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Petrochemicals in the Middle East and Saudi Arabia

Source: 9/26/2005, Location: Middle East

According to Mohamed Al Mady, Vice Chairman & CEO, SABIC, petrochemical development in the Middle East, particularly the Gulf Cooperating Council or GCC countries is clearly accelerating. These countries include Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, and the Arab Emirates. Neighboring Iran is also accelerating its petrochemical development. Iran has the world's second largest reserves of natural gas, just behind Russia. If we look at ethylene as a proxy for the industry, half of the growth in new ethylene capacity in the next five years will be in the Middle East and one-third will be built in Asia. By 2010, ethylene production in Iran and the GCC countries is estimated to account for about 20% of the global capacity.

SABIC will be playing an important role in the future growth of Middle East petrochemical industry with major expansions in ethylene, propylene, ethylene glycol, polyethylene, polypropylene, styrene monomer, steel, methanol and urea. SABIC's current and planned investment in capacity expansions are expected to reach approximately $20 billion in the next three years. With these expansions, the annual production of products will grow from 43 million tons to 64 million tons by 2008. Other private sector Saudi investors and foreign partners will also be building ethylene crackers and derivatives plants as well.

The Middle East with its hydrocarbon resources and its strategic geographic location, has become the world's most attractive location for petrochemical assets. For European petrochemical companies, it is an economic bridge to the rapidly growing Asian markets. Companies in Europe and Middle East have unique strengths that when combined can yield quite positive results.

While Japanese and American companies recognized the strategic benefits of participating early in the joint development of the Mideast petrochemical industry. With the exception of Ecofuel and Fortum, most European petrochemical companies chose not to participate. Although many European companies have been slow to appreciate the benefits of investing in the Middle East, it is not too late and more European companies are now actively participating in the development of the Middle Eastern petrochemical industry with significant investments throughout the region. The Middle East will continue for many reasons to be an attractive area for European investment.

At the same time, some European companies have chosen to divest their petrochemical businesses, preferring to focus on more strategic downstream or upstream businesses. This may present an opportunity for these European companies to form a joint venture or alliance with companies, such as SABIC, who wish to invest in the growth of the European petrochemical industry. This occurred when SABIC acquired the petrochemical assets of DSM. This acquisition moved SABIC closer to its objective of global expansion and also provided DSM with capital to move further downstream in accord with its strategic objectives. SABIC has been able to provide capital which permitted a restructuring of the European assets, thereby yielding a more competitive entity --- better able to expand and grow in the European market.

SABIC believes they have much to gain by investing in Europe and growing with the Euro markets. At the same time SABIC welcomes cooperation with European companies in establishing joint ventures both in Europe and elsewhere. As part of Saudi Arabia's desire to participate more broadly in global trade, accession to membership in the World Trade Organization (WTO) is now progressing. Currently Saudi Arabia's status with respect to WTO membership is "observer negotiating entry." Accession in 2005 will bring Saudi Arabia in closer community and cooperation in trade matters with all WTO member countries. WTO membership is an important step for Saudi Arabia in integrating its trading activities into the global trading system and in protecting its product exports from erosion due to illegal trade barriers. Al Mahdy hope that the European community will provide support for Saudi Arabia's accession to WTO membership. WTO membership will strengthen trade between our regions providing significant benefits that accompany free and open trading to both Europe and Saudi Arabia. While some voices may call for protectionism, past history clearly demonstrates that this is not the path for future progress and growth of the European industry. Efforts to put trade barriers in place that restrict imports of basic building blocks end up penalizing the domestic downstream consumers and fabricators. Ultimately, these barriers impose a severe penalty on the domestic economy.

Future Outlook For Global Petrochemical Industry

In discussing the future of the petrochemical industry, it is noteworthy that very large increments of new capacity will come on-stream in the 2007 - 2009 time period. Some industry analysts predict that such a large capacity addition -- much of it in the Middle East -- is likely to affect industry profitability for several years. However, some top executives in the petrochemical industry believe the current peak will extend through the 2007 – 2009 period.

SABIC believes that there is some good news that will follow whatever actually happens in the 2007 - 2009 period. The favorable demographics which will exist in China, India, Brazil and other industrializing countries will continue to increase demand for our petrochemical products.

SRI in its "World Petrochemical" publication has estimated that over the next three to four decades, perhaps two-thirds of the world's population will climb out of absolute poverty, and rising living standards will create a rising demand for bulk commodity chemicals growing similar to the demand which existed from 1960 - 2000.

While a number of long term factors are moving in a direction that may appear to threaten our industry, some very significant strategic factors are moving in a direction that is quite favorable for the industry. We have much to look forward to in the future.

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