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Table 25: Additional costs on petrochemical producers of higher feedstock prices Current scheme Government revenues raised (US$50/bb!) US Spot/(US$50/bbl) (US$bn) Ethane 950 1,411 461 Methane 201 457 256 Propane 3,918 4,898 980 Butane 789 986 197 Naphtha 2,348 2,934 587 Ammonia 64 132 69 Feedstock cost 8,269 10,819 2,550 Electricity & water 1,039 2,053 1,014 Total 9,309 12,872 3,564 Source: IHS Chemical, BofA Merrill Lynch Global Research. US spot refers to natural gas prices of US$2.6/mn BTU. The US$2.5bn feedstock price rise could directly accrue to the central government through Saudi Aramco, while higher electricity and water charges would not. Moving further down the value chain Downstream operations in Saudi have historically been international Joint-Ventures (JVs) and government-owned entities like SABIC. In July 1993, the government issued a Royal Decree that merged all the state-owned refineries, distribution activities and marketing operations under Saudi Aramco. This resulted in a transfer of the government’s stake in three key refineries and international refining and petrochemical operations to one state-owned company. Today, Saudi Aramco is one of the largest crude oil refiners in the world and aims to become a top-three petrochemical producer through standalone petrochemicals facilities like Sadara, downstream integration at its many refineries, and potential acquisitions. The recent announcement of the US split with Shell was followed by comments that the breakup was due to different strategies by both companies with Aramco increasing its focus on petrochemicals. Petrochemicals - a route to diversification Saudi Arabia is emerging as one of the largest petrochemicals producers globally. The country initially started with integrated refining leading to petrochemical production through its multiple JVs in Saudi and other regions, and is now building the largest petrochemical complex globally. One of the goals is to maximise the value of the Saudi hydrocarbon chain. Ultimately, this expansion into petrochemicals should further support the diversification drive and thus support the stated goals for the Saudi economy. Saudi Arabia (potentially through Saudi Aramco) aims to become a leader not only in commodity chemicals, but also downstream petrochemical conversion. In the cities of the Jubail and Rabigh, the Ministry of Energy, Industry and Mineral Resources (along with Saudi Aramco) is constructing value-parks next to upstream chemical facilities. The aim is to provide integration and the infrastructure for SMEs to operate and produce value-added products in the Kingdom. This diversification into specialty chemicals could increase returns from the current US$500/ton level to around US$2000/ton by 2040, according to local press citing senior Aramco officials. Saudi Arabia could also look to grow its international refining footprint to provide further integration opportunities, as was suggested by the recent split of the Motiva JV (Saudi is more keen to expand its downstream operations, whilst Shell is looking to reduce them). Two petrochemical projects are also being built. The first is the Sadara project in Jubail, which is expected to become the world’s largest integrated chemicals complex with 3MMt of output. It will use naphtha as feedstock. The second is Petro Rabigh II, which is the expansion project of the existing Petro Rabigh plant that will process 4MMt (93kb/d) of naphtha feedstock, and is planned to be launched in 2016. NTP includes the long discussed Oil-to-Olefins (OTC) Saudi’s national transformation plan includes the development of a US$770mn industrial cluster whereby expansion to the Aramco refinery is likely to take place, providing the platform for the long discussed OTC, Oil-to-Olefins, project. Saudi 70 GEMs Paper #26 | 30 June 2016 38 Merrill Lynch HOUSE_OVERSIGHT_016180