4.36 PM Friday, 29 March 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 04:56 06:10 12:26 15:53 18:37 19:52
29 March 2024

Saudi to put $63bn into oil sector

Published
By Nadim Kawach

Saudi Arabia is pumping nearly SR236 billion ($63bn) into projects to boost its petrochemical industry and maintain its position as one of the world’s top chemicals producers, the Gulf kingdom’s largest bank has said on Saturday.

Nearly 21 per cent of the value of the 62 projects is in the execution stage while 33 per cent is in the study phase and 18 per cent is in the bidding stage, National Commercial Bank (NCB) said in a study sent to 'Emirates24|7'.This indicates that although capacity expansions are already being undertaken, larger industry growth and project development will be onstream after 2015, NCB said, adding that projects “On Hold” also form a significant share at 14.5 per cent.

“The value and volume of forecast petrochemical contract awards are significantly higher in 2012 than in previous years, at SR124bn and 23 projects. These capacity additions will become operational from 2015 onwards, thereby asserting that the kingdom will not only ride out the environment of overcapacity in the medium term but also become the primary centre of global production over the long-term.”

The study said the Saudi petrochemical sector would continue to hold a considerable global market share of product categories that lie not too far downstream of its pronounced feedstock advantage.

“Producers’ low cost margins and recent profit growth will allow them to stay afloat during the supply glut and squeeze out higher-cost producers in Europe and North America,” the study said.

“This will open up acquisition opportunities for Saudi producers, and encourage diversification into more sophisticated derivatives production.”

The report said that at this point, distribution channels will become imperative, adding that although the Kingdom possesses feedstock, utilities and a strong infrastructure, it does not have access to markets of specialised products.

“Thus, distributors in the mature markets of Asia, Europe and the US will become more attractive opportunities for acquisition.”The report said it believes the Saudi petrochemical industry is beset with challenges, including a shortage of skilled labor force in the medium term, scarcity of ethane and rising feedstock prices,  sustainability of demand recovery in the Chinese market; and antidumping duties.

“A key challenge is the need for a well trained and flexible labor force further down the product chain. Hydrocarbons extraction and basic petrochemical production is heavily capital-intensive and is able to provide employment to only 0.6 per cent of the total labor force,” it said.

“However, downstream production requires skilled technical and craft personnel. The Kingdom’s shortage of skilled personnel, particularly in petrochemicals, will not be remedied overnight, and will require the import of expatriate workers. This will create a long-term constraint on Saudi Arabia’s capacity rollout and hinder its goal of creating sustainable job opportunities for Saudi nationals.”

NCB said the second and “most important” challenge of the sector is the scarcity of ethane, it said, noting that Saudi Aramco has allocated the totality of its ethane reserves and is currently making concerted efforts to bring more gas online. “With no guarantee of finding additional sources, policy makers are turning to liquid fuels. Naphtha is a more versatile feedstock, whose production opens up a broader range of aromatics and intermediates, and involves more manpower.”

Furthermore, the additional labour costs and expensive maintenance of naphtha-fed crackers make the rate of return on its products lower than those of ethane-based products, according to the study.It said the recent surge in petrochemical prices and subsequent growth of domestic producers’ profits will offset the higher cost of naphtha in the short term.

“However, in the long-term a more sophisticated feedstock mix involvingboth ethane and liquids will be required to encourage further foreign investment. This is why the trend towards refinery and petrochemical plant integration is on the rise….another feedstock solution would be to increase the production of non-associated gas,” NCB said, adding that Saudi Arabia is raising gas production from non-associated gas fields to cater for rising domestic demand, which has been growing at seven per cent annually in recent years.

“The third challenge to producers is the sustainability of recovery in the Chinese market. China is Saudi Arabia’s largest importer of petrochemicals, and acts as a processing center for European and US demand.  However, rising Chinese petrochemical capacities threaten to reduce its demand for foreign imports.”