The Kingdom of Saudi Arabia has weathered the ups and downs of the last few years, but faces a period of slowed development and shifting markets. Will Rankin provides a snapshot of the current scenario and Saudi's greener future...

Saudi Arabia earned $116 billion from oil production in the first seven months of 2010, having completed its mammoth goal of expanding its production capacity to 12.5m barrels a day, enough to cover 15 per cent of demand, in 2009. This vast, complex and technically challenging project cost almost $100 billion and took five years to complete.

This is the single biggest factor that will help reduce – or at least delay – the risk that the world could again face a shortage of oil as it did in the summer of 2008, when supply was no longer able to keep up with rampant demand and oil prices raced to $147 a barrel.

The kingdom now holds 90 per cent of the world's spare capacity, and controls nearly a quarter of recoverable global oil resources.

The Energy Information Authority reports that Saudi Arabia saw its income jump by 64 per cent to $100 billion in the first half of this year from $61 billion during the corresponding period of 2009.

Prince Turki al-Faisal, Saudi Arabia's former ambassador to the US and the UK, wrote in an article for Foreign Policy magazine: "Following the irrational and unsustainable price spike of the past few years, Saudi Arabia undertook investments to ensure the world would not be surprised by such a supply failure again."

While other OPEC nations battle politics, war and internal strife, Saudi Arabia's capacity expansion stands as a benchmark for other oil producing nations.

It has an unrivalled role in global oil markets, endowed as it is with a quarter of the world's proven oil reserves and the expanded production capacity.

Credited with managing its funds prudently while the inflated petrodollars of 2008 flowed in, the government has pledged to spend $400 billion on infrastructure and hydrocarbons investments in the next five years.

The Saudis have also diversified their energy sector more than other producers.

"We expect Saudi petrochemicals suppliers to outperform global rivals with margins driven by cheap feedstock costs and strong demand coming from Asia," Dr. Saleh Alsuhaibani, head of Research at Al Rajhi Capital, the investment banking subsidiary of Saudi Arabia's Al Rajhi Bank, said in said in its new report, "Advantage Saudi Arabia".

"We believe a shift toward heavier, more expensive feedstock in plants from now on will not constrain profits growth as improving prices and higher volumes should offset the higher costs.," he added.

"The Saudi petrochemicals sector is fundamentally attractive as feedstock costs for these companies are the lowest in the world," and though the shift currently taking place to heavier and more expensive feedstocks will result in slightly higher input costs, "this should not greatly harm the competitiveness of the sector, the report said.

The report includes information from five companies: SABIC, Sipchem, Saudi Kayan, Yansab and Petro Rabigh.

Saudi Arabia alone should account for over 10 percent of global capacity by 2014, due to major new projects like the SABIC's plants at Yanbu and Jubail, Alsuhaibani said. This new investment should help Saudi petrochemicals suppliers to bolster their positions in Asia.

The analysts suggest this combination of enjoying the world's lowest feedstock costs and large-scale capacity expansion is transforming the Saudi petrochemicals sector into a formidable force.

Saudi Arabian companies currently account for 10 percent of China's petrochemicals imports, the report said.

With no new allocations of ethane since 2006, Saudi petrochemicals players are currently shifting to heavier and more expensive feedstocks. This will result in slightly higher input costs, but should not greatly harm the competitiveness of the sector.

The Kingdom's petrochemicals sector accounts for 5 percent of Saudi GDP and 34 percent of the value of the stock market. SABIC alone represents 22 percent of the TASI.

While in the long term, China could be a potential competitor to Saudi petrochemicals players as petrochemical imports from the Kingdom are replaced by local Chinese output, currently local Chinese demand for petrochemicals is outpacing supply growth, China is seen to be a net importer of petrochemicals given the size of the supply-demand gap, Al Rajhi Capital said in its report.

China is the current driver of global petrochemicals demand growth, while India and Brazil represent the next big markets, which will generate demand over the longer term. In the near term, "we expect capacity additions to lag demand growth in all three markets and so believe that a ready market will soak up expansion by the Saudi petrochemical majors," it said.

Chinese state-owned players like Sinopec and PetroChina are rapidly building new ethylene capacity, aided by favorable government policies for joint ventures with foreign majors. China is also on a propylene capacity build-up which will see the country become the largest producer of the chemical in the world.

Nonetheless, environmental worries, the economically unviable size of scattered petrochemicals plants and the potential threat of overcapacity could delay the commercial start of production, the report said, noting that "demand is catching up at a faster pace".

The report welcomed SABIC's wide business mix, its low-cost production and strategy of high investment, while Sipchem's focus on methanol products and gearing to Asia give it strong recovery potential. The large petrochemicals stocks have dominated recent market trading. This makes it hard to bet against the sector, and SABIC in particular, the report added.

Both Yansab and Petro Rabigh have high debt levels, although it is believed Petro Rabigh should benefit from strong parents and its shift to integrated production, according to the report.

Besides, a shift toward crackers using heavier feedstocks will boost employment via a more labour-intensive process.

Future prudence

Meanwhile, King Abdullah is now encouraging wise development to protect the interests of future generations.

The King recently told Saudi scholars studying in Washington to be prudent with oil exploration "in order to keep the earth's wealth for our sons and grandsons," according to the state-owned Saudi News Agency.

"The King's statement shouldn't be perceived as a message that Saudi Arabia is stopping its capacity expansion projects but rather that [it] has to be mindful of the future needs of the country and be cognizant of its usage wisely and prudently to support future generations," John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi, told Bloomberg.

State-owned Saudi Aramco plans to invest more than $120 billion in the next six years on crude oil and petrochemical projects.

"Even though Saudi Aramco's conventional crude oil reserves are the largest in the world, at slightly more than 260 billion barrels, we operate an extensive and aggressive exploration programme to ensure we will have the petroleum resources to meet domestic and world demand for many years to come," Aramco said in its 2009 annual review.

Aramco is drilling a record number of wells to find more hydrocarbons resources. Aramco plans to drill 45 to 50 oil exploration wells in 2010, Abdulla al-Naim, vice president for exploration, said last December.

Saudi officials have begun to issue notices against expanding domestic energy use. Saudi Arabia's demand will rise to 8.3 million barrels a day of oil equivalent in 2028 from 3.4 million barrels in 2009 unless the kingdom becomes more efficient, according to Aramco.

But this demand could be cut by 50 percent through improved energy efficiency.

Yet with such high investment levels in 'old' fuels, it seems Saudi Aramco is not yet too enamoured by green technologies, stating in the Saudi Gazette that it is 'unrealistic' for Saudi Arabia to plough into alternative energy sources when the number one cash crop of oil has built its wealth.

And analysts agree that Saudi won't make inroads into new energy sources without the right regulatory regime in place – especially given the inherent conservatism of the Kingdom, along with a pricing structure for an alternative fuel that beats the cheap, ubiquitous black gold.

There is some interest in biofuels and electric vehicles, but oil will still be king in the Kingdom for many years to come.

Saudi Arabia is also taking steps to deliver cheaper cleaner water via new investment in desalination plants.

The biggest drive toward alternative energy is, in part, a bid to meet the ever increasing energy needs of two of the fastest-growing markets in the world: China and India.

While America pursues avenues to fulfil its own energy needs domestically, it's only logical that Saudi Arabia and the other Middle East energy producing nations look into solar, wind, wave and biofuels to meet their own domestic needs, while sending their lucrative oil and gas to the emerging Asian economies.

And although this might not be too pleasing for environmental lobbyists to hear, at least a move towards greener energy in the Middle East will have a dramatic impact on the global carbon footprint, even if these new resources are pursued for purely economic reasons.

[ends]

Billions of barrels…but proceeding with prudence

[standfirst]

The Kingdom of Saudi Arabia has weathered the ups and downs of the last few years, but faces a period of slowed development and shifting markets. Will Rankin provides a snapshot of the current scenario and Saudi’s greener future…

Saudi Arabia earned $116 billion from oil production in the first seven months of 2010, having completed its mammoth goal of expanding its production capacity to 12.5m barrels a day, enough to cover 15 per cent of demand, in 2009. This vast, complex and technically challenging project cost almost $100 billion and took five years to complete.

This is the single biggest factor that will help reduce – or at least delay – the risk that the world could again face a shortage of oil as it did in the summer of 2008, when supply was no longer able to keep up with rampant demand and oil prices raced to $147 a barrel.

The kingdom now holds 90 per cent of the world’s spare capacity, and controls nearly a quarter of recoverable global oil resources.

The Energy Information Authority reports that Saudi Arabia saw its income jump by 64 per cent to $100 billion in the first half of this year from $61 billion during the corresponding period of 2009.

Prince Turki al-Faisal, Saudi Arabia’s former ambassador to the US and the UK, wrote in an article for Foreign Policy magazine: “Following the irrational and unsustainable price spike of the past few years, Saudi Arabia undertook investments to ensure the world would not be surprised by such a supply failure again.”

While other OPEC nations battle politics, war and internal strife, Saudi Arabia’s capacity expansion stands as a benchmark for other oil producing nations.

It has an unrivalled role in global oil markets, endowed as it is with a quarter of the world’s proven oil reserves and the expanded production capacity.

Credited with managing its funds prudently while the inflated petrodollars of 2008 flowed in, the government has pledged to spend $400 billion on infrastructure and hydrocarbons investments in the next five years.

The Saudis have also diversified their energy sector more than other producers.

 “We expect Saudi petrochemicals suppliers to outperform global rivals with margins driven by cheap feedstock costs and strong demand coming from Asia,” Dr. Saleh Alsuhaibani, head of Research at Al Rajhi Capital, the investment banking subsidiary of Saudi Arabia’s Al Rajhi Bank, said in said in its new report,  “Advantage Saudi Arabia”.

 “We believe a shift toward heavier, more expensive feedstock in plants from now on will not constrain profits growth as improving prices and higher volumes should offset the higher costs.,” he added.

“The Saudi petrochemicals sector is fundamentally attractive as feedstock costs for these companies are the lowest in the world,” and though the shift currently taking place to heavier and more expensive feedstocks will result in slightly higher input costs, “this should not greatly harm the competitiveness of the sector, the report said.

The report includes information from five companies: SABIC, Sipchem, Saudi Kayan, Yansab and Petro Rabigh.

Saudi Arabia alone should account for over 10 percent of global capacity by 2014, due to major new projects like the SABIC’s plants at Yanbu and Jubail, Alsuhaibani said. This new investment should help Saudi petrochemicals suppliers to bolster their positions in Asia.

The analysts suggest this combination of enjoying the world’s lowest feedstock costs and large-scale capacity expansion is transforming the Saudi petrochemicals sector into a formidable force.

Saudi Arabian companies currently account for 10 percent of China’s petrochemicals imports, the report said.

With no new allocations of ethane since 2006, Saudi petrochemicals players are currently shifting to heavier and more expensive feedstocks. This will result in slightly higher input costs, but should not greatly harm the competitiveness of the sector.

The Kingdom’s petrochemicals sector accounts for 5 percent of Saudi GDP and 34 percent of the value of the stock market. SABIC alone represents 22 percent of the TASI.

While in the long term, China could be a potential competitor to Saudi petrochemicals players as petrochemical imports from the Kingdom are replaced by local Chinese output, currently local Chinese demand for petrochemicals is outpacing supply growth, China is seen to be a net importer of petrochemicals given the size of the supply-demand gap, Al Rajhi Capital said in its report.

China is the current driver of global petrochemicals demand growth, while India and Brazil represent the next big markets, which will generate demand over the longer term. In the near term, “we expect capacity additions to lag demand growth in all three markets and so believe that a ready market will soak up expansion by the Saudi petrochemical majors,” it said.

Chinese state-owned players like Sinopec and PetroChina are rapidly building new ethylene capacity, aided by favorable government policies for joint ventures with foreign majors. China is also on a propylene capacity build-up which will see the country become the largest producer of the chemical in the world.

Nonetheless, environmental worries, the economically unviable size of scattered petrochemicals plants and the potential threat of overcapacity could delay the commercial start of production, the report said, noting that “demand is catching up at a faster pace”.

The report welcomed SABIC’s wide business mix, its low-cost production and strategy of high investment, while Sipchem’s focus on methanol products and gearing to Asia give it strong recovery potential. The large petrochemicals stocks have dominated recent market trading. This makes it hard to bet against the sector, and SABIC in particular, the report added.

Both Yansab and Petro Rabigh have high debt levels, although it is believed Petro Rabigh should benefit from strong parents and its shift to integrated production, according to the report.

Besides, a shift toward crackers using heavier feedstocks will boost employment via a more labour-intensive process.

Future prudence

Meanwhile, King Abdullah is now encouraging wise development to protect the interests of future generations.

The King recently told Saudi scholars studying in Washington to be prudent with oil exploration “in order to keep the earth’s wealth for our sons and grandsons,” according to the state-owned Saudi News Agency.

“The King’s statement shouldn’t be perceived as a message that Saudi Arabia is stopping its capacity expansion projects but rather that [it] has to be mindful of the future needs of the country and be cognizant of its usage wisely and prudently to support future generations,” John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi, told Bloomberg.

State-owned Saudi Aramco plans to invest more than $120 billion in the next six years on crude oil and petrochemical projects.

“Even though Saudi Aramco’s conventional crude oil reserves are the largest in the world, at slightly more than 260 billion barrels, we operate an extensive and aggressive exploration programme to ensure we will have the petroleum resources to meet domestic and world demand for many years to come,” Aramco said in its 2009 annual review.

Aramco is drilling a record number of wells to find more hydrocarbons resources.  Aramco plans to drill 45 to 50 oil exploration wells in 2010, Abdulla al-Naim, vice president for exploration, said last December.

Saudi officials have begun to issue notices against expanding domestic energy use. Saudi Arabia’s demand will rise to 8.3 million barrels a day of oil equivalent in 2028 from 3.4 million barrels in 2009 unless the kingdom becomes more efficient, according to Aramco.

But this demand could be cut by 50 percent through improved energy efficiency.

Yet with such high investment levels in ‘old’ fuels, it seems Saudi Aramco is not yet too enamoured by green technologies, stating in the Saudi Gazette that it is ‘unrealistic’ for Saudi Arabia to plough into alternative energy sources when the number one cash crop of oil has built its wealth.

And analysts agree that Saudi won’t make inroads into new energy sources without the right regulatory regime in place – especially given the inherent conservatism of the Kingdom, along with a pricing structure for an alternative fuel that beats the cheap, ubiquitous black gold.

There is some interest in biofuels and electric vehicles, but oil will still be king in the Kingdom for many years to come.

Saudi Arabia is also taking steps to deliver cheaper cleaner water via new investment in desalination plants.

The biggest drive toward alternative energy is, in part, a bid to meet the ever increasing energy needs of two of the fastest-growing markets in the world: China and India.

While America pursues avenues to fulfil its own energy needs domestically, it’s only logical that Saudi Arabia and the other Middle East energy producing nations look into solar, wind, wave and biofuels to meet their own domestic needs, while sending their lucrative oil and gas to the emerging Asian economies.

And although this might not be too pleasing for environmental lobbyists to hear, at least a move towards greener energy in the Middle East will have a dramatic impact on the global carbon footprint, even if these new resources are pursued for purely economic reasons.

[ends]