Saudi Aramco to Invest $120 Billion on Oil and Petrochemical Projects; SABIC to Operate Crackers at Low Costs

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Researched by Industrial Info Resources (Sugar Land, Texas)--State-owned Saudi Arabian Oil Company (Saudi Aramco) (Dhahran, Saudi Arabia), the world's largest oil-producing company, intends to invest about $120 billion in the next five to six years on projects in the oil and petrochemical sectors.

According to chief executive officer Khalid al-Falih, the funds will be sourced from individual Saudi investors, loans and joint ventures. He said that about $60 billion would be spent on the oil sector, while the rest would be utilized for overseas investments and to develop petrochemical projects. The company completed several refinery expansions a year ago and is now concentrating on expanding its business portfolio by entering the petrochemical sector. Saudi Aramco is also trying to meet the nation's domestic gas demands.

Falih added that in the face of unpredictable demand, growth in demand is expected to come from the Middle East, China and India. The recent global economic crisis brought about a sharp fall in oil demand and that has left Saudi Arabia with a massive stock of oil that it can now use to meet any sudden growth in global demand. In fact, Saudi Arabia is the only oil-producing country in the world with spare capacity that can be deployed on demand. The country's current oil production capacity stands at 12.5 million barrels per day.

Share-holding company Saudi Basic Industries Corporation (SAU:2011) (SABIC) (Riyadh, Saudi Arabia), which is 70% owned by the state, procures its feedstock gas at 75 U.S. cents per million British thermal units (Btu) against the global average of $6.5 per million Btu. Such a low rate has made it possible for the company's ethane-based crackers to manufacture ethylene at about $110 per ton, which is very low in comparison to the manufacturing costs of other companies. The costs can reach $900 per ton. SABIC procures propane and butane at subsidized rates as well.

The company thus continued to expand, even as rival businesses struggled with high raw material costs last year. SABIC saw sales volumes grow 5% to 46 million tons over the fourth quarter of 2009. Its profits rose to $1.22 billion over the same period, in comparison to profits of $82.7 million recorded in the fourth quarter of 2008. The company's annual profits, however, fell 59% in 2009 because of the huge drop in demand in the wake of the global economic crisis. The fall in oil prices forced the company to reduce both production and prices.

In January 2010, SABIC obtained a loan of $2.68 billion from Chinese banks to finance its 50:50 joint venture petrochemical project at Tianjin in China. The company's joint venture partner is China's major petroleum company, China Petroleum & Chemical Corporation (NYSE:SNP) (Sinopec) (Beijing, China). While feedstock costs are not low in China, the high costs will be somewhat offset by the large and growing customer base, and the lower costs of production, labor and construction. Trial operations at the ethylene unit and other plants at the 3.2 million-ton-per-year Tianjin complex have been initiated. The ethylene production capacity of the complex is 1 million tons per year. About $1.8 billion has been obtained as a long-term loan from Chinese lenders, while about $88 million has been obtained as a short-term circulating fund.

SABIC intends to ramp up petrochemical production to 130 million tons per year by 2020, a huge jump from its production capacity of 56 million tons in 2008. To achieve that target, the company would have to bring many more plants on line.

SABIC has a 35% stake in Saudi Kayan Petrochemical Company (SAU:2350) (Al Jubail, Saudi Arabia), which is setting up a 6 million-ton-per-year petrochemical complex at Jubail on the Gulf coast. The main units of the complex are scheduled to begin operations this year.

According to PetroChem Wire LLC (PCW), the U.S petrochemical industry newsletter, ethylene prices in January rose from 41 U.S. cents per pound to 46.75 U.S. cents per pound.

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