Year in review: Petchems expand but profit hit by oil price and reforms

Petrochemical production in the GCC is forecast to have increased by about 2.6 per cent to 148.4 million tonnes per annum in 2016.

An Aramco oil refinery in Dahran, Saudi Arabia. Aramco and other petrochemicals companies are looking to increase production as the GCC countries move to diversify their economies. Getty Images

The Arabian Gulf petrochemical industry expanded this year but it was hit by the oil price rout and energy subsidy reforms that put pressure on margins.

The year was also marked by announcements from two state-run energy companies, Abu Dhabi National Oil Company (Adnoc) and Saudi Aramco, of plans to nearly triple petrochemical production as part of regional governments’ efforts to diversify their income away from a dependence on crude.

Aramco is seeking to raise production to 34 million tonnes per annum (mtpa) by 2030 from the current 12 mtpa, while Adnoc is targeting an increase to 11.4 mtpa by 2025, up from 4.5 mtpa now.

Petrochemical production in the region this year is forecast to have increased by about 2.6 per cent to 148.4 mtpa from 144.6 mtpa last year, according to the Dubai-based Gulf Petrochemicals and Chemicals Association.

“We anticipate an additional 6.65 million tonnes of petrochemical capacity in 2017 subject to project completion,” said Abdulwahab Al Sadoun, the association’s secretary general. “However, the actual growth rate in 2017 and 2016 may be lower compared to 2015 since a big portion of new capacity additions will come from speciality chemicals, which tend to be lower in volume but higher in value compared to commodity petrochemicals.”

Projects such as Sadara, Saudi Aramco’s US$20 billion joint venture with Dow Chemical of the US, is expected to ramp up output and will bring new products to the region.

But producers’ profits are narrowing because the prices of petrochemicals are linked to crude prices, which are still at half mid-2014 levels.

“Most observers do not think that oil prices will rise substantially in 2017 and so operating margins for many companies may be at levels seen during 2016,” said Arvind Aggarwal, a principal for the Middle East at consultancy Nexant.

“Low margins may attract new partnerships with existing producers, through to a sequence of selected mergers/consolidation.”

For example, Sabic (Saudi Arabia Basic Industries Corporation), posted a 6.8 per cent fall in third-quarter net profit, even as it cut costs.

Gulf countries also began last year removing subsidies and raising prices on energy, which will slowly erode competitiveness of regional producers who retained an edge over global rivals with cheap gas feedstock.

“Historically, oil prices have been the main driving factor for GCC petrochemical names but we believe that subsidy reform will take on a more driving role in the coming years as more efficient producers will outperform, while the less efficient ones will have trouble maintaining attractive returns,” said Yousef Husseini, a petrochemical analyst at Egyptian investment bank EFG Hermes.

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