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Gulf NOCs bank on chemical cure

The current oil market slump validates the increasing focus of the Gulf’s main upstream producers on petrochemicals

Saudi Aramco’s acquisition of Saudi Arabian petrochemicals champion Sabic in mid-June was the culmination of a drive by major Gulf NOCs, underway for well over a decade, to build an international downstream presence.

Initially, their focus was on refining—with Aramco, Kuwait’s KPC and Qatar Petroleum (QP) all now owning overseas refining capacity, overwhelmingly concentrated in fast-growing Asian economies. In the last five years, their global expansion has both stepped up a gear and shifted in focus—based on a consensus view that petchems will replace the transport sector as the primary source of incremental crude consumption by the next decade. Aramco’s on-schedule completion of the Sabic deal, four months into another demand and price collapse that has seen both NOCs and IOCs and scrambling to cut or defer spending, reaffirms that petchems commitment.

Aramco had advanced furthest into the global petchems sector even it acquired Sabic. But few of the NOCs’ recent refining investments—domestically or internationally—have come without an element of petchems integration. For example, the UAE’s Adnoc was running a wholly domestic operation as recently in 2017, while its 4.5mn t/yr Borouge refining and petchems complex—operated as a joint venture with Austria's Borealis—was entirely separate from its core upstream business.

Indian ambitions

Plans to treble Adnoc’s chemicals production to 14.4mn t/yr by 2030 were put at the heart of a new long-term strategy in 2017. The following year, the company lined up its overseas debut—agreeing to develop, jointly with its more experienced Saudi rival, the world's largest refinery and integrated petchems complex in India—the high demand growth market that all major producers are chasing.

The project has been beset by delays, massive cost escalation and local political strife, but neither NOC appears ready to walk away. Apparently undeterred by the experience, Adnoc and Borealis signed in October a provisional agreement with German chemicals firm BASF to develop a $4bn greenfield petrochemicals plant in Gujurat. “Gulf companies have typically supplied India by exporting finished products. But there comes a point as the market grows very rapidly when there is a real case for investing domestically,” says Patrick Kirby, principal analyst at consultancy Wood Mackenzie.

“Lower valuations and depressed margins could provide acquisition opportunities for those, like the Gulf oil companies, looking at the longer-term—giving rapid access to scale and markets" Kirby, Wood Mackenzie

Domestically too, downstream integration has become a corporate mantra. The 3.3mn t/yr Borouge-4 complex now under development in Abu Dhabi’s western region will be based on a 1.8mn t/yr mixed-feed cracker using streams from the nearby Ruwais refinery—the two plants anchoring a $45bn downstream hub for derivatives and conversion industries. Investing in petchems at home also has advantages for the NOCs’ government owners as a catalyst for wider growth and, importantly, job creation—something which upstream extraction, however lucrative, struggles to provide.

The recent downstream history of KPC—notoriously slow in moving projects from conception to execution—illustrates the changing nature of the ambitions of Gulf companies. A 200,000bl/d refinery in Vietnam, first planned in 2008, was jarringly anomalous by the time of its commissioning 10 years later—a relatively small facility in a marginal market without any petchems element.

The firm is now moving in the same direction as its regional counterparts. At home, a petchems complex is due to be bolted onto the new 615,000bl/d Al-Zour refinery, finally nearing completion after some 15 years on the drawing board. Internationally, KPC acquired a stake in a South Korean propylene producer in August last year and a major affiliate completed a chemicals plant in Texas.

Inorganic growth across the highly cyclical global petrochemicals industry could become more frequent over the next 4-5 years as a period of overcapacity bites. “Lower valuations and depressed margins could provide acquisition opportunities for those, like the Gulf oil companies, looking at the longer-term—giving rapid access to scale and markets,” says Kirby. Aramco's planned acquisition of the oil-to-chemicals business of India's Reliance Industries conglomerate provides an exemplar.

Qatar gets going

QP—an upstream giant in gas, for which long-term demand growth prospects may be healthier than for oil—has been slower in terms of downstream diversification in recent years, both in petchems and in international expansion. In 2014 and 2015, the company abruptly cancelled two world-scale domestic petchems projects and wound up its QP International subsidiary, which had focused on international refining. However, in the space of a month last summer, two agreements were signed with Chevron to develop ethane-based plants in each firm's home country, with combined cracker capacity of 3.8mn t/yr.

14.4mn t/yr — Adnoc's planned chemical output by 2030

FIDs on these, as on several other of the NOCs' putative petchems ventures, remain pending and are likely to be delayed by this year's oil price crash. But heir longer-term logic may actually be boosted by another stark demonstration of the volatility of global crude markets and their potential to become rapidly oversupplied.

Locking in long-term demand downstream, diversifying income and developing more reliable future revenue streams all look attractive prospects in an uncertain world. “The main business for Gulf NOCs will remain in production [of crude oil] so for them acquiring equity in strategic downstream projects and regions is a way of positioning their future crude, as demand starts to plateau or decrease,” says Maryro Mendez, research director at Wood Mackenzie.

And the implications of extreme price swings and of the fickleness of existing oil demand sources are existential for the Gulf firms' owners. While Shell, for example, disappoints only shareholders who chose the stock when it cuts its dividend, Aramco’s travails meant the Saudi Arabian government was forced to institute a three-fold tax hike—affecting the livelihoods, and potentially the political quiescence, of a population of 35mn.

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