In March this year, I had the honour of participating and speaking at an important industry gathering organised by the Energy Club of King Abdullah Petroleum Studies and Research Center (KAPSRC), an independent, non-profit institution that focuses on research in energy economics, policy, technology, and the environment. The high-level meeting facilitated a great, thought-provoking discussion among senior industry leaders attending the event and offered an unrivalled opportunity to deliberate and address some of the most pressing challenges facing the regional industry, the global economy and society today.
The significance of platforms like this cannot be overstated. As we find the energy industry in an important state of transition, knowledge-sharing and collaboration will be key to ensuring the progress of this region now and in the future. In my address to the audience, I presented a picture of the Arabian Gulf chemical industry’s evolution since its inception and shared some insight into the industry’s transformation that’s currently underway.
The chemical industry in the Arabian Gulf is one of the fastest growing industries globally whose very beginning started out of the drive to capture the value of associated gas – otherwise being flared and treated as waste – and convert it into high-value chemicals and petrochemicals. The journey began in the early 1960s in partnership with some of the world’s leading international oil companies, which saw the establishment of the first chemical joint ventures in the GCC region founded out of Saudi Arabia and Kuwait.
Early chemical production in the Arabian Gulf was based on the C1 value chain as one of the key drivers to develop the regional chemical industry was to create a ‘domestic market for the gas’ and ‘turn it from waste to value’, thereby transforming the region from an economic, social and environmental perspective.
The GCC had successfully built a vibrant petrochemical industry driven by favourable regional and global conditions. An abundance of natural resources such as oil, natural gas, phosphate rock and sulphur gave rise to the establishment of new industries that were to position the GCC region in the decades to come as a leading global production and export hub for chemicals and fertilisers.
World-class infrastructure in the industrial cities throughout the Arabian Gulf facilitated the transportation and export of these valuable commodities abroad, while proximity to the burgeoning Asian markets combined with favourable supply chain cost enabled further growth of these economically vital industries. The GCC chemical production expanded dramatically at a CAGR of 10.7% between 1978 and 2018.
Current industry landscape
Today, the GCC chemical industry is predominantly focused on petrochemicals, which make up 72% of its total production, with Saudi Arabia being the leading producer in the region, accounting for 68.2% of total chemical output. Despite continuous expansion in GCC production capacity, industry sales follow a different pattern and depend on global price dynamics.
While the region’s share in global production capacity doubled from 3.2% in 2000 to 6.6% in 2017, its share in global sales stood at just 2.2%. This is largely due to production being predominantly concentrated on commodity chemicals, which are more closely affected by the price of feedstock vs. specialty chemicals, which are more diversified and have higher margins.
Nevertheless, the GCC enjoys a leading global position in a number of chemicals, especially high-volume commodity products, and more recently producers have started to specialise in the production of niche products, emerging as leading chemical players worldwide. Saudi Arabia is the world’s largest exporter of polyethylene (PE), having exported 8,000 kilo tonnes of PE in 2016. SABIC has the second largest market share, ranking among the world’s top polycarbonate and PBT producers at 28% and 11%, respectively.
While the GCC represents only 7% of global chemical capacity by volume, it is one of the most productive regions after North America and Europe scoring 145% over the global industry productivity average. The region has benefited significantly from leveraging economies of scale, utilising advanced technology, and enjoying feedstock cost advantage.
Focus on portfolio diversification
Throughout its evolution, the industry’s pace of development and product portfolio have largely been influenced by volume and type of feedstock available. However, in recent years, chemical producers have shifted their focus from volume to value. Phase 1 of the GCC chemical production was concentrated on producing basic and forward commodities from associated gas. As natural gas supply, and particularly ethane gas, began to be constrained, mixed feedstock production came to the fore, giving rise to more differentiated commodities (Phase 2).
In the next stage of its development (Phase 3) from 2009 to date, chemical producers have been focusing on refinery integration and naphtha cracking, producing more performance polymers and specialty chemicals. What we are about to witness is the beginning of Phase 4 from 2024 onward, which will be characterised by crude-oil-to-chemicals (COTC) production and significant volume of aromatics.
Product diversification in the GCC has been led by Saudi Arabia and gained momentum in the past decade driven by the strategic direction adopted by chemical producers to maximise value addition by expanding into higher value specialty and performance chemicals. Furthermore, feedstock allocation was linked to diversification to maximise the industry’s socio-economic benefits. Between 2010 and 2017, Saudi Arabia’s chemical industry added 46 products, representing a 66% increase in the region’s product slate, and by 2025, GPCA estimates that the industry’s portfolio will further increase by 16% adding 19 new production lines.
Future growth outlook
The GCC chemical capacity is expected to increase by 33.6% in the next decade, reaching 231.8 million tonnes, driven by refining expansion and chemical integration. GCC overseas production capacity is also projected to expand by a CAGR of 7.6% reaching 38.7 million tonnes by 2027, with the bulk of growth set to take place in Asia.
Innovative COTC technology development by SABIC and Saudi Aramco is considered as the path forward to attractive growth in chemical production, leading to a yield increase of between 40-70%. As a commodity focused industry, the GCC chemical producers will continue to contend with key external challenges such as changing industry competitiveness, rising self-sufficiency of China and the US, challenging trade developments and the growing role of technology and innovation.
The emergence of the US shale gas and Chinese coal as key raw materials for petrochemicals and the subsequent reduction of cost position of competitors in these two regions present a key challenge for the GCC petrochemical exports to this region. China has been investing heavily in developing large-scale COTC projects, and with two COTC plants currently under construction, markets will see a change in trade patterns for some key commodities such as paraxylene. China’s forecasted import of paraxylene is projected to drop from 13.2 million tonnes in 2019 to 1.2 million tonnes in 2023.
Nevertheless, continued strong growth in petrochemical demand is expected in the coming years, as demand for chemicals will rise 70% over the next 15 years, driven by strong population increase and rise in the middle class.
Dr Abdulwahab Al-Sadoun is the secretary general of the Gulf Petrochemicals and Chemicals Association (GPCA). Set up in March 2006, GPCA is a dedicated non-profit association, serving its members with industry data and information sources.
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