Investments in MENA's Downstream Sector

The Middle East and North Africa region has embarked on an ambitious drive to expand its downstream footprint, investing heavily in refining expansions and greenfield projects, and ploughing capital into a clutch of petrochemicals schemes, as per writes James Gavin. Expansion plans have dwarfed the region's investment in upstream capacity expansion. According to one estimate by the energy finance group Apicorp, total Arab investments in the oil downstream sector for the 2008-2012 period amount to $105 billion, compared with just $67 billion for upstream ventures. The push for refining expansion reflects the need to secure more value-added from the region's base resource - hydrocarbons - and to boost economic diversification. The need to increase the region's refining capacity follows the recognition that the Middle East and North Africa (MENA) region enjoys a crude oil distillation capacity of less than 9 million b/d, about 10% of the world's total, even though it produces one-third of the world's oil and sits on most of the world's hydrocarbon reserves. However, with substantial new refining capacity planned to come on stream, the region's main economies account for 60 per cent of worldwide capacity growth. Iran has up to seven new refineries planned, in concert with a large programme of upgrades to existing plants. The goal is to reduce the country's heavy reliance on importing refined product that has proved expensive at a time of high oil prices. Iran's new refineries will have 1.6 mln b/d refining capacity, doubling the country's capacity to 3.3 mln b/d at a cost of €15 billion. Upgrades are under way at Bandar Abbas and Arak, with the major projects scheduled for completion by 2014. However, the high cost of the plans and the difficulties in raising finance are likely to impact National Iranian Oil Company's development timetable - aggravated by Iran's inability to access international trade and project finance, due to US sanctions. Saudi Arabia's refining plans, being export-related, may stand a better chance of meeting the timetable. Saudi Aramco is planning to invest in almost 2.1 million b/d of additional refining capacity domestically and overseas, to reach 3.9 million b/d by 2012. The deep conversion refineries planned for Yanbu and Jubail are central to Saudi plans to transform heavy crude into the more marketable high-grade gasoline. Many of the Kingdom's lighter crude fields are in decline and Aramco wants to make more use of its substantial reserves of heavy crude, such as at the Manifa, Zuluf and Marjan fields. The key challenge for all of the MENA refining plans is to make sure that projects are completed in a more constrained financial environment. Most Middle Eastern refining projects have a 70:30 debt:equity ratio, and the freezing up of the commercial lending market has raised questions over commercial viability. Kuwait's National Petroleum Company, for example, is planning a large 615,000 greenfield refinery at Al-Zour, along with other upgrades to its refineries. However, it faces a real challenge to raise the funding for much of the proposed new capacity. Estimates of the ultimate cost of building Al-Zour are as high as $19 billion, while the original budget was $5 billion. Saudi Arabia's Petro-Rabigh refinery is another capital-intensive refining/petrochemicals project, costing over US$10 billion. Originally conceived as a 50:50 venture between Saudi Aramco and Japan's Sumitomo Chemical, the project held an initial public offering in January 2008, raising about $12 billion through an equity offering of 25%. Under the plans, Saudi Aramco's Rabigh refinery on Saudi Arabia's Red Sea coast will be upgraded to produce petrochemical products, including 900,000 tpa of polyethylene, 700,000 tpa of polypropylene, 600,000 tpa of ethylene glycol and 400,000 b/d of propylene oxide. The company has already raised $5.8 billion under long-term project financing, limiting the need for fresh capital - a boon in the Gulf's depressed project finance climate. A number of key projects will now be shelved. In December 2008, US giant Dow Chemical was informed by Kuwait's state-owned Petrochemical Industries Company that their $17.4 billion joint venture was to be shelved, after political opposition to the deal, influenced by the worsening global financial conditions since the JV partnership was announced in 2007. Like most MENA petrochemicals scheme, the Rabigh project will have the advantage of cheaply priced feedstock. The price of naphtha, the Gulf region's base petrochemical feedstock, fell last year to levels equivalent to European producers, which operate at higher margins than their Middle East counterparts. Polyethylene prices fell to $1,117/tonne at the end of November, against a March 2008 peak of $2,123/tonne. The impact on profitability has been stark. Saudi Basic Industries Corporation (Sabic), the Middle East's largest petrochemicals producer, reported a 95 per cent fall in profits for the fourth quarter of 2008, due to a sharp fall in demand. Speciality plastics have been particularly badly affected, as a result of the car industry's problems in the global economic downturn. Nearly all countries in the area have been affected by shortages of gas feedstock, imitating the availability of gas and ethane, the building blocks of the region's petrochemicals. These trends will transform the dynamics of the Saudi petrochemical industry in the longer run. It is expected that future projects would be based on a mixture of feedstock, such as ethane, propane and naphtha. According to a forecast by Bahrain-based investment bank SICO, future Middle Eastern projects could yet return to profitability as a result of mixed feedstock, even if the margins are down on previous years. According to its analysis, a cracker based on a mix of ethane/propane (35 per cent ethane/65 per cent propane) in the region would cost about $400 to produce a tonne of ethylene, compared to more than $700 for a US-based naphtha cracker. Looking ahead, Saudi Arabia will continue to increase capacity in the region, along with Iran. According to the CMAI Petrochemical Industry Report, Sabic and Iran's National Petrochemical Company will dominate the ownership of regional petrochemicals capacity with an installed capacity in 2008 more than five times greater than the next largest participant, US giant ExxonMobil Chemicals. In North Africa, it is a different picture. Egypt has an ambitious master plan to build more than 20 petrochemicals plants by 2012, to produce about 15 million t/y of chemicals. In Algeria, Total has a contract to build an ethane steam cracker complex at Arzew to be up and running by 2013-14, by which time market analysts expect the global economy to have recovered. Libya also has ambitions to establish a petrochemicals sector. A consortium of Dow and state-owned National Oil Corporation is to overhaul the Ras Lanuf petrochemicals complex. The financing challenge is the key obstacle for MENA's petrochemicals plans. But the base economic case of advantaged feedstock should boost the region's chances of capturing more market share once the industry is on a sounder commercial footing.