A chemical reaction

The petrochemicals refining industry underpins the Saudi economy and the growing numbers of international oil companies that are investing in its future. Here ALI AL-NAIMI Saudi Arabia's Minister of Petroleum and Mineral Resources.

“In terms of historical growth, it is well documented that our region has attracted investment in the chemicals industry because of our sustainable competitive advantages”
-Ali Al-Naimi

Without question, the soundness and growing diversification of our regional economy will help restore calm following the turbulence of the moment.  And of course, one of the fundamentals of our region's economic strength is the petrochemicals and chemicals industries. I wish to explore the main factors affecting the development of the industry. First, it is always useful to think about where the industry has been as we think about where the industry might go in the future. We are in a world where changes happen more rapidly than ever before.  Industry evolution should not be the exception, but in fact the expectation. Second, I will talk about the general picture today and going forward from the view of an oil and gas producer.   Chemicals are a significant and growing portion of the global petroleum industry, but as we all know the petroleum industry is very broad and strategic not only to companies, but also to countries. Lastly, I want to talk about the future in terms of how we can cooperate and collaborate with one another towards a greater good for both the region and the world and for the betterment of this great industry.

A brief history

In terms of historical growth, it is well documented that our region has attracted investment in the chemicals industry because of our sustainable competitive advantages.  These advantages include not only reliable, affordable supply of feedstock but also location and port facilities convenient to serve Asian and European markets.  Additionally we have the advantages of the regulatory and political stability in the Gulf and good relationships with partners who helped us build our own competencies over the years.  As a result, our region today boasts some of the largest and most efficient, modern facilities in the world after starting from very modest means in the late 1970's. From the earliest days of petroleum production in Saudi Arabia until as recently as the 1970s, much of the gas that was brought to the surface with oil was flared.  This same situation existed throughout the Gulf. In our case, the decision to end gas flaring and transform the gas from a wasted commodity to a useful resource involved taking a long strategic view. The first piece of the strategy was actually to collect the gas and connect the Kingdom from the oil fields in our Eastern Province to potential users as far away as the west coast through creation of the Saudi Master Gas System, which took place in the 1970s. Saudi Arabia confounded the shortsighted by undertaking a strategic, long-term investment in a massive project to utilise hydrocarbon production capacity.  This system has given us access to resources used for electric power generation, energy for water desalinisation plants, and abundant, competitively priced feedstock for petrochemicals.

The industrialisation saga continued with investment in what observers at the time called the biggest construction project in all of history - the creation of the modern industrial cities of Jubail on the East Coast and Yanbu' on the Red Sea shore.  A special Royal Commission was established to build the infrastructure for the two cities. Finally, in 1976, Saudi Arabia created the Saudi Basic Industries Corporation, or SABIC. SABIC, which Engineer Al-Mady so ably leads today, was assigned to initially develop the primary industries in the Royal Commission cities.  With SABIC and its partners, the Kingdom moved definitively into using gas associated with oil production to manufacture value-added materials such as fertilizers and petrochemicals.  At the beginning of the 1980s, direct investment in the Saudi chemical industry was about US$2 billion dollars.  The goal at the time was simple - just to enter into the chemicals business. By the end of the 1990s, such investment had increased to approximately US$20 billion and the goals of the industry began to change, from merely learning the business to operating in a self-sufficient manner. Today SABIC continues to grow and prosper as an industry leader.

Thirty percent of the shares of SABIC are owned by private and institutional shareholders in GCC countries.   SABIC continues to leverage its strengths in numerous domestic and international joint ventures.  Saudi Arabia now also has many private players in the chemicals industry, making a dynamic contribution to the market and to this association.  In addition to SABIC, 13 other chemical companies are listed on the Saudi Tadawul Stock Exchange.  From a single petrochemical mega-complex in 1983, the nation now has 24 mega-complexes, 14 of which are international joint ventures and several others are either under construction or planned.

Future potential

Saudi Arabia today accounts for about 62 percent of chemical production in the GCC region and approximately eight percent of global production. It is already the world's largest methanol producer and the second largest ethylene producer.  By 2015 the Kingdom's petrochemical production is projected to increase from today's levels of about 60 million tons per year to more than 80 million tons per year.  The evolution of downstream industries is accelerating - moving beyond even the most sophisticated physical products toward sustainable leadership in human capital and advanced research. And industry analysts project that direct investment in the Saudi chemical industry by 2015 will far surpass the 100 billion dollar mark. This is quite remarkable when put into context, but we have seen growth stories in the chemicals sector occur throughout the Gulf, with each country charting its own way forward. Taken as an entirety, GCC chemicals production appears set to move to greater and greater heights.  The goals of the business are changing as well.  The chemical industry in the Gulf is no longer simply operating facilities to manufacture products; it is becoming a key enabler of other industrialisation activities.

But before we talk about shaping the future, we should focus on an area of the business which, like chemicals, touches our lives every day: the upstream oil and gas sector. The upstream industry is based on a declining resource model. In other words, the early days of an oil and gas field are often its best days from a financial point of view. This may be counter-intuitive for those in the chemical industries who, after a start up period, expect to operate facilities for several decades and require relatively modest capital investment to maintain or de-bottleneck facilities. A major change that has taken place during the past few years is that the Saudi Arabian Ministry of Petroleum and Mineral Resources has begun to take a more  vital, strategic role in allocating feedstock to diversify and strengthen the Kingdom's economy.  In Saudi Arabia, we are blessed with abundant natural resources, and we were able to overcome challenges and provide competitively priced gas and NGL products fostering strong growth in our chemical industry.   During the past 15 years, we have been able to add massive new investments in Hawiyah and Haradh as well as our new gas development at Karan and our new ethane straddle plant.  Besides a record number of wells being drilled by Saudi Aramco directed at new hydrocarbon sources today, we also have opened up exploration for new gas in the southern part of the Kingdom through our foreign partnerships with Shell, Sinopec, Lukoil and ENI.

Stewardship of our natural gas resources is a strategic strength for my nation and for our region and beyond.   A programme that began not too many years ago, based only on making productive use of associated gas that would have been flared, today has been transformed dramatically, for the economic benefit of the entire world.   Even as we have produced vast amounts of natural gas, our production and reserves continue to increase.  In 1990, Saudi Arabia's natural gas reserves were 181 trillion cubic feet (TCF).  At year-end 2008 they were higher, at 263 TCF, and we project that in 2010 proven reserves will be still even higher, as Saudi Aramco targets discovering a minimum of five TCF of additional non-associated gas reserves annually.  Investment and application of new technologies are leading to greater abundance of natural gas.  Another important factor is the change in the ratio of non-associated to associated gas.  For instance in 1990, 75 percent of our natural gas reserves were in production.  In 1981, Saudi raw gas production was 1,654 million standard cubic feet per day (MMSCFD).  Today it is approximately 8,800 MMSCFD, and we project production levels to exceed 13,000 MMSCFD by 2020. This means our investment and management strategies are succeeding in meeting our objectiveciated gas, whose production can be constrained by the factors of oil production.  Today non-associated gas accounts for 48 percent of total gas reserves, and we expect it to constitute a significantly higher proportion in the future. There is comparable good news in gas of always staying ahead of demand for natural gas - toward all of its end uses in power generation, desalinisation, and chemical feedstock.  

International partnerships

We see the future of the chemical industry evolving so that local producers foster further investment and creation of knowledge in many different sectors.  I can offer a few observations about the future situation from a Saudi Arabian viewpoint. Our own national approach involves linkages between refining and chemical industries both inside and outside the Kingdom.    On November 8, 2009, Saudi Arabia celebrated the inauguration of Petro Rabigh, the largest integrated refining and petrochemical complex ever built at a single time.  This US$10 billion facility will be producing more than 18 million tons of petroleum-based products per year, with some two-and-a-half million tons per annum of ethylene- and propylene-based derivatives.  Petro Rabigh is jointly owned by Saudi Aramco, Sumitomo Chemical Company of Japan, and private and institutional shareholders who acquired equity in the company in 2007 in the first Initial Public Offering involving Saudi Aramco.

Saudi Aramco this year has also inaugurated another significant international joint venture in chemicals - the Fujian Refining and Petrochemical Company, in partnership with Sinopec of China and ExxonMobil.  This enterprise, in Fujian Province, expands a refinery's capacity and adds new petrochemical facilities.  The new petrochemical complex includes an 800,000 tons-per-year ethylene steam cracker, an 800,000 tons-per-year polyethylene unit, a 400,000 tons-per-year polypropylene unit and a 700,000 tons-per-year paraxylene unit. Back at home and in the near future, Saudi Aramco is developing major integrated refinery-based chemical complexes through joint ventures with Dow Chemical in Ras Tanura, with Total in Jubail, and with ConocoPhillips in Yanbu. In addition, the Jazan refinery which is up for competitive bidding provides opportunities for petrochemical synergies.

In the coming years, Saudi Arabia is poised for increases in the quantity and quality of our exports.  We will diversify our chemical portfolio into more complex, distinctive products such as speciality chemicals and engineering thermoplastics.  Saudi Arabia now actively encourages private investment in the chemical sector in order to strengthen our position as a global chemical leader and to diversify towards value-added speciality chemicals, formulated products, and performance polymers. Other opportunities will be found with various SABIC projects and Petro Rabigh Phase II, and other private sector projects are all working to develop projects with higher know-how content which will add to the technology profile of the industry and the utilisation of novel, proprietary processes.  Our aim is to be able to produce a substantial number of upstream products as well as a range of sophisticated downstream products for the development of the local market and the world market.

In connection with this, the Government of Saudi Arabia has initiated the Saudi Industrial Clusters programme to develop and to provide support to a range of new industries. The program aims to grow and diversify the national economy by developing targeted industrial sectors that leverage the Kingdom's natural resources, including the petrochemical industry products, and our young and growing Saudi workforce. The sectors have been selected in areas where the Saudi Arabian fundamentals of abundant, competitive energy and basic materials can be leveraged to create competitive ventures that meet the aspirations of both the nation and the investor. The selections have been made only in sectors where we believe that over time Saudi Arabia can become competitive on a global basis.  Key sectors now are being developed, each representing a different category of manufactured products: automotive value chain, metals processing, plastics, consumer goods, and solar.  As you can see, the clusters programme will create not only manufacturing industries but also will spur additional development in the utilisation of our mineral resources. Our goal is for global and regional markets to contain not just basic products but also a significant number of consumer and industrial products labeled "Made in Saudi Arabia".

Knowledge creation

The Saudi chemical industry leadership is intimately connected with our vision for economic and social development beyond physical products.  Last September the nation inaugurated a remarkable new postgraduate research institution, King Abdullah University for Science and Technology, or KAUST.  The university has enlisted numerous major corporate research partners - including Schlumberger, Boeing, Halliburton, and Dow Chemical as well as SABIC and Saudi Aramco. The launch of KAUST accelerates efforts that have been going on for some time through higher education and specialised training to enhance the quality and quantity of opportunities for employment and economic growth in Saudi Arabia.  Numerous other Saudi universities have endowed professorships and programmes in partnership with the hydrocarbons and chemical industries. 

Specialised training institutions also support our strategy, as do the research and training centres of leading corporations operating in the Kingdom. Advances emerging from KAUST and other institutions will complement gains in intellectual property we expect from joint ventures of Saudi and international companies. Realising our nation's strategic advantages as a global chemical hub, and reaching our further goals for development of intellectual and human capital, are vital to the citizens of Saudi Arabia. Our population is very young and is growing. This reality requires a high quality of education for our youth to support diversification of industries and the economy, and to provide jobs for the new generation.  Because of this I want to emphasise the need for action to promote international trade.

International trade

Petrochemical producers in the Gulf region export significant volumes of their products to other regions of the world - in fact to more than 100 countries. It is very important for our industry to have access to the world's market unfettered by artificial trade barriers. There is a concern that de-globalisation is a growing threat and could result in restrictions of world trade. Most experts are in agreement that growth in global trade is beneficial to economic growth in most countries. Growth in global trade in prior years has been credited with lifting millions of people out of poverty in the emerging economies and bringing lower prices to consumers around the world. And yet, the World Trade Organisation's Doha trade round has been languishing for over seven years as major country negotiators have been unable to reach consensus. This is in the face of an estimated 10 percent drop in merchandise trade volumes, according to WTO estimates. There are further complications to concluding a successful Doha trade agreement brought about by the recent recession. There have been significant job losses in many major countries, which encourage governments to protect domestic jobs and industries.  Currently, there is a serious concern and some hard evidence that protectionism will gain strength, further depressing global trade as well as making it more difficult to complete a successful new WTO agreement. Gulf petrochemical producers are long-term players, aiming to deliver affordable products to world consumers.  It is certainly in our interests to work to maintain open markets and to support efforts to re-energise the Doha negotiations.

Growth in global trade is in our interests as well as those of our customers around the world. Our region has long-term comparative advantages to be the world hub for petrochemicals production, and increasingly, the hub for more sophisticated downstream products.  Neither the recession of 2008 nor any protectionist measures by parties outside the GCC region can alter this fundamental reality.  The Gulf region´s advantages are based on geography, natural resources, and an already well developed production, refining and chemicals manufacturing infrastructure.  In this regard, it is strategically and economically in the best interests of GCC producers to develop and expand their domestic markets.  A vibrant and growing domestic market that provides stability of demand, also reduces costs for transportation and mitigates the effects of trade barriers.

Building a skills base

For sure, the near future will present some obstacles that will test our durability, commitment and management skills. In the Gulf we have a productive and trained workforce.  We must continue to provide training to further upgrade and burnish the skills of this workforce, and we must look for ways to separate ourselves from competitors through innovation and development of proprietary technology and markets.  The Gulf chemicals industry can and must redouble its efforts for environmental stewardship, corporate social responsibility, training and employing our own nationals, promoting R&D to support new technologies and small business development, and best practices in safe operations and corporate governance.  These concerns are common to many other hydrocarbon processing industries beyond chemicals such as petroleum refining and gas processing operations, thus perhaps it would be time to consider broadening this very association to include these types of companies. It is my fervent belief that every step we take to improve our understanding of these concerns and our performance in addressing them will add not only to our reputation but also to our profits.

The end products of chemicals are things in which we can take pride: life-saving pharmaceuticals; packaging to make food safer and more accessible; durable and affordable materials for clothing and shelter.  A world without today's chemical products would be catastrophically poorer, less healthy, and more dangerous.  May all of us in the industry renew our commitment to work together to promote sustainable growth, and to promote public awareness of the current and still-to-be-discovered benefits our industry offers for the quality of life.