RIYADH, (Reuters) – Two of Saudi Arabia’s biggest petrochemical firms said on Saturday they have agreed to cooperate on the execution of projects to create synergies after the global economic slowdown hit their profitability.
Shares in the SABIC and Sipchem both soared by almost the 10 percent limit to close at their highest levels since November after the announcement was made.
Under a memorandum of understanding, Saudi Basic Industries Corp (SABIC) will crack ethane feedstock to provide Saudi International Petrochemical Co (Sipchem) with ethylene olefin and in exchange Sipchem will provide SABIC with carbon monoxide, the two firms said in a statement.
“We will crack ethane to get ethylene to capitalise on synergies between the two companies … This is being done for the (ethane) gas allocation,” SABIC’s Chief Financial Officer Mutlaq al-Morished told Reuters.
Asked on the potential implications of the agreement in terms of further rapprochement between the two firms, Morished said: “Let’s not read too much into this”.
The two firms said they would use the existing surplus production capacities “to utilise Ministry of Petroleum and Mineral Resources allocated raw materials to produce a number of specialty petrochemical products.”
The ministry provides petrochemical firms with feedstock such as ethane.
The launch over the past four years of billions of dollars worth of petrochemical projects in the kingdom has raised concern among both industry executives and analysts over the availability of enough ethane to meet the resulting increase in demand for the industry’s preferred feedstock.
The fact that most of Saudi gas is produced in association with oil output, making volumes fluctuate with oil production, accentuates these concerns, especially since Saudi oil output is at its lowest in over six years after the kingdom and OPEC curbed output to match rapidly falling demand.
State oil giant Aramco’s announcement of plans to venture into the petrochemicals industry, as it did with Japan’s Sumitomo Chemical or as it plans to do with U.S. Dow Chemical, has heightened these concerns. The plans would technically lead to lower availability of ethane to its rivals, which include state-controlled SABIC.
The Middle East Economic Survey (MEES) reported in March that Saudi Arabia would expedite work on two offshore gas fields in the kingdom to meet growing domestic energy demand.
Petrochemical firms could resort to alternative sources of feedstocks but these will cause a surge in costs.
The global crisis hit hard both firms in the first-quarter: SABIC posted its first loss in seven years while the much smaller Sipchem posted an 87.4 percent plunge in its net profit.
SABIC is currently executing projects within the kingdom worth 12 billion riyals ($3.2 billion) that would add 623,000 tonnes per year to its overall capacity, while Sipchem has $810 million worth of projects in the country to add 325,000 tonnes.
The projects are expected to start production by mid-2013.