth in energy based-industries which allows industries, whether state or privately owned, to tap into the vast private financial markets thereby creating a turbo effect on investments.
The first prong is the "traditional way" of State owned or private companies in JV with a large foreign companies. This JV approach has allowed large projects to be developed, and by and large, has been a great success and is mostly responsible for Saudi Arabia's total production today of about 50 millions ts/y of products. The main protagonists in these projects have been SABIC for about 90% of this production and a few industrially minded merchant families for the balance. However, the world markets require very large projects, the size of which make it difficult for even SABIC to fund them directly.
In the second prong state entities and the industrialist families sector have started tapping the huge capital resources of the private sector. The $14 billion Rabigh petrochemical project was established as a separate legal entity called PetroRabigh owned 35% by Saudi Aramco, 30% by Sumitomo and the balance to the Saudi public through shares floated on the stock market in Riyadh. A total of about $8 billion in loans was structured to include loans from State entities like SIDF [the development bank], GOSI [the social security fund] and the state pension fund. A syndicate of private banks with substantial participation from Japanese and Gulf banks easily floated the balance. A similar structure is being put for a $20 billion venture in Ras Tannura with Saudi Aramco, Dow Chemical and the Saudi public.
SABIC had innovated this type of "mixed" structure when it established Yansab and United Petrochemical, about $10 billion worth of total investments, two years ago with similar financial structures, albeit not including a foreign ownership. SABIC also innovated when it placed very large amounts of Sukkuk [Islamic bonds] on the markets in Saudi Arabia to fund its $3 billion acquisition of Huntsman assets in Europe and its purchase for $11 billion of the advanced plastics division of General Electric.
The private sector has also used the stock market to fund its industrial growth. In less than two years, the number of companies traded on the stock market has doubled to 144. There are now 33 industrial companies, started by the private sector, which have tapped the stock market in Riyadh for investment in numerous industries but mostly related to the energy based sector. The stock market has also opened up opportunities to the service companies spurring industrial development. Thus, both state-owned and private institutions have been able to unleash the pent-up capital available in the Kingdom and are eager to benefit from the Saudi natural advantage of the low-cost energy, thereby creating the "faster" development in the Gulf.
Key Conclusions:
Energy-based industries in the Persian Gulf, especially chemicals, will become the largest in the world by 2015.
The present exponential growth is based on access to low cost feedstocks and access to large volume capital from both the States and the public.
Saudi Arabia is growing the fastest because it has harnessed a perfect mix of low-cost feedstocks, State funds, publicly traded stocks and technology providers.
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Jean-Francois Seznec is a Senior Advisor in the Markets and Country Strategies practice, which houses PFC Energy's expertise in country risk and petroleum sector policy. For further information on this article contact Enews_jseznec@pfcenergy.com.