Crunch time in Saudi price review

A wide-ranging governmental review of prices for gas and oil inputs in the Saudi petrochemicals sector will have huge implications for the kingdom's bid to become the world's largest producer of chemicals in the next decade, experts say. Low-cost ethane, a component of natural gas, was the foundation for the country's highly competitive chemicals production at companies such as Saudi Basic Industries Corporation, now the region's largest public company.

But most experts expect Saudi ethane prices to rise by 66 per cent in as little as two years and supplies to run short. Saudi producers have already forecast price rises from the current 75 US cents for each million British thermal units (BTUs) to $1 or $1.25 a million BTUs, said Abdulwahab al Sadoun, the secretary general of the Gulf Petrochemicals and Chemicals Association. "Even if there is a revision of the price approved in Saudi Arabia I think it will be reasonable and the players will remain extremely competitive on an international level," Mr al Sadoun said at a chemicals conference last week.

Saudi government officials said last year the price increase was likely to happen by 2012. The bigger problem for investors wanting to build ethane-based plants is that supplies of the gas are inadequate to supply new projects. Although the kingdom has the world's largest known reserves of oil, natural gas discoveries have not kept pace with industrial demand. Experts say producers will have to turn to alternatives, including naphtha and liquid petroleum gases, both produced from crude oil at refineries.

But both remain priced close to international market rates, undermining the competitive advantage the Saudi chemicals sector has long enjoyed. The price rise for ethane was inevitable but without a reduction in costs for naphtha, Saudi Arabia risked losing its appeal to international investors and slowing its industrialisation efforts, said Jean-François Seznec, an associate professor at Georgetown University in Washington.

Under Saudi Arabia's membership agreement with the World Trade Organisation (WTO), the state oil company Saudi Aramco could supply domestic chemicals producers with naphtha at a price that covers the production cost plus a small profit, Mr Seznec said. That would lead to a price of between $45 and $100 a tonne compared with the current $650 a tonne on the Asian market, he said. But Aramco and oil ministry officials have baulked at offering such a low price, fearing that the resulting bonus in chemicals profits would simply flow to foreign investors and leave the country, Mr Seznec said.

"They're not doing it and they're refusing to do it, and I think that's a big problem for this business," he said of Saudi oil officials. "Why would a big international company invest billions of dollars in a new production plant without a feedstock advantage? The whole purpose of joining the WTO was to use the natural advantage of the kingdom." Mr Seznec declined to comment on the effect the dispute was having on proposals for new joint-venture plants in the kingdom planned by Total, Dow Chemical and others, but final investment decisions on big new chemicals ventures have stretched out for years longer than predicted.

If a naphtha price reduction is to go through, Saudi policymakers will need to devise some form of regulation to reassure critics that huge profits will be reinvested in the kingdom's economy, Mr Seznec said. One means of doing that would be to tax profits, a proposal that would be unlikely to gain traction with the tax-averse government. Another would be to set minimum investment requirements that compel foreign investors to train Saudis and involve private Saudi companies in the business.

Without a naphtha reduction "what will happen is the chemical industry will continue to grow, but it will not grow as quickly as it could have", Mr Seznec said. "Both sides have a strong argument but in the meantime nothing happens." @Email:cstanton@thenational.ae