Published by BUSINESS MONITOR INTERNATIONAL LTD
Including 5-year industry forecasts
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United Arab EmiratesPetrochemicalsReport Q3 2009 ISSN: 1749-2521
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United Arab Emirates Petrochemicals Report Q3 2009 Including 5-year industry forecasts by BMI
Part of BMI’s Industry Survey & Forecasts Series
Published by: Business Monitor International
Publication date: June 2009
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CONTENTS
Executive Summary .........................................................................................................................................5
SWOT Analysis.................................................................................................................................................7
UAE Petrochemicals Industry SWOT .................................................................................................................................................................... 7 United Arab Emirates Political SWOT .................................................................................................................................................................. 8 United Arab Emirates Economic SWOT ................................................................................................................................................................ 9 United Arab Emirates Business Environment SWOT............................................................................................................................................. 9
Global Market Overview.................................................................................................................................10
Global Ethylene Capacities ................................................................................................................................................................................. 10 Table: World Ethylene Production By Country, 2008 And 2013 (‘000 tonnes capacity) ..................................................................................... 10 Polypropylene...................................................................................................................................................................................................... 13 Quarterly Oil Products Price Outlook ................................................................................................................................................................. 16 Table: Oil Product Price Assumptions, Q408-Q409 (US$/bbl)............................................................................................................................ 18 Table: Oil Product Price Forecasts, 2006-2013 (US$/bbl).................................................................................................................................. 19
Gulf Regional Overview.................................................................................................................................20
Table: Announced Ethylene Cracker Projects In The Gulf Region ...................................................................................................................... 22
UAE Market Overview ....................................................................................................................................24
Table: The UAE’s Petrochemicals Sector – Cracker Capacity Data, 2006-2013 (‘000 tpa) ............................................................................... 24
Petrochemicals Business Environment.......................................................................................................25
Table: Middle East And Africa Petrochemicals Business Environment Ratings .................................................................................................. 25 Limits Of Potential Returns.................................................................................................................................................................................. 26 Risks To Realisation Of Returns .......................................................................................................................................................................... 27 The UAE’s Business Environment Outlook.......................................................................................................................................................... 27 Foreign Direct Investment ................................................................................................................................................................................... 29
Industry Trends And Developments ............................................................................................................30
Abu Dhabi............................................................................................................................................................................................................ 30 Dubai And The Northern Emirates ...................................................................................................................................................................... 32 Related Industries – Developments ...................................................................................................................................................................... 33 Table: Major UAE Oil And Gas Concessions...................................................................................................................................................... 35 Plastics Futures ................................................................................................................................................................................................... 36
Industry Forecast Scenario...........................................................................................................................37
Table: The UAE’s Petrochemicals Projects......................................................................................................................................................... 37 Table: The UAE’s Petrochemicals Sector, 2007-2013......................................................................................................................................... 39 Macroeconomic Outlook...................................................................................................................................................................................... 40 Table: United Arab Emirates – Economic Activity, 2005-2013 ........................................................................................................................... 42
Company Profiles...........................................................................................................................................43
Abu Dhabi National Oil Company (Adnoc) ......................................................................................................................................................... 43 Abu Dhabi Polymers (Borouge)........................................................................................................................................................................... 45 Abu Dhabi Fertilizer Industries (Adfert).............................................................................................................................................................. 48
Country Snapshot: UAE Demographic Data ...............................................................................................49
Section 1: Population........................................................................................................................................................................................... 49
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Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 49 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 50 Section 2: Education And Healthcare.................................................................................................................................................................. 50 Table: Education, 2002-2005 .............................................................................................................................................................................. 50 Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 50 Section 3: Labour Market And Spending Power .................................................................................................................................................. 51 Table: Employment Indicators, 2000-2004.......................................................................................................................................................... 51 Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 51
BMI Forecast Modelling.................................................................................................................................52
How We Generate Our Industry Forecasts .......................................................................................................................................................... 52 Chemicals And Petrochemicals Industry ............................................................................................................................................................. 52 Cross Checks ....................................................................................................................................................................................................... 53 Business Environment Ratings............................................................................................................................................................................. 54 Table: Petrochemicals Business Environment Indicators And Rationale............................................................................................................. 54 Weighting............................................................................................................................................................................................................. 55 Table: Weighting Of Indicators ........................................................................................................................................................................... 55
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Executive Summary
An ambitious programme of expansion at Abu Dhabi’s Borouge complex is on course, with its backers
pressing ahead with a third phase in the massive petrochemicals project even before the second phase is
due for completion in 2010. This indicates that the development of the country’s petrochemicals industry
is robust in the face of a severe decline in global demand and remains attractive to investment due cheap
and abundant feedstock resources, according to BMI’s latest UAE Petrochemicals Report.
The Borouge 2 project is on schedule with operation due to begin in 2010. Borouge 2, located next to
Borouge’s existing petrochemical complex in Ruwais, will raise production capacity from the current
600,000tpa to 2mn tpa of polyolefins. It will include one 540,000tpa Borstar technology-enhanced PE
unit and two 400,000tpa Borstar PP units. A proposed Borouge 3 was announced in April 2008. In the
same month of 2009, Borouge announced plans to commission a front-end engineering and design study
for the Borouge 3 project to boost total production capacity to 4.5mn tpa by Q413. It will comprise an
ethane cracker and PP and PE units. According to Borealis, Borouge 3 will capture additional feedstock
availability resulting from the upstream refinery and gas processing expansions of the Abu Dhabi
National Oil Company (Adnoc). The PP plants are expected to consume propylene supplied by local
refineries. The LDPE unit, Borouge’s first, will supply the wire and cable infrastructure market. However,
exact capacities, including the cracker, have not been disclosed, although BMI believes it will be as large
as the Borouge 2 cracker, which has a production capacity of 1.5mn tpa. Combined polyolefins capacity
will be 2.5mn tpa, of which BMI believes up to 1mn tpa will be PP. BMI has projected start-up for
commercial production in Q114.
Another major upcoming development is the proposed 7mn tpa Abu Dhabi Chemicals Company
(Chemaweyaat) Complex 1, which includes a 1.5mn tpa naphtha cracker, and aromatics, phenol and
derivatives plants at Taweelah, to be completed in 2013-2014. It is envisaged the complex will be the
world’s largest grassroots integrated chemical project, although by end-2008 no further details were
available on the complex’s capacities. BMI believes it is unlikely that the cracker and related units will be
completed before 2014. Ownership will be split between the International Petroleum Investment
Company (IPIC) (40%), Abu Dhabi Investment Council (40%) with the remainder held by Adnoc.
In BMI’s Middle Eastern Petrochemicals Business Environment Rankings matrix, the UAE has a score of
58.4 points, 5.8 points behind Qatar and 2.1 points ahead of Kuwait. The UAE’s score has fallen 1.3
points this quarter due to deterioration in its country risk ratings. However, it has risen from fourth to
third place as a result of a larger decline in Kuwait’s score. The two states have jostled for third place in
recent months, but Kuwait has suffered as a result of policy reversals in the refining and petrochemicals
sectors which has adversely affected its market risk score, while its overall country risk rating as fallen, in
line with global economic trends. BMI believes that it is unlikely the UAE will raise its ranking further
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with Saudi Arabia and Qatar continuing to lead the Middle East rankings over the next five years, even
with the additional capacity provided by the second phase of the Borouge complex in 2010 However, it is
likely to hold on to its third place, with the expansion of the Borouge complex and the proposed
Chemaweyaat 1 bolster its petrochemicals capacities.
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SWOT Analysis
UAE Petrochemicals Industry SWOT
Strengths Large hydrocarbon reserves provide plenty of cheap feedstock for the petrochemicals industry
Geographically well placed to export to both Europe and new and emerging Asian markets, such as India and China
Adnoc and Borealis are forging a strong commercial partnership
Weaknesses Narrow production portfolio
Relatively small production capacity given the size of its hydrocarbon reserves; expansion plans might miss the current positive petrochemicals climate and come onstream at a low point in the price cycle
Outside of the Borouge company, the sector has reflected the economy as a whole in attracting little in the way of foreign direct investment (FDI)
The country faces problems regarding access to the EU markets, as the union feels that Middle East governments provide feedstock to domestic companies at a subsidised rate
An extreme climate and a highly saline Arabian Gulf lead to high investments to offset the corrosion caused to petrochemical process facilities
Opportunities Borouge is expanding PE capacity and, given Borealis’s expertise in PP production, may expand its portfolio into propylene and PP production
The Chemaweyaat project will eventually have a capacity of 6mn tonnes of petrochemicals per year
Abu Dhabi is setting up special economic zones to house petrochemical production facilities
As many projects are state financed, the sector should not suffer as badly from the liquidity crisis as many rival markets
The financial crisis is causing capital expenditure costs to drop, which should encourage investment, providing financing can be arranged
The government is increasing efforts to attract FDI
The emergence of China as a major petrochemicals consumer
Threats An economic slowdown in China could negatively impact export revenues
Increased feedstock prices could pressure margins
Competition from new production capacity in Asia
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United Arab Emirates Political SWOT
Strengths Standards of living are high for nationals, which has dampened any demands for greater political representation
The monarchy enjoys strong support nationwide
Weaknesses Lack of democracy poses long-term risks given trends towards greater popular participation elsewhere in the region
Sheikh Khalifa bin Zayed assumed the presidency after the death of Sheikh Zayed al-Nahayan. He is equally conservative and is unlikely to make concerted efforts to address constitutional issues
The succession lineage is somewhat opaque, raising concerns about longer-term stability
Opportunities The UAE co-operates closely with other GCC states in security and economic policy
The UAE is typically a 'dove' within OPEC, sympathetic to the needs of consumer states, which is good for its relations with the West
Dubai enjoyed a smooth political succession following the death of former ruler Sheikh Maktoum bin Rashid al-Maktoum in January 2006, with new ruler Sheikh Mohammed bin Rashid al-Maktoum welcomed by most of the public
Threats There is a long-running territorial dispute with Iran, which continues to affect bilateral relations
Relatively poor living conditions among some foreign workers have led to strikes and demonstrations. Given the size of the expatriate community, this poses some threat to domestic stability
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United Arab Emirates Economic SWOT
Strengths The UAE is a member of the Gulf Co-operation Council, which, as well as being a common market, is targeting a common currency by 2010
The UAE has one of the most liberal trade regimes in the Gulf, and attracts strong capital flows from across the region
In common with most Gulf states, there are a high number of expatriate workers at all levels of the economy, making up for the otherwise small workforce
The UAE is diversifying its economy, minimising vulnerability to oil price movements
Weaknesses The UAE's currency is pegged to the dollar, giving it minimal control over monetary policy and reducing its ability to tackle inflationary pressure
The state's location in a volatile region means that its risk profile is, to some extent, affected by events elsewhere. US concerns about regional militant groups and Iranian WMD programmes could affect investor perceptions
Opportunities Oil prices are expected to stay high (by historical standards) over the forecast period
Economic diversification into gas, tourism, financial services and high-tech industry offers some protection against volatile oil prices
The construction, tourism and financial sectors are growing rapidly, driven by domestic and foreign investment
Threats Heavy subsidies on utilities and agriculture and an outdated tax system have contributed to persistent fiscal deficits in the past, although rising oil revenues have masked the problem in recent years
Some bottlenecks have been forming in the construction sector and there is a chance of delays in several high-profile construction projects
United Arab Emirates Business Environment SWOT
Strengths The UAE is a member of the Gulf Co-operation Council, a six member common market, and has been a member of the WTO since 1996
The state has invested large amounts in infrastructure, and will continue to do so
The UAE's diversified economy reduces risks from volatile oil prices
Weaknesses Due to the state's federal nature, regulations can vary considerably across emirates
The regional economy is oil-dependent. This has historically been very cyclical, which increases risks for long-term projects
Opportunities Large number of free trade zones offering tax holidays and full foreign ownership
Comparatively relaxed rules on expatriate employment
The UAE's social stability and relative prosperity means that there is far less concern for security than in some other Gulf states
Threats The state is bureaucratic relative to regional peers
Strong oil prices have massively increased liquidity. This has resulted in strong financial inflows, increasing risks that projects of lower potential are being funded
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Global Market Overview
Global Ethylene Capacities
Table: World Ethylene Production By Country, 2008 And 2013 (‘000 tonnes capacity)
Country 2008e 2013f
United States 29,270 27,770
Saudi Arabia 10,760 19,670
China 10,160 20,910
Japan 8,760 8,760
South Korea 7,490 7,690
Germany 5,745 5,745
Iran 5,606 9,006
Canada 4,951 4,951
Brazil 4,425 6,445
Taiwan 4,120 4,120
Netherlands 3,980 3,980
France 3,465 3,465
Russia 3,095 5,230
United Kingdom 2,885 2,885
India 2,850 7,300
Belgium 2,540 2,540
Thailand 2,480 4,470
Singapore 2,040 4,040
Malaysia 1,770 1,770
Mexico 1,580 2,580
Spain 1,480 1,480
Qatar 1,300 6,000
Kuwait 850 1,700
Argentina 755 755
Egypt 730 730
Poland 625 700
Hungary 620 620
Indonesia 620 620
UAE 600 2,050
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Table: World Ethylene Production By Country, 2008 And 2013 (‘000 tonnes capacity)
Country 2008e 2013f
Venezuela 550 1,850
Czech Republic 525 595
Romania 520 520
Turkey 520 520
Australia 515 515
South Africa 500 500
Bulgaria 450 450
Israel 450 450
Nigeria 300 300
Azerbaijan 250 300
Central Asia 240 240
Slovakia 210 210
Algeria 130 1,230
Colombia 86 86
Chile 60 60
e/f = estimate/forecast. Source: BMI
BMI estimates that total global ethylene capacity amounted to around 130.9mn tpa in 2008, with Asia
Pacific representing 31.5% of installed capacity and North America a further 27.5%.
Although the Middle East and Africa
represent the largest source of oil and
gas, the region contributed just 16.2% of
total capacity. This is set to change over
the medium to long term as new capacity
comes online. The region’s contribution
to global capacity is forecast to rise from
11.8% in 2007 to 24.5% by 2012, the
region should represent 24.5% of global
ethylene capacity, which we forecast will
reach 182mn tpa. Although Asia Pacific
will have the strongest growth in demand
Ethylene Global Capacity By Region
2008
* Includes Central Asia. Source: BMI
South America
4.4%
Middle East and Africa
16.2%
Asia Pacif ic*31.5%
Eastern Europe4.8%
NAFTA27.5%
Western Europe15.5%
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for olefins, its contribution is likely to rise by just 2.2 percentage points (pp).
Another region set to raise its global profile is South America, with significant new capacity set to come
online in Brazil and Venezuela. Brazilian
petrochemicals giant Braskem is seeking
to dominate production in the region and
become a serious player on the
international petrochemicals market; the
company is ramping up capacity,
including a world-scale ethylene joint
venture (JV) in Venezuela.
With Saudi Arabia and Qatar in particular
ramping up capacities with a number of
world-scale projects, the feedstock will
also shift. At present, naphtha represents
54% of feedstock for the world’s
crackers, with ethane providing a further 28%. By 2012, BMI forecasts that ethane will represent around
45% of total feedstock, derived largely from the gasfields in the Arabian Gulf. Access to cheap feedstocks
gives petrochemicals companies in the Arabian Peninsula and Iran an even greater cost advantage over
producers elsewhere in the world, particularly in Europe and North America. Higher oil prices have led
governments in the region to reinvest profits in constructing petrochemicals plants. By 2012, the Middle
East and Africa will have nearly twice the capacity of Western Europe. Saudi Arabia accounts for almost
half the US$250bn committed to
petrochemicals projects in the Middle
East, excluding Iran. Due to this strong
growth in capacity in the Gulf region,
investors will be reluctant to expand
capacity in North America and Western
Europe. Even debottlenecking expansions
could be abandoned due to concerns
about feedstock costs and loss of
competitiveness.
An increased use of ethane and expansion
of capacity should help raise margins.
Ethane costs just over a third of the cost
of naphtha and cracking margins are 6.5% higher. Naphtha prices have risen in line with crude, which
was reaching all-time highs by mid-2008. This caused ethylene contract prices to soar to over 70 cents per
Ethylene Global Capacity By Region
2012
NAFTA20.3%
Western Europe11.7%
Asia Pacif ic*33.7%
South America
5.1%
Eastern Europe4.8%
Middle East and Africa
24.5%
* Includes Central Asia. Source: BMI
Ethylene US Contract Prices
2007 And 2008 (cents per pound)
0
10
20
30
40
50
60
70
80
Jan0
7F
ebM
arA
prM
ay Jun
Jul
Aug Sep Oct
Nov
Dec
Jan0
8F
ebM
arA
prM
ay Jun
Jul
Aug Sep
Source: BMI
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pound in July 2008, a 47% year-on-year (y-o-y) increase. Average oil prices of US$60 per barrel (/bbl) or
above make the Middle East the prime destination for investment, due to access to low-cost ethane.
However, the sharp decline in oil prices towards the end of 2008 and into 2009 should give naphtha-fed
crackers a boost in competitiveness.
The global slowdown is also a cause for concern for the petrochemicals industry, which will carry out
large-scale capacity additions in 2009 and 2010, leading to a supply glut. Middle Eastern producers will
be particularly affected as they are heavily reliant on exports, particularly to Asia. Already, Saudi projects
are being delayed due to a lack of buyers for their products as well as the global financial crunch,
although this is expected to be a short-term phenomenon. In the long term, with Middle Eastern capacity
growth rising faster than Chinese import growth, producers are likely to reduce operating rates. In 2008,
significant parts of China’s polyolefins market were in stagnation, with the situation likely to deteriorate
further in 2009, putting pressure on olefins prices. Chinese ethylene self-sufficiency could top 60% by
2010, compared to 45% in 2006. The falling price of naphtha feedstock will also undermine the
competitive advantage ethane-fed crackers in the Middle East rely on to penetrate new markets. The
downturn is not likely to last beyond 2010, as Chinese demand is likely to accelerate, with a supply gap
exceeding 15bn tpa by the end of the next decade. Additionally, Chinese crackers are expected to struggle
to find competitively priced sources of naphtha, thereby bolstering the penetration of Middle Eastern
producers in Asian markets.
Polypropylene
Demand for PP has been running on average at 7.5% over the past decade, which is well above global
average economic growth. BMI estimates global PP demand at 48mn tonnes in 2008. The polymer is
attractive as it can be used in a wide range of products and yet it is priced lower than other thermoplastics.
In recent years, global PP prices have been pushed up by demand growth outstripping capacity additions
and the effect of high oil prices on propylene feedstock. As with all petrochemicals commodities, the
level of growth in China and India has been largely responsible for the pace of PP demand growth. Rising
PP prices mean they are catching up with PE prices, leading to a slackening in demand growth
momentum.
Nevertheless, PP consumption is set to exceed 50mn tonnes in 2010 and could reach 80mn tonnes by
2016, making it the world’s largest polyolefins market. As a result, global plant operating rates are
expected to stay at around 80-90% of capacity, based on expected capacity growth. Most new capacity
will come onstream in 2009-2012, causing a temporary decline in capacity utilisation.
Demand growth is set to continue despite the global economic slowdown, due to a broadening of the
variety of applications – particularly in the packaging, construction and automotive industries. The Asia-
Pacific region has become the world’s largest PP market and has led growth, due to rapid industrialisation
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in China and India, which are driving PP demand as their demand growth rates exceed their growth in
capacity. South America is also witnessing high rates of demand growth, although it will remain a smaller
market than Europe and North America over the foreseeable future.
BMI estimates that global polypropylene capacity totalled 53mn tpa in 2008, with the United States the
world’s largest PP producer with 17% of capacity, followed by China on 13%. Western European
producing markets contributed a further 19.4%, while the Middle East – despite its immense resources –
represented just 8.2%. The global landscape is set to radically shift over the next five years, as demand
and supply shift eastwards due to growth in developed markets, according to BMI research.
In 2008 alone, BMI estimates the amount of added capacity at over 4mn tpa, with a further 5mn tpa over
the following two years. Capacity expansion is occurring during a period of economic downturn, leading
to excess capacity. PP producers in the Middle East and Asia will firm up their positions on the global
market, exporting their surpluses to the detriment of Western European and North American producers
which are unlikely to put significant new capacity online in coming years. BMI analysis indicates that
profitability in Western Europe and North America will come under attack from cheap imports and will
struggle to maintain their competitiveness on export markets. BMI forecasts a net decline in PP capacity
in these regions, with producers mothballing or closing older, smaller and less efficient plants with
capacities under 200,000tpa, instead focusing their attention on increasing capacity at larger sites.
Production is shifting eastwards, following the pattern of demand. BMI expects modest declines in US
capacity over the next five years. US producers are set to devote an increasing amount of output to the
domestic market as exports come under pressure from new capacity in the Middle East and Asia. Net
exports are likely to fall to zero by 2012. The main challenge for the US is over-reliance on propylene
derived from fluid catalytic cracker units
in refineries. As refinery capacity is
unlikely to keep up with the growing
demand for propylene feedstock,
polypropylene producers will be forced
to look to other sources to sustain output.
According to BMI forecasts, US demand
will reach around 9.0mn tpa in 2009, an
18% rise over 2005 levels, leaving a net
surplus of around 1.5mn tpa for export.
In Western Europe, BMI estimates show
that the recovery in PP demand since
2005 slowed considerably in 2008 as the
Regional Contribution To PP Capacity Expansion
2008-2012
Japan1.1%
West Europe6.8%
Middle East23.7%
Central and
Eastern Europe3.5%
Africa3.4%
Other Americas
14.2%
Other Asia23.5%
China23.8%
Source: BMI forecasts
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region’s economy slowed. Demand growth is set to be stronger in the Central and Eastern European
markets over the next five years, although outside Russia there will not be any significant extra PP
capacity coming online. This trend could lead to the EU becoming a net PP importer over the next five
years. Producers are already closing PP plants and instead focusing their attention on debottlenecking and
expanding their other facilities.
The stagnation in production in Europe and North America and slower demand growth rates stand in stark
contrast to the surging Chinese market, which will become increasingly self-sufficient. China is now the
world’s largest PP consumer, with BMI projecting demand reaching 11.8mn tonnes in 2010, a third more
than in 2006. This is likely to lead to a deficit of over 1mn tonnes. Yet, the addition of 4mn tpa of PP
capacity over 2008-2011, with other projects in the pipeline, should help contain the growth in imports.
According to BMI forecasts, China will represent 23.8% of the 14.3mn tpa of PP capacity that is due to
come online worldwide between 2008 and 2012. The whole of Asia will represent just under half the
additional capacity, while the Middle East will add a further 23.7%, largely due to the developments in
Saudi Arabia. There are no plans for additional capacity in the US, giving China the opportunity to
become the world’s biggest PP producing nation. Most of the contribution to capacity expansion in the
Americas will be in Brazil with 2.38mn tpa due to be added over the next five years.
Meanwhile, in the Middle East, PP projects have faced delays. The opening of PetroRabigh’s 700,000tpa
PP plant in Saudi Arabia was moved from Q408 to Q109, while the Sharq and Yansab complexes, which
have a large amount of associated PP capacity, were also moved to 2009. Other PP plants due to come
online in the Kingdom in 2009 include a 250,000tpa expansion of Saudi Polyolefins’ plant at Al-Jubail.
Also at Al-Jubail, the Al-Waha Petrochemical JV between LyondellBasell and Sahara Olefins is due
to add an extra 460,000tpa of PP.
There are, however, significant risks facing PP producers. A stronger than expected slowdown in Chinese
economic growth could lead to a glut in supply, driving down prices and forcing less competitive
operations out of business. Margins will also be put under pressure by sustained high oil prices, which
will keep the price of propylene at high levels. A combination of over-capacity and rising costs of raw
materials could lead to a reduction of PP capacity in developed markets.
A significant constraint facing the industry is the tightening of the propylene market as production of the
monomer outstrips refinery output. Cuts in refinery throughput during the course of the global economic
downturn will make this constraint more evident. As a result, some PP producers are considering plans to
build plants dedicated to propylene production. While feedstock prices are set to rise, Chinese and
Middle Eastern producers are managing to bring down prices of end products, leading to pressures on
margins, particularly for producers in the developed world. The only way they can stay afloat is to corner
niche markets with innovative products requiring greater technical sophistication than currently offered
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by plants in emerging markets. Efficiency in the manufacturing process also needs to be improved and
markets developed. At the same time, energy and transportation prices are high, although easing with the
decline in oil prices.
Quarterly Oil Products Price Outlook
Preparing For The Big Squeeze
Weaker demand for diesel in road transport use, gas oil for manufacturing and industrial applications, and
falling jet fuel consumption have acted in concert to pull the rug from under the middle distillates market.
Gasoline prices and margins had, earlier in the first quarter, made some progress. Since then, refiners
have again struggled. There is no clear pattern yet emerging for the oil products sector but, based on
OPEC’s efforts to limit crude supply, the downstream segment may be in for a tough time if crude prices
rally but product demand remains weak. This is a recipe for ongoing margin weakness and refiners are
preparing themselves for the big squeeze. The start-up of new refineries in Asia and the Middle East will
only exacerbate the situation by providing an ill-timed boost to global capacity that will lead to reduced
plant utilisation rates if demand remains weak.
Lower fuel prices may stimulate demand in certain markets but the trend towards higher fuels taxation
and the overhaul of subsidies in some developing countries mean that a near-term rebound is far from
certain. In spite of some evidence that US drivers are migrating back to less fuel-efficient vehicles, the
major shifts in patterns of consumption resulting from vehicle ownership changes are unlikely to be
reversed simply because pump prices are temporarily lower. The move in Europe away from gasoline and
towards diesel is expected to continue for a while longer, in spite of steep price differentials. However,
advances in small petrol engine technology may mean these more economical units bring to an end the
love affair with diesel.
Over the longer term, expansion of the oil refining system is still needed, particularly as market growth is
likely to accelerate as the world pulls clear of recession/depression. However, refining margins are likely
to be under pressure for many months. Coupled with weaker upstream economics and modest profits in
fuels retailing, the downturn in refining profitability means that both international and national oil
companies may re-examine investment plans. The downstream oils market needs to see continued high
spending in new crude distillation capacity, improved plant upgrading capability and better storage and
distribution logistics. There will inevitably be reduced capital expenditure if industry earnings and cash
flow remain under pressure. This can only result in the market tightening once again as demand picks up
– with a return to extreme price volatility and generally higher fuel prices.
Moving Markets
The continued weakness of refined product prices has played into the hands of those countries wishing to
revise or abandon regulated systems. Many are seizing the opportunity and making sweeping changes that
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should bring prices more closely in line with the wider market. This will have an appreciable impact on
demand patterns over the medium to longer term, but the likely effects are difficult to assess at such an
early stage. India’s fuel pricing policies are a case in point, where political issues are entwined with
overall energy strategy. In early February 2009, the government decided to deregulate the price of
gasoline, gasoil, liquefied petroleum gas (LPG) and kerosene, reflecting lower international oil prices. A
month later, it decided to defer the move, with the May elections providing the explanation. Based on
prevailing international prices, the liberalisation of the domestic products market would arguably result in
another fall in retail prices, which are already down some 20% since December 2008. There is a risk,
however, that more recent crude price strength may signal higher fuels prices to come. This could boost
pump prices at an unfortunate time for some politicians. The government coalition, led currently by the
Congress Party, which has been re-elected, will continue with the liberalisation policy.
In March 2009 China surprised the market with a 3-5% increase in gasoline and diesel prices, its first in
three months. This effectively reversed a cut made in January and sent out a clear signal that Beijing
wants to move pump prices in tandem with global markets. The National Development and Reform
Commission (NDRC) announced a 4.6% increase for gasoline and 3.2% for diesel, which was a reflection
of steady gasoline demand backed by strong car sales against reduced diesel use. Diesel in China now
costs almost the same as it does in Singapore, and gasoline has closed the gap to just 20% below the
Singaporean price, according to a report from Reuters. In mid-2008, Chinese diesel prices were half the
level in Singapore.
Revised Forecasts
In Q109 BMI estimates that the global wholesale price for premium unleaded gasoline was US$50.63 per
barrel (bbl). This compares with US$56.37 in Q408 and during the two quarters the price has ranged from
a monthly low of US$40.38 in December 2008 to the February 2009 US$53.29/bbl. Gasoline prices in
Q109 were down from US$102.15/bbl in Q108 (-50.4%). For Q209, we now forecast an average global
gasoline price of US$55.78/bbl, a rise of 10.2% over the previous quarter, but a year-on-year (y-o-y)
decline of more than 56% from the impressive US$127.92/bbl seen a year earlier. For the whole of 2009,
the BMI assumption for gasoline is an average US$56.89/bbl, with the price peaking at a forecast
monthly average of US$64.75 in December 2009. The overall y-o-y fall in 2009 gasoline prices is put at
44.1%.
In Q109 gasoil averaged US$56.83/bbl, based on a composite global price. This represents a y-o-y fall of
51.0%, illustrating a slight relative weakening of diesel versus gasoline. For Q209 our revised forecast is
for global gasoil at an average US$66.81, representing a quarter-on-quarter (q-o-q) increase of 17.6% –
but a 56.4% y-o-y decline. For 2009 as a whole, the BMI forecast is for an average price of
US$69.35/bbl, assuming a monthly high of US$94.48/bbl in December. The full-year outturn is a 42.8%
fall from the 2008 level.
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Jet prices averaged US$58.93/bbl in Q109, using the composite for New York, Singapore and Rotterdam.
The annual decrease was 50.4%, with jet matching the decline in gasoline prices. The monthly low during
the previous six months was US$60.34 in December 2008, with the price reaching US$61.83/bbl in
January 2009. Volatility has been low in the jet market when compared with gasoline and diesel. In Q209,
we are assuming an average global jet price of US$68.22, a q-o-q rise of 15.8% and a y-o-y fall of 56.4%.
For 2009, the monthly average price is forecast to range from US$53.75 in February to US$96.76/bbl in
December, proving an annual level of US$71.78/bbl. This compares with US$124.95/bbl in 2008.
In 2008 naphtha was the weakest performer among the major refined products, gaining 31% to
US$87.40/bbl during 2008. In Q109, naphtha averaged an estimated US$42.91, compared with
US$93.70/bbl in Q108 and US$38.37 in Q408. The 2009 average naphtha price is put by BMI at
US$46.40/bbl, down 47% from the 2008 level.
Table: Oil Product Price Assumptions, Q408-Q409 (US$/bbl)
Gasoline Q408 Q109e Q209f Q309f Q409f
Rotterdam Premium Unleaded 54.96 48.95 54.93 58.90 60.08
NY Harbour Unleaded 57.84 49.12 55.79 61.32 62.93
Singapore Premium Unleaded 56.32 53.81 56.62 58.95 61.22
Global average 56.37 50.63 55.78 59.72 61.41
Jet/kerosene
Rotterdam 79.66 58.81 69.28 72.77 88.70
NY Harbour 81.95 60.82 68.51 72.99 91.37
Singapore 74.73 57.16 66.86 70.06 83.98
Global average 78.78 58.93 68.22 71.94 88.02
Gasoil
Rotterdam 77.89 57.08 66.93 70.30 86.76
Mediterranean 78.40 57.98 66.14 68.99 87.35
Singapore 70.25 55.44 67.35 68.46 79.41
Global average 75.52 56.83 66.81 69.25 84.51
e/f = estimate/forecast. Source: BMI
Looking further ahead, we see gasoline prices recovering to US$63.45/bbl in 2010, rising further to
US$71.11/bbl in 2011 and stabilising at around US$76.58/bbl from 2012. Gasoil is expected to rebound
to US$77.35 in 2010, reaching a plateau of US$93.35/bbl from 2012. The price of jet is forecast to
average US$80.06/bbl in 2010 and US$89.72 in 2011, before levelling out at US$96.62/bbl from 2012.
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Table: Oil Product Price Forecasts, 2006-2013 (US$/bbl)
Gasoline 2006 2007 2008 2009f 2010f 2011f 2012f 2013f
Rotterdam Premium Unleaded 74.25 75.75 100.12 55.72 62.14 69.64 75.00 75.00
NY Harbour Unleaded 76.64 78.75 102.54 57.29 63.90 71.61 77.12 77.12
Singapore Premium Unleaded 73.18 74.98 102.64 57.65 64.30 72.06 77.60 77.60
Global average 74.69 76.49 101.77 56.89 63.45 71.11 76.58 76.58
Jet/kerosene
Rotterdam 81.29 81.13 126.61 72.39 80.74 90.49 97.45 97.45
NY Harbour 82.01 82.48 127.13 73.42 81.89 91.77 98.83 98.83
Singapore 80.56 79.17 121.11 69.52 77.54 86.89 93.58 93.58
Global average 81.29 80.93 124.95 71.78 80.06 89.72 96.62 96.62
Gasoil
Rotterdam 77.52 77.02 122.62 70.27 78.37 87.83 94.59 94.59
Mediterranean 77.30 77.69 121.75 70.11 78.20 87.64 94.38 94.38
Singapore 76.74 77.03 119.53 67.67 75.47 84.58 91.09 91.09
Global average 77.18 77.24 121.30 69.35 77.35 86.69 93.35 93.35
f = forecast. Source: 2000-2006 historical data: EIA; 2007/2008 historical data: IEA: Forecasts: BMI
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Gulf Regional Overview
Oil-producing countries in the Middle East have increasingly been reinvesting revenue from the recent
surge in crude prices into petrochemicals with the aim of diversifying their economies. Furthermore, the
easy availability of feedstock has made the Gulf region a major focus of petrochemicals industrial
development, supplying to the fast-growing markets of Asia, particularly China and India.
A major growing concern is the expected decline in the global petrochemicals markets, with BMI
expecting a downturn in the sector. Middle Eastern producers will have an advantage over their European
and North American rivals as they have access to cheaper feedstocks. However, the massive expansion in
China, expected in 2010-13, could lead to a decline in global ethylene operating rates of up to 85%,
according to some estimates. The level of crowding out of European and North American producers will
depend on the strength of demand from emerging markets.
There are problems with slippages in construction schedules. The generation of projects that began
construction in 2004 and 2005 and are expected to be completed by 2010 are on schedule. However,
projects due for completion after 2010, particularly those approved in 2007, are suffering difficulties
accessing raw materials, human resources shortages and high capital costs, with some olefins complexes
seeing costs increasing by 290% over the past five years. Currently, project delays of a few weeks or
months have been recorded in the Arab Gulf states. However, high political risk, restrictions on imports
and exports, a lack of expertise in building and running complex sites and difficulties in financing have
led to significant delays in Iran. Iranian producers are facing a cash crisis and a crisis of confidence. The
Olefins 8 Arvand petrochemical complex is widely tipped for further delays and is unlikely to begin
production until after 2010. The Olefins 11, 12 and 14 projects, combined, will produce millions of
tonnes of ethylene, PE and PP, but are now facing delays of years well beyond 2010. Even for those
projects that are completed, it is debatable whether they can be run to acceptable international practices
and standards. In Qatar, Qatar Petroleum and South Korea’s Honam Petrochemical have announced
that construction of their US$2.6bn mega petrochemical complex would be put on indefinite hold. The
project, already delayed to 2012, will now only be reviewed when market conditions improve. At least
four other projects have been delayed as a result of the tough market conditions and liquidity restrictions.
Nonetheless, competitively priced feedstocks, close proximity to the fastest growing markets – China,
India and South East Asia – as well as strong political support to build a competitive export-based
industry are expected to help the Middle East withstand the current environment and propel growth.
According to a report jointly conducted by the Gulf Petrochemicals & Chemicals Association (GPCA)
and McKinsey in December 2008, low-cost gas is expected to keep driving growth in the Gulf chemicals
industry over the next five years. Furthermore, government support for projects should act as a buffer
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against potential liquidity problems. Other factors promoting regional growth in petrochemicals include
tax incentives and the latest cracking facilities incorporating state-of-the-art technology.
Gulf countries are expected to account for around 20% of the world’s ethylene production by 2010,
compared to the current 8%, the GPCA has predicted. In the UAE, production capacity is expected to
triple. According to the Gulf Organization for Industrial Consulting (GOIC), annual investment in the
GCC’s chemicals and petrochemicals industries is set to reach US$120bn in 2012. Some 50% of all new
ethylene projects being developed in the world are located in the region, according to the GPCA. Saudi
Arabia represents around 63% of total investment in the region, while Qatar comes second with a 14%
share. Around 1,969 chemicals and petrochemicals-related companies operate in Gulf region, employing
some 155,000 workers. The GPCA has forecast that the region will account for 40% of total global
petrochemical production within 10 years but has also warned that this would bring fresh challenges to
the region’s producers in terms of the need to secure more feedstock. Gulf petrochemicals producers are
aiming to diversify their production of polymers and speciality chemicals, with Saudi Kayan leading the
way. Saudi Basic Industries Corporation (Sabic)’s 2020 plan aims to raise the amount of speciality
chemicals as a proportion of total sales to up to 30% by 2020, with Kayan underpinning its strategy.
Similar strategies are being adopted across the region. Qatar is eager to utilise its massive gas reserves for
downstream industries. In Kuwait, the Equate JV is doubling petrochemicals capacity in Shuaiba with
the construction of new units adding capacity of 850,000tpa of ethylene, 600,000tpa of EG, 300,000tpa of
PE and 450,000tpa of styrene. Plans are being considered for capacity increases in the Shuaiba complex.
By 2010, Borouge will complete the construction of a cracker in Abu Dhabi with 1.4mn tpa of ethylene
and 800,000tpa of propylene by 2010. This will provide feedstock to PE and PP units with a capacity of
540,000tpa and 800,000tpa, respectively. Outside the GCC, Iran’s National Petroleum Company (NPC)
aims to increase sales to US$20bn by 2015, with plans to increase output to 12mn tpa of ethylene, 4mn
tpa of aromatics, 10mn tpa of polymers and 5.8mn tpa of urea. Europe is a key market for NPC.
This rapid rise of olefins output in the Gulf region will have a large impact on the global market, with a
likely drop in prices. A weakness has been the rising cost of plant construction, which could undermine
the profitability of these new operations and place questions over the commercial viability of some plants.
Plants in Saudi Arabia and the UAE are likely to be the most affected as both countries, until recently,
experienced increasing demands on the construction sector. In Saudi Arabia, the cost of the petrochemical
and refinery expansion project by Saudi Aramco and Sumitomo Chemical at Rabigh more than doubled
to US$9.8bn, while the cost of the Saudi Kayan project almost tripled to nearly US$10bn. But with
demand for construction and building materials weakening amid the global economic slump, the region
could benefit from a decline in construction costs in the next few years.
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Table: Announced Ethylene Cracker Projects In The Gulf Region
Country Company Location Capacity (‘000 tpa) Onstream
Abu Dhabi Borouge II Ruwais 1,400 2010
Iran NPC No.5 Kharg Island 500 2010
Amir Kabir No.6 Bandar Imam 520 Onstream
Marun No.7 Bandar Imam 1,100 2008
Arvand No.8 Bandar Imam 1,100 2010-2011
Arya Sasol No.9 Assaluyeh 1,000 Q407
Jam No.10 Assaluyeh 1,300 Q407
Kavyan Petrochemical No.11 Assaluyeh 2,400 2012
Persian Gulf Petrochemical No.12 Assaluyeh 1,900 2012
Ilam Petrochemicals No.13 Ilam 500 2010
No.14 Assaluyeh 1,200 2013
Boushehr Petrochemical No.15 Assalyueh 670 2014
Kuwait Olefins II Shuaiba 850 2008
Oman OPIC Sohar 800-1,000 2011
Qatar Qapco Mesaieed 200+ 2011
Ras Laffan Olefins Co Ras Laffan 1,300 2009
QP-Honam Mesaieed 900 On hold
QP-ExxonMobil Ras Laffan 1,300 2012
QP-Shell Ras Laffan 1,200 2012
Saudi Arabia Petrokemya 960,000 Q109
Petrokemya 1,300,000 2012
Sharq Jubail 1,300,000 Q308
JCP Jubail 300,000 Q108
NCP 1,200,000 2011
Petro-Rabigh Rabigh 1,300,000 H109
Ras Tanura Integrated Petrochemical Co Ras Tanura 1,200,000 2012
Saudi Aramco/Sabic Yanbu 2015
Saudi Ethylene and Polyethylene Co - (SEPC) 1,000,000 Q408
Saudi International Petrochemical Co - (Sipchem) 1,350,000 2010-2011
Saudi Kayan Petrochemical Co 1,350,000 2010
Yanbu National Petrochemical Co - (YanSab) Yanbu 1,300,000 H208
Source: Chemical Week
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There is a danger in over-reliance on Asian markets, which are likely to see a moderation in growth as
many new petrochemical plants come online. At the same time, these markets will see a rise in
petrochemicals capacity, raising the prospect of global over-capacity. China is a particular case for
concern. It is the main target for new capacity, but it is ramping up its own domestic production as well. It
is also committed to propping up the sector. In February 2009, Beijing approved a plan to revive growth
in China’s petrochemical producers as part of its stimulus efforts.
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UAE Market Overview
The UAE’s share of petrochemicals production in the GCC is estimated at 7.0%. The industry makes up
22% of the country’s manufacturing sector, with local production meeting 60% of domestic plastic
demand. The petrochemical sector is valued at AED18bn (US$4.9bn), providing an important source of
material for the plastics industry. The UAE is the second-largest producer of plastic products in the GCC
after Saudi Arabia. Around 260 companies are involved in plastic manufacturing in the UAE, with a
combined capacity of 300,000tpa.
Borouge 2 is to join its predecessor by the end of this decade, representing the second major development
of the UAE’s petrochemical sector. Borouge 1, the US$1.2bn complex – a 600,000tpa cracker and a two-
line 450,000tpa PE unit – was brought onstream in December 2001 at Ruwais, Abu Dhabi. Borouge 1 is a
60:40 JV between Borealis and Adnoc, and was the first plant in the Middle East and Asia Pacific to use
Borealis’ proprietary Borstar bimodal polymerisation technology. The technology allows production of
high, medium and linear low-density PE products that are used in flexible and rigid packaging, and the
pipe, wire and cable industries. In April 2008, it was reported that Borouge had initiated a feasibility
study to expand its polyolefin operations further. The planned Borouge 3 development would expand
production by an additional 2.5mn tpa of polyolefins and would include a LDPE unit. It is believed that
the extra capacity will help the company to keep up with demand for special polyethylene and propylene
in the Middle East and Asia.
The UAE has a strong and growing base chemicals sector, which utilises methane, ethane and gas liquid
feedstock in the petrochemicals units. In common with other Middle East nations, UAE benefits from
low-cost, accessible oil and gas reserves, although its feedstock availability is less than some of its
neighbours in the region. Feedstock is available at reduced rates under a government measure designed to
promote the non-oil sector, providing producers with a cost advantage for export markets. On the
downside, this has caused problems in trade with EU members, with Brussels citing subsidised feedstock
supplies as giving an unfair advantage. Abu Dhabi is keen to develop a petrochemical sector and wants to
encourage investment in special economic zones.
Table: The UAE’s Petrochemicals Sector – Cracker Capacity Data, 2006-2013 (‘000 tpa)
2006 2007 2008 2009f 2010f 2011f 2012f 2013f
Borouge I, Ruwais Abu Dhabi 600 600 600 600 600 600 600 600
Borouge II, Ruwais Abu Dhabi na na na na 1,450 1,450 1,450 1,450
f = forecast; na = not available. Source: Borouge, BMI
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Petrochemicals Business Environment
BMI’s risk scoring in the petrochemicals sector is based on dynamic scores that reflect on future growth
as well as current capacities and the size of the internal market, along with investment risk assessments of
the political, economic and regulatory environments. The UAE petrochemicals industry business
environment is fairly attractive in regional terms due to abundant, cheaply extractable feedstock supplies,
a low risk business environment in general, and the fact that it is well placed geographically to export to
Asia. However, a narrow production portfolio and current low production capacity relative to potential
feedstock are primary reasons for a constrained growth. In BMI’s Middle Eastern Petrochemicals
Business Environment Rankings matrix, the UAE has a score of 58.4 points, 5.8 points behind Qatar and
2.1 points ahead of Kuwait. The UAE’s score has fallen 1.3 points this quarter due to deterioration in its
country risk ratings. However, it has risen from fourth to third place as a result of a larger decline in
Kuwait’s score. The two states have jostled for third place in recent months, but Kuwait as suffered as a
result of policy reversals in the refining and petrochemicals sectors which has adversely affected its
market risk score, while its overall country risk rating as fallen, in line with global economic trends. BMI
believes that it is unlikely the UAE will raise its ranking further with Saudi Arabia and Qatar continuing
to lead the Middle East rankings over the next five years, even with the additional capacity provided by
the second phase of the Borouge complex in 2010. However, it is likely to hold on to its third place, with
the expansion of Borouge and the proposed Chemaweyaat 1 bolster its petrochemicals capacities.
Table: Middle East And Africa Petrochemicals Business Environment Ratings
Limits of potential returns Risks to realisation of returns
Country Petrochems
market Country
structure Limits Market
risks Country
risk Risk Petrochemicals
rating Rank
Saudi Arabia 83.3 67.2 77.7 60.0 69.0 66.3 74.3 1
Qatar 63.3 55.4 60.5 85.0 67.7 72.9 64.2 2
UAE 43.3 69.1 52.3 70.0 73.8 72.7 58.4 3
Kuwait 46.7 74.9 56.5 40.0 62.7 55.9 56.3 4
Iran 70.0 47.6 62.2 10.0 54.3 41.0 55.8 5
Israel 33.3 78.8 49.2 80.0 66.9 70.8 55.7 6
South Africa 43.3 57.4 48.3 80.0 58.6 65.0 53.3 7
Egypt 40.0 53.8 44.8 40.0 58.2 52.8 47.2 8
Turkey 40.0 48.0 42.8 75.0 47.1 55.5 46.6 9
Algeria 16.7 49.6 28.2 40.0 6.5 51.5 35.2 10
Nigeria 10.0 29.1 16.7 20.0 52.2 42.6 24.4 11
Scores out of 100, with 100 highest. Source: BMI
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Limits Of Potential Returns
This rating is a composite of our score for the domestic ‘Petrochemicals Market’ and the ‘Country
Structure’ score, which assesses physical, financial and trade infrastructure. In this category, the UAE
scores 52.3 points, the fifth-highest in the region and 0.9 points ahead of the regional average of 51.4
points.
In terms of BMI’s ‘Petrochemicals Market’ rating, which measures our combined scores for current
capacity in ethylene and polymer production as well as five-year growth projections for cracker
capacities, the UAE scores 43.3 points, 3.4 points below regional average. Abu Dhabi-based Borouge
plans to increase its polyolefins production capacity to 620,000tpa in 2008, from 574,000tpa in 2006 and
518,000tpa in 2005. Increased capacity will be provided by the installation of a sixth furnace, which will
provide extra ethylene. It is targeting production at 2mn tpa by 2010 at its Ruwais plant. The 1.45mn tpa
Borouge 2 cracker, due onstream in 2010, is set to provide much of the feedstock for the increased
capacity. Meanwhile, in February 2009, Abu Dhabi launched the company that will oversee the
development of the largest petrochemicals complex in the world. Chemaweyaat has been established with
initial capital of AED500bn (US$135.9bn). Ownership will be split between IPIC (40%), Abu Dhabi
Investment Council (40%) with the remainder held by the Adnoc. When the development is completed it
will have the capacity to export 6mn tonnes of petrochemicals per year. It is estimated that the first phase
of construction – scheduled to commence in 2013-14 – will need around US$20bn in investment. In
terms of the UAE’s ‘Country Structure’ rating, which measures financial and physical infrastructure and
trade bureaucracy, the UAE scores 69.1 points, the second-highest level in the Middle East and Africa
after Israel and 8.9 points ahead of the regional average. On the financial front, UAE provides good
opportunities. There are a large number of free zones, primarily located in Dubai, which offer tax
holidays and relaxed conditions on foreign ownership. However, the nation needs to strengthen its
financial system to fully leverage the opportunities presented by new projects and companies. Meanwhile,
the UAE’s economy is facing falling demand for exports, weakness in the construction market, job losses
and increased investor caution, which will have a negative impact on domestic sectors such as
petrochemicals. In February 2009, Abu Dhabi's economic advisory board claimed that a country-wide
stimulus package is necessary to head off recession. The report, released on February 8 by the Abu Dhabi
Council for Economic Development (ADCED), called for a 'comprehensive economy stimulant package',
covering the UAE as a whole and encompassing public spending on infrastructure and mega projects. If
implemented such a plan could involve sizeable investment in the petrochemicals sector, which is seen as
a way of diversifying revenues.
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Risks To Realisation Of Returns
This rating comprises the ratings for ‘Market Risks’ and ‘Country Risk’, weighted towards ‘Market
Risks’. In this category, the UAE scores 72.7 points.
In the ‘Market Risks’ category, which measures the regulatory environment of the petrochemical sector,
the UAE scores 70 points, 6.5 points above the regional average. Regulations concerning the
petrochemicals sector are in line with the regulatory system governing investment and trade in other parts
of the economy, but the development of the petrochemicals sector is constrained by the availability of
ethane feedstock, which is dependent on imports from Qatar. The UAE's investment climate is becoming
more clement for foreign direct investors: the federal government, led by Abu Dhabi, has made
significant headway in the past five years in increasing the role of the private sector. Mohammed Omar
Abdullah, secretary of the department of planning and economy, stated in February 2009, that the Abu
Dhabi government is planning to take significant steps to support investment in the region. The
government will introduce several new laws to encourage investments from local and foreign investors in
this era of global economic downturn.
Yet the overall legal framework continues to favour local over foreign investors. The average tariff rate is
just 4%, while free trades zones offer numerous incentives, such as exemptions from taxes and duties.
The WTO has urged the authorities to prioritise the rationalisation of the trade regime in line with plans
for uniform customs procedures among the six members of the GCC.
In terms of its ‘Country Risk’ rating, which covers the long-term economic, financial and political risks
and the structure of the economy, the UAE scores 73.8 points. This is the highest score in the region and
14.0 points above the regional average. Growth has been driven, over the last few years, by ample oil-
derived liquidity, which has boosted government and consumer spending power and investment, and
enabled the government to provide a very favourable tax environment for businesses operating in the
emirates. We see all of these factors continuing: the government is not going to risk political stability by
cutting spending, particularly when it can afford not to. Meanwhile, in the event of a deteriorating
economic scenario, Abu Dhabi would be likely to mobilise its huge financial resources – the value of its
sovereign wealth fund was estimated at US$875bn pre-credit crunch – to engineer some form of rescue
package, either directly or via the federal government.
The UAE’s Business Environment Outlook
Introduction
The UAE has some of the best physical infrastructure in the Gulf region, and combined with its relatively
open economy and low tariff regime, it has established itself as a major trade hub. However, the
breakneck speed of its recent economic expansion has raised some problems; construction of housing,
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transport links and other facilities has struggled to keep pace with population growth, leading to
congestion, supply bottlenecks and rising house-price inflation. The latter remains a major concern in the
business community, as currency depreciation against the euro in particular has raised operating costs and
increased the difficulty of attracting skilled foreign workers.
Latest Developments
A recent spate of events has raised concerns over the UAE's business environment, adding to existing
questions surrounding its political stability. As ever, the construction and real estate industries are at the
heart of the matter. A riot by labourers in Ajman on March 31 came hot on the heels of a violent protest
by workers in Sharjah in mid-March. The riots in Ajman saw 400 workers from a local engineering
company attack company vehicles and refuse to return to work. Although less severe than the Sharjah
protest, where 1,500 workers burnt cars and buses and damaged the offices of contractor Drake & Skull,
the Ajman incident once again centred around pay levels. The labourers reportedly demanded an AED200
monthly hike in their food allowance to reflect the recent increase in food prices in the UAE.
Meanwhile, in Dubai in early April 2008, local property developer Damac announced that it was pulling
out of its Palm Springs beachfront development, part of the larger Palm Jebel Ali manmade island project
being led by Nakheel. The Palm Springs development was already severely behind schedule –
construction had not even begun at the end of March, despite an original completion deadline of
December 2007. The decision provoked consternation and anger among investors; a group of almost 60
UK-based investors reportedly gave Damac until April 11 to change its mind regarding the cancellation or
face legal action. The ultimatum appears to have worked: on April 16, the company announced that it had
reversed its cancellation decision.
This episode appears to have sparked fear among many would-be investors in the UAE. In a poll carried
out by Arabian Business, two-thirds of respondents said that the cancellation had made them reconsider
buying property off-plan and had made them ‘very cautious about the Dubai property market’. The
remaining third said that they might consider buying before construction had begun but that it would
depend heavily on the reputation of the developer involved. Dubai has a large secondary market for off-
plan real estate, which many investors have used to buy into the Palm Springs development (paying the
original buyers a significant premium).
At a time when risk aversion among real estate investors is rising, Dubai has also been hit by several
major property fires. On 26 March 2008, an explosion at an illegal fireworks warehouse killed eight
people and caused an estimated AED600mn worth of losses to businesses in the Dubai Industrial City
area. Under its obligation to support Dubai's industrial sector, the city's management has been forced to
make 1.5mn square feet of warehouse space available at a reduced rate to businesses affected by the
blaze. This was followed on April 1 by a fire at the Naif Souq in the Deira district of Dubai. The blaze,
reportedly started by an electrical fault, destroyed more than 200 shops.
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Foreign Direct Investment
Foreign Investment Policy
The UAE's investment climate is becoming more clement for foreign direct investors: the federal
government, led by Abu Dhabi, has made significant headway in the past five years in increasing the role
of the private sector. Yet the overall legal framework continues to favour local over foreign investors – a
fact that partly reflects the benign macro environment in light of the country's substantial oil revenue
windfall. This has endowed local and regional Gulf investors with substantial liquidity, disincentivising
the search for new FDI sources from outside the region.
Change may be on the way. In June 2007, the government said a new companies’ law would open some
areas within the services sector to full foreign ownership while also allowing greater foreign participation
– up to 100% – in other areas such as financial services. This is likely to be enacted in 2008. At present,
foreign shareholders may only hold up to a 49% equity interest in limited liability companies; indeed, all
companies established in the UAE are required to have a minimum of 51% national ownership, although
profits may be divided differently. In the insurance sector, companies must be 75% owned by a UAE
national or 100% by a UAE corporation.
Full foreign ownership is generally only allowed within economic free zones. In order to do business in
the UAE outside the free zones, a foreign business must usually have a UAE national sponsor, agent or
distributor, which once chosen, has exclusive rights. In order to bid for federal projects, a contractor must
be at least 51% owned by UAE nationals, and tenders must be accompanied by a bid bond – an
unconditional bank guarantee for 5% of the value of the bid. However, government tendering practices do
not live up to international standards, and re-tendering is common.
On the positive side, the absence of income tax compensates for the restrictive investment environment.
FDI figures remain difficult to verify, though data from UNCTAD claims that FDI inflows totaled
US$8.4bn in 2006, with much of it attracted to the booming real estate and construction sectors. The UAE
is now the Gulf’s second-biggest FDI destination after Saudi Arabia. Perhaps even more impressive,
given the massive investments made by UAE firms and individuals outside the Emirates, the country has
more inward FDI stock by foreigners than nationals’ outward FDI stock in foreign countries. According
to a Dubai Chamber of Commerce & Industry report in 2007, during 1997-2006, the average net inward
FDI flows as percentage of gross fixed capital formation was 17% for UAE.
Abu Dhabi is preparing to offer international oil companies access to its gas deposits for the first time. In
2007, Abu Dhabi National Oil Corporation announced plans to set up a new operating company in
partnership with IOCs to extract, process and supply some 3bn cubic feet a day (cf/d) of onshore sour gas.
Until now, the main destinations for FDI have been ICT and software, tourism and textiles. The main
sources of FDI are the UK, the US and India.
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Industry Trends And Developments
Abu Dhabi
The UAE’s petrochemical developments are concentrated in Abu Dhabi, which owns the fifth-largest oil
reserves in the Middle East and hosts most of the olefins and polymer production capacity in the UAE.
Despite the global economic downturn, Abu Dhabi continues to press ahead with its plans to develop its
petrochemicals industry and has made strategic acquisitions in the downward market.
In February 2009, the government-owned International Petroleum Investment Company (IPIC) agreed
to buy Canada’s Nova Chemicals, one of North America’s largest plastics producers. In April 2009,
Nova Chemicals shareholders agreed to sell the company to IPIC for US$2.3bn. The deal, which will
allow Nova to work independently of IPIC, was expected to be completed in late May or early June. In
mid-May, the EU regulatory authorities approved the acquisition. Under the agreement, IPIC said it
would provide a US$250mn credit backstop facility to maintain Nova’s liquidity. In Q109, Nova
Chemicals posted a net loss of US$123mn compared to a net profit of US$52mn in Q108. The company’s
sales revenue stood at US$818mn, down 57% y-o-y. Its olefins and polyolefins business segment reported
adjusted EBITDA profit of US$13mn, up from the adjusted EBITDA loss of US$210mn in Q408 but
lower than adjusted EBITDA of US$246mn in Q108. The decline year-on-year was related to a higher
rate of decline in selling prices than feedstock costs, leading to a fall in margins at a time of falling sales.
In April 2009, Dubai Multi Commodities Centre (DMCC) announced that three Asian petrochemical
companies began operations in Dubai as part of the DMCC free zone, including PTT Polymer
Marketing DMCC (owned by Thailand’s PTT Polymers), Titan DMCC (owned by Malaysia’s Titan
Chemicals Corporation) and SCG Plastics DMCC (owned by Thailand’s SCG Chemicals). They are
using the DMCC as a base to market products throughout the region, taking advantage of a 50-year tax
holiday, 100% business ownership and full ownership of business premises guaranteed as part of the
zone.
IPIC has been investing in companies worldwide with the aim of developing Abu Dhabi’s petrochemical
sector. In January 2009, IPIC CEO Khadem al-Qubaisi said the company plans to increase its portfolio,
currently worth around US$12bn to US$15bn, to as much as US$20bn over the next five years, according
to reports. Among other recent investments, in October 2008 it bought a 70% stake in German firm MAN
Ferrostaal AG, which builds petrochemical, oil and gas plants.
The acquisitions come as Abu Dhabi prepares to develop Chemaweyaat, the world’s largest
petrochemical complex. According to reports, the ruler of Abu Dhabi signed in February 2009 a decree
that established a joint venture between IPIC, the Abu Dhabi Investment Council and Adnoc to build the
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complex. The first phase of the Chemaweyaat project, which includes a naphtha cracker, will receive
US$20bn in investment. The complex, to be located at Taweelah in Abu Dhabi, is expected to begin
operations in 2013-2014.
Manufacturing at the Abu Dhabi Polymers Park is expected to start by the end of June 2009. More than
60 plastics manufacturers are expected to be based at the industrial park by 2015, with investment
anticipated to hit US$4.5bn by that time. More than 60% of the products made at the park will be for
export, according to Emirate News.
Meanwhile, Borouge, a joint venture between state-run Adnoc and European petrochemical giant
Borealis, is moving ahead with its expansion plans. The multi-billion dollar Borouge 2 project – one of
the largest petrochemical projects in the Middle East – is due for completion in 2010. Borouge 2 will
raise production capacity from the current 600,000tpa to 2mn tpa of polyolefins. It will include one
540,000tpa Borstar technology-enhanced PE unit and two 400,000tpa Borstar PP units.
The new expansion will be located next to Borouge’s existing petrochemical complex in Ruwais. The
new capacity will be marketed mainly to the Middle East and Asia Pacific, targeting high-end
applications in the pipe and high performance packaging areas. The work for the front-end engineering
design (FEED) for an olefins conversion unit was awarded to ABB Lummus Global. Meanwhile, the
FEED for the polyolefin units was awarded to Fluor Mideast. Maersk Logistics is acting as Borouge’s
consultant to advise on the supply chain concept for Borouge 2 products.
Borouge is continuing to invest in operations in China to expand the market for the complex in Ruwais.
In December 2008, the company began construction on a new logistics hub and compounding facility in
Shanghai, China. The logistics hub is due to begin operations in May 2010. The plant will produce
50,000tpa and serve the automotive and electrical appliance sectors. Borouge also announced plans in
October 2008 to build a logistics hub in Guangzhou, China. Borouge has said that it ‘expects to take
further advantage of the country’s status as the world’s fastest growing automotive market and its drive to
become the biggest car producer in the world within the next 10 years’.
Borouge is planning a new petrochemical complex to be located at Ruwais, with new facilities coming
onstream in 2012. The expansion project would complement the Borouge 2 polymer project. The
company is also considering starting base chemical production. If all these projects are realised, Ruwais
would become one of the largest plastics and chemical production complexes in the world.
In April 2009, Borouge announced plans to commission a front-end engineering and design study for the
Borouge 3 project to boost total production capacity to 4.5mn tpa. The project aims to expand its
polyolefin manufacturing capacity by 2.5mn tpa in Q413. It will comprise an ethane cracker and PP and
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PE units. According to Borealis, Borouge 3 will capture additional feedstock availability resulting from
the upstream refinery and gas processing expansions of Adnoc.
Dubai And The Northern Emirates
Dubai is the second most important emirate in terms of both production and trade. The emirate
contributes around 70% of the UAE’s foreign trade in petrochemicals products. Of the 260 plastic
manufacturing plants in the UAE, just over 100 are located in Dubai. Nearly half of Dubai’s plastic
manufacturing capacity is dedicated to the production of plastic pipes. The number of petrochemicals and
plastic companies located at Dubai’s Jebel Ali Free Zone increased by over 70% between 2000 and 2005,
at an annual rate of around 14.6%. However, just 40% of raw materials used in the Dubai plastics
industry are sourced from the UAE, with the rest imported from Europe, the GCC, Asia and South
America.
Its port facilities handle much of the petrochemicals and plastics exported from the UAE. Dubai-based
global port operator DP World was set to open Terminal Two at its Jebel Ali port facility at the end of
February 2009. The terminal will allow
the port to accommodate the extra
containers from the Port of Rashid, which
is transferring some of its operations to
Jebel Ali.
The new container facility will increase
Jebel Ali's handling capacity by 5mn
twenty-foot equivalent units (TEUs),
bringing the port's total annual TEU
handling capacity to 14mn TEUs. Jebel
Ali is DP World’s flagship port, and
container throughput has been growing
steadily. In 2005 the facility handled
6.39mn TEUs. By 2008 it was handling 12mn TEUs.
The completion of Terminal Two will add extra capacity to port and will enable Jebel Ali to meet
increased throughput demand if necessary. The terminal was designed with a view to taking on the
operations of the Port of Rashid, and container operations at the Rashid started being transferred to Jebel
Ali in the third quarter of 2008.
Jebel Ali will be capable of handling 14mn TEUs a year, but BMI questions whether in the current
downturn, the demand will be there. A number of shipping companies have been cutting their Asia-
Europe routes and this has had an impact on the Middle East’s port sector, as a number of Arabian Gulf
Dubai’s Plastics Sector
2006
Packaging 18%
Fibreglass 20%
Pipes48%
Misc 6%
Sheets 4%
Containers 4%
Source: MIST News
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ports were stop-offs on these routes. Meanwhile, news that two major shipping companies, Maersk and
CMA CGM, are prepared to go round the Cape of Good Hope rather than the Suez Canal in a bid to save
costs does not bode well for Middle Eastern ports. DP World’s senior vice president of commercial and
corporate strategy is quoted by Emirates Business as saying that ‘although Jebel Ali will continue to
grow this year, regional container throughput will decline to single digits in 2009, before re-bounding in
2010.’
Smaller emirates are also benefiting from growth in the petrochemicals sector, despite the lack of
upstream activity. The country’s third-largest emirate, Sharjah, started up its first petrochemical plant in
early 2008 – an ammonia unit located in the Hamriya free zone with a capacity of 1,180 tonnes per day.
The plant was bought second-hand from the US by the client, Green Dome Petrochemicals, and is being
built by Petron Emirates Contracting and Manufacturing Company. It is part of a US$200mn
investment by Green Dome’s parent company, Oman Chemicals and Pharmaceuticals Company. A
urea unit with a capacity of around 1,000 tonnes per day will be integrated with the ammonia plant and
was due to come online in 2008.
Growing demand for plastic bottles and containers is encouraging growth in capacity in polymer
production. In Ras al-Khaimah, JBF Industry – a JV between JBF, a major polyester producer in India,
and government-controlled Ras Al Khaimah Investment Authority (RAKIA) – began production of
PET film chips in March 2008, producing 200 tonnes per day. The PET film chip line was to start in
December 2007 but was delayed due to technical reasons. The plant also produces 600 tonnes of PET
bottle chips daily.
Meanwhile, Fujairah Plastic Factories, the UAE’s top producer of polymer films for packaging and
plastic bags, is aiming to double production in 2007-2010. It currently manufactures around 24,000tpa of
polymer films at its plants in Sharjah, Ajman and Fujariah. A fourth factory came online in Fujairah’s
new industrial zone in Q108. In the first phase, it will have a capacity of 12,000tpa, but is set to reach
24,000tpa by 2009, potentially doubling the firm’s output of polymer films by the end of the decade.
Much of the growth will be stimulated by foreign demand, with the company exporting 70% of its
production – a level it hopes to maintain. The firm’s directors believe that a rapid increase in capacity is
essential to maintaining competitiveness. Rising oil prices have led to higher polyethylene prices and
have pushed up baseline costs for plastics producers. Raw materials – LDPE and HDPE – typically
comprise 80% of costs for polymer film producers. Fujairah Plastic Factories is hoping that it can muscle
out rivals from the market by increasing capacity and becoming more flexible and responsive to demand.
Related Industries – Developments
The UAE is set to upgrade two oil refineries by end-2011 in order to meet rising domestic demand for
refined products. According to the International Energy Agency (IEA)’s timetable for scheduled upgrades
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in global refining capacity, the two refineries to be upgraded are the Ruwais refinery in Abu Dhabi, which
is operated by Adnoc, and the Jebel Ali refinery in Dubai, which is operated by Emirates National Oil
Company (ENOC).
Although concerns over slowing global oil demand growth, particularly in Asia, mean that export-oriented
refinery projects in the Middle East are being postponed or shelved, refinery upgrades and expansion
projects designed to supply the domestic market are proceeding as local refined products consumption
continues to rise. Middle Eastern regional oil use of 8.24mn b/d in 2001 rose to 10.61mn b/d in 2007. It
should average 10.86mn b/d in 2008 and then rise to around 12.10mn b/d by 2013. The UAE accounted
for 4.24% of 2007 regional consumption, with its market share expected to be 4.57% by 2013.
The Ruwais refinery originally had capacity of 120,000b/d. An upgrade project to expand capacity was
completed in 2005, including refits of existing units and expansion of units for production of unleaded
gasoline and low-sulphur fuel oil. The plant processes crude oil and condensate into light products mainly
for export to Japan and elsewhere in Asia. Fuel oil from Ruwais is sold as bunkers by Adnoc and also used
for domestic electric power generation. According to the December 2007 Oil and Gas Journal Worldwide
Refining Survey, Ruwais had crude distillation capacity of 350,000b/d plus vacuum distillation capacity of
56,680b/d. The IEA report says the upgrade is scheduled to be completed in Q411. The Jebel Ali refinery
has a 70,000b/d LPG-naphtha hydrotreater and a 36,000b/d crude catalytic reformer. The expansion is due
to be completed in Q109.
The UAE had planned a massive expansion of its refining capacity to meet rising Asian demand for
transport fuels. Two major developments were planned: an expansion of the Ruwais plant capacity to
817,000b/d and a new build refinery in Fujairah. Abu Dhabi's investment arm IPIC and US major
ConocoPhillips signed a deal in 2006 for the new refinery with 500,000b/d capability. Conoco pulled out
in 2007 citing rising costs, however, and IPIC announced in March 2008 that the plant’s capacity would
be reduced to less than 200,000b/d. Since then it has been looking for a new European partner for the
project but has reported no progress. The global financial crisis and concerns over the rate of Asian growth
means this project is unlikely to proceed. The Ruwais project upgrade looks more secure, although it is
uncertain as to whether capacity will be expanded to as much as 817,000b/d. In addition, it may make
sense to delay the project in order to take advantage of falling construction costs, meaning there could be
some risk to the completion date of Q411 being achieved.
Rocketing domestic demand is providing the impetus behind a huge boom in Abu Dhabi’s gas industry.
Over the last decade, gas consumption in Abu Dhabi has doubled. The development of natural gas fields
also results in increased production and exports of condensates, which are not subject to OPEC
production quotas. Dubai’s gas consumption has been growing by nearly 10% annually due to expansion
of the emirate’s industrial sector, a switch to gas by its power stations, and the need for an enhanced oil
recovery (EOR) system based on gas injection for its mature oilfields. Overall UAE gas consumption is
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forecast to reach at least 64bcm by 2012. Production of gas is on the rise, with 80bcm achievable by 2012
– providing exports of 15.7bcm.
The UAE is considering revising its system of oil and gas concessions to spur technological development
and introduce more competition into its upstream segment. Once Adnoc has concluded its sour gas
licensing round with international oil companies (IOCs), it is expected that the company will focus on
reforming the concessions system as it seeks to boost production capacity from 2.9mn b/d in 2006 to
3.5mn b/d by 2011/2012. BMI estimates that actual production is likely to be around 3.2mn b/d by 2012.
We assume 2007 production averaged 2.85mn b/d (including gas liquids), providing exports of 2.56mn
b/d. There is risk on the downside to these estimates, and whether a reform of the country’s concessions
will provide the boost the UAE needs to achieve its output targets is questionable.
Table: Major UAE Oil And Gas Concessions
Concession Location Output Capacity Expiry Equity stakes
Abu Dhabi Co for Onshore Oil Operations (ADCO)
Operates onshore and in shallow
coastal waters of Abu Dhabi 1.4mn b/d
1.45- 1.5mn b/d 2014
Adnoc 60%, BP 9.5%, Royal Dutch Shell 9.5%, Total 9.5%, ExxonMobil
9.5%, Partex 2%
Abu Dhabi Marine Operating Co (Adma-Opco)
Operates offshore Abu Dhabi
510,000-520,000b/d 550,000b/d 2018
Adnoc 60%, BP 14.66%, Total 13.33%, Japanese
Oil Development Co. 12%
Zakum Development Co (Zadco)
Operates Upper Zakum, Umm Al
Dalkh & Satah fields 550,000b/d 600,000b/d 2018 na
Zadco Upper Zakum na na 2026
Adnoc 60%, ExxonMobil 28%, Japanese Oil
Development Co 12%
na = not available/applicable. Source: Reuters
Currently there are a number of large concessions in the UAE covering multiple fields, held by Adnoc as
majority stakeholder in partnership with IOCs. IOCs from Japan, France, Britain and elsewhere own up to
40% of the energy sector in Abu Dhabi, the only Gulf oil producer to have retained foreign partners on a
production sharing basis. As well as holding the majority stake in all upstream oil ventures, Adnoc is
currently planning a limited further opening of oil production to foreign firms. The initial asset sale
involved 28% of the offshore Upper Zakum field to US major ExxonMobil.
Several options are being considered for the concessions, including splitting them into their individual
fields and issuing competitive tenders for the fields’ development. Although the concessions are not due
to expire until 2014 at the earliest, it is expected that renegotiations will begin early. This may provide the
opportunity for smaller players to get a toehold into the UAE’s upstream segment and may open the door
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for national oil companies (NOCs), particularly from Asia, to get involved. Nevertheless, the UAE is
unlikely to take any action that will put at risk its solid relationship with existing IOC partners.
Plastics Futures
The Dubai Gold & Commodities Exchange (DGCX) was due to introduce plastics futures contracts on
February 5 2009 but postponed the launch after receiving feedback from members of the plastics industry.
‘Although the product is ready to launch, the plastics industry needs more time to prepare for trading the
contracts, particularly in light of the current economic climate,’ James Bernard, executive director of
plastics at the Dubai Multi Commodities Centre, said when the postponement was announced.
A total of 12 futures contracts in plastics were to be launched, covering all polymers across the Middle
East and Asia. The first contracts to be traded were for LDPE and PP, with the DGCX claiming the move
would offer protection against market instability. Malcolm Wall Morris, CEO of the DGCX, said the
exchange would keep working to help ready industry participants and launch the contracts when the
industry is prepared. Dubai Multi Commodities Centre has a 51% stake in DGCX while India’s Financial
Technologies Group and Multi Commodity Exchange (MCX) holds a 49% stake.
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Industry Forecast Scenario
Table: The UAE’s Petrochemicals Projects
Product Investors Capacity (000 tpa) Location Completion
Ethylene Borouge 1,450 Ruwais, Abu Dhabi Q310
Propylene Borouge 800 Ruwais, Abu Dhabi Q310
LLDPE Borouge 540 Ruwais, Abu Dhabi Q310
PP Borouge 800 Ruwais, Abu Dhabi Q310
Source: BMI
The GCC produces approximately 30% of the most commonly used petrochemical products and accounts
for 7% of worldwide production. However, by 2010 this is expected to rise to 20% of global production.
The UAE in particular is investing heavily in its petrochemicals industry and is expected to triple
capacity over the next decade.
Borouge is targeting production at 2mn tpa by 2010 at its Ruwais complex. The 1.45mn tpa Borouge 2
cracker, due onstream in 2010, is set to provide much of the feedstock for the increase in capacity.
According to plans announced in April 2008, Borouge is exploring Borouge 3, which would entail an
additional 2.5mn tpa of polyolefins capacity coming online by end-2014. This would more than double
the company’s overall capacity to 4.5mn tpa. However, expenditure on the Borouge 2 project has
increased nearly twofold from initial estimates to US$4.5bn, including the US$1.8bn Borstar technology-
based polyolefins units, and US$1.3bn ethylene and metathesis plants. Two of the new units will make
PP, each with 400,000tpa capacity, and one unit will have a 540,000tpa polyethylene capacity. The
expanded complex will be the largest plastics and petrochemicals complex in the Middle East and one of
the largest in the world. Presently, Borouge supplies 35% of its output to the Middle East, with the rest
exported to Asian markets. The company is hoping that Asian markets will absorb the increase in output.
Borouge is anticipated to grow to twice its current size by 2020, with further development after Borouge
2. Between 2010-2020, it aims to boost capacity potentially by 2mn tpa through 2020. However, Borouge
has abandoned its plans to expand its portfolio by including basic petrochemicals. Adnoc and Borealis
had been looking at a plan to build a propane dehydrogenation facility and a major cumene-phenol
complex.
The commitment to the Borouge 3 project indicates that the partners are confident of a turnaround in the
global economy and that the complex is competitive enough to survive against European and Asian rivals.
The PP plants are expected to consume propylene supplied by local refineries. The LDPE unit, Borouge’s
first, will supply the wire and cable infrastructure market. However, exact capacities, including the
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cracker, have not been disclosed, although BMI believes it will be as large as the Borouge 2 cracker,
which has a production capacity of 1.5mn tpa. Combined polyolefins capacity will be 2.5mn tpa, of which
BMI believes up to 1mn tpa will be PP. BMI has projected start-up for commercial production is Q114.
Another major upcoming development is the proposed 7mn tpa Chemaweyaat Complex 1, which includes
a 1.5mn tpa naphtha cracker, and aromatics, phenol and derivatives plants at Taweelah, to be completed
in 2013-2014. It is envisaged the complex will be the world’s largest grassroots integrated chemical
project, although by end-2008 no further details were available on the complex’s capacities. BMI
believes it is unlikely that the cracker and related units will be completed before 2014.
One of the chief problems the UAE’s petrochemical sector will face is not necessarily a lack of
competitiveness, but a lack of feedstock. The UAE is also expanding its upstream capacities. Overall
UAE crude production could reach 3.23mn b/d by 2013. We are assuming total 2009 production
averaging 2.92mn b/d (including gas liquids), providing exports of 2.43mn b/d. This represents a decline
from the estimated 2008 level, thanks to OPEC policy. Overall UAE gas consumption is forecast to reach
66.7bcm by 2013. Production of gas is on the rise, with 90.0bcm achievable by 2013, providing exports
of 23.3bcm. Borouge is confident upstream supply will be sufficient for its expansion programme.
Although BMI has in the past voiced concerns that Borouge 3 could be scaled back or scrapped
altogether due to a lack of feedstock, Borouge’s feasibility studies show that there is enough feedstock to
supply the planned plants without having to rely on heavier feedstocks such as naphtha.
At the same time as Borouge’s cracker is due to come online in 2010, growth in Asian markets is due to
moderate. Nevertheless, Borouge anticipates that polyolefin demand in the Middle East and Asia is
expected to grow by 6-8% per annum until 2010, and should absorb the capacity expansions.
Borouge has no PP production capacity as yet, although it does market Borealis PP products regionally.
However, Borealis is a leading international PP producer and innovator, and recently produced the first
Borstar PP cups using propylene from Lurgi’s methanol-to-propylene (MTP) process at Statoil’s
methanol plant in Norway. Whether Borouge is a candidate for the new MTP process largely depends on
the availability of methanol – a possibility, given the volumes of competitively priced products within the
region.
Meanwhile, the global petrochemicals industry is being roiled as a slump in economies around the world
curbs demand and financing for research and expansion tightens. The current environment is expected to
weed out less competitive participants and drive consolidation in the sector. According to a survey of
chemicals CEOs conducted by PriceWaterhouseCooper’s in late 2008, two-thirds of respondents said
they expect to postpone investments due to an anticipated rise in the cost of financing. One-third of the
survey respondents said they expect to complete a cross-border merger in the next year.
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However, in the UAE the slowdown in construction activity could result in lower capital expenditure
costs for large-scale projects, providing that funding can be secured. High capital expenditure
requirements have discouraged investment in the UAE, and this situation could now begin to change.
Meanwhile, the liquidity situation should be better in the UAE than many other markets, because many of
the major projects are government-owned. However, those that do rely on private financing from banks
can expect greater scrutiny and may even face postponement.
Sustained demand growth in the Asia Pacific region, led by China’s increasing demand for imported
chemicals products, continues to be a major factor so far as the global petrochemicals sector’s demand is
concerned. Asia is a key export market for Borouge, as clearly indicated by Adnoc and Borealis’s
decision to establish a separate company in Singapore to market Borouge’s output. A slowdown in the
rapid industrialisation programmes in China, which could have a severe effect on the global
petrochemicals environment, and particularly on Middle Eastern exporters such as the UAE, which is
building up capacity in order to target China, remains a threat. Meanwhile, China’s planned stimulus
package for its domestic petrochemicals sector should help the industry develop in the country, and could
potentially help the country to challenge the Middle East in this area.
Table: The UAE’s Petrochemicals Sector, 2007-2013
2007 2008 2009e 2010f 2011f 2012f 2013f
Oil production (‘000b/d) 2,915 2,965 3,025 3,100 3,200 3,300 3,425
Oil consumption (‘000b/d) 450 470 489 509 521 534 553
Oil exports (‘000b/d) 2,465 2,495 2,536 2,591 2,679 2,766 2,872
Gas production (bcm) 49.2 58.0 63.0 70.0 80.0 85.0 90.0
Gas consumption (bcm) 43.2 48.0 52.0 56.0 59.4 62.9 66.7
Gas exports (bcm) 6.0 10.0 11.0 14.0 20.6 22.1 23.3
Refining capacity (‘000b/d) 620 1,000 1,000 1,000 1,000 1,500 1,500
Ethylene capacity (‘000tpa) 600 600 600 1,650 2,000 2,000 2,000
Polypropylene (‘000tpa) 600 620 640 1,940 1,940 1,940 1,940
Polyethylene capacity (‘000tpa) 0 0 0 800 800 800 800
e/f = estimate/forecast; na = not available. Source: Borouge, BP Statistical Review of World Energy, BMI
The UAE has a considerable potential for growth in the plastic industry due to the abundant availability of
feedstock. Development of a domestic petrochemicals industry is now gathering pace, which could
considerably enhance the growth of small and medium enterprises (SMEs) in the sector. A major growth
opportunity for the plastic industry is expected to come from the export market. Large volume plastic
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products, such as plastic pipes used in construction, are unlikely to grow beyond domestic demand.
However, packing products such as plasma bags, sheets, covers and strips have considerable potential for
being exported from the country to several major markets in the world.
Government policy both at federal and emirate level is focused on economic diversification away from
oil. While Dubai is focusing on construction, air transportation and tourism, Abu Dhabi (home to Adnoc)
wants to create a non-oil industrial base, including a larger petrochemical sector.
Macroeconomic Outlook
Growth Outlook Weakening
We believe that the UAE will avoid an economic contraction in 2009, but only just. Further negative
news in the property market has shaken investor and consumer confidence, and growth in these two
components of GDP will drop considerably.
The coming year will be a difficult one for the UAE. We have revised down our growth forecasts once
again on the back of a worsening export sector, weakness in the construction market, job losses and
increased investor caution. It is possible that the country could fall into recession – defined as two
consecutive quarters of negative growth – during the year, but this will be difficult to assess given the
lack of quarterly data provided by the central bank. Overall, we believe that real GDP will grow by 1.0%
in 2009, rising to a healthier 3.4% in 2010. Much of the worst news will come out of Dubai; this is the
Emirate that is most closely integrated with the global economy and the one that has experienced the most
rapid growth in recent years. Abu Dhabi has greater natural wealth thanks to its oil reserves, but economic
weakness in Dubai will undoubtedly have some feed-through effects across all Emirates.
Once again, the property and construction market, particularly in Dubai, is integral to our view. Bad news
has been emanating from the sector for several months, and we have previously highlighted before the
likelihood of price falls in the residential sector in particular, due to oversupply and weakening investor
confidence. What has changed during the last quarter is the stance of property developers. As recently as
October or even November 2008, most major developers were insisting that all their construction plans
remained on track, that financing was not a problem and that they remained confident of finding buyers
for all new projects.
Construction Cancellations Multiply
Now, however, developers are publicly acknowledging the harsh conditions that they face, admitting that
projects may be delayed or cancelled and shedding staff (or warning of future job losses). In December,
Nakheel, one of Dubai's largest property developers (and fully controlled by the government), delayed its
Trump International Hotel and Tower project indefinitely. This sent shockwaves around the industry for
two reasons. First, the project was set to be one of Nakheel’s flagship developments, had attracted
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worldwide media attention and was backed by high profile investors. Second, it already had full funding
in place, construction contracts had been awarded and some units at the development had already been
sold.
The delay is a major blow to Dubai’s international reputation, particularly when combined with Nakheel’s
postponement of other key projects. Much of the Palm Jebel Ali, the second of the firm’s palm-shaped
island projects, has been delayed, as has the Dubai Waterfront and Gateway Towers on the Palm
Jumeirah. These setbacks have reinforced the sentiment that no development in Dubai is safe, a feeling
illustrated by other major project cancellations. Tatweer has told contractors to halt work on its
Healthcare Towers, Sama Dubai has put the Jumeirah Hills project on hold and the Dubai government
itself has put a halt to work on the Meydan Racecourse grandstand (which was already in the advanced
stages and due to be completed ahead of the Dubai World Cup horserace in 2010).
Fewer Flamboyant Investments
In light of these developments, we are now far more bearish on investment spending than we have been in
the past. This is admittedly also partly due to base effects – after three years in which real growth in gross
fixed capital formation (GFCF) averaged an estimated 14.3% annually, an eventual slowdown was
inevitable. However, the sharp contraction in project financing was the major factor in the downward
revision of our forecasts. Some growth will still occur – indeed, there are still many construction projects
ongoing, while government-funded investment will continue in key sectors such as infrastructure. Dubai’s
government announced in early January 2009 that it would ramp up spending on transport, such as the
expansion of the Dubai Metro project, new road building and improvements to Dubai’s port facilities.
The spending plan proves that the authorities are prepared to fall into fiscal deficit in order to shore up the
economy – Dubai is expecting a budget shortfall of AED4.2bn, or 1.3% of its projected GDP. For the
UAE as a whole, we are forecasting government spending to increase by 5.0% y-o-y in 2009, moderating
slightly to 4.0% in 2010. However, with financing far more difficult to come by and buyers far more
cautious, we expect a temporary halt to the sort of megaprojects that have made the UAE famous over the
last 10 years.
Consumers To Rein In Spending
The outlook for private consumption is also less positive. First, job losses are expected during 2009. Staff
are already being shed at many property companies – Nakheel, for example, made 500 of its workforce
redundant in December 2008. The aforementioned project cancellations will lead to lower employment
not just at master developers, but also at construction companies, utilities providers, property
management firms and myriad other companies that have expanded on the back of the property boom.
UAE nationals will be largely insulated, due to generous government benefits; indeed, the majority of the
citizen workforce is already employed in the public sector, which is set to expand over the forecast
United Arab Emirates Petrochemicals Report Q3 2009
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period. So job losses will be concentrated among foreign workers. And whereas in most countries, rising
unemployment would usually lead to an automatic increase in government welfare spending, the vast
majority of foreign nationals have no right to any form of benefit payments.
Faced with a weakening job market, many may therefore return to their home countries, resulting in a
contraction of the total number of consumers. It is too early to judge how far this trend will go, but we
certainly believe that the rapid growth in population necessary for the government to fulfil its own
economic expansion plans is unlikely to occur over the next two to three years. Even if the scale of job
losses remains fairly small, the proliferation of bad news globally, lower property prices and less
generous remuneration packages are likely to rein in consumer spending during 2009 and to a lesser
extent in 2010.
Risks To Outlook
Aside from the property market, the major risks to our forecasts stem from external factors. As a regional
trade hub, the UAE is highly exposed to economic developments across the Middle East, and the Gulf in
particular, via its re-export and shipping revenues. Should the region’s slowdown prove deeper or longer
than currently expected, the UAE is unlikely to be capable of bucking the trend. On the political front, the
conflict between Israel and Gaza has pushed up oil prices slightly. However, given falling global demand
for energy, this will have a limited impact on the UAE’s export revenues, while the fighting (and the
inflammatory rhetoric emanating from Iran) will only serve to raise awareness of political risk among
foreign investors.
Table: United Arab Emirates – Economic Activity, 2005-2013
2005 2006 2007e 2008 2009e 2010f 2011f 2012f 2013f
Nominal GDP, AEDbn 1 508.2 624.6 729.7 991.2 881.5 1011.4 1163.1 1310.0 1387.3
Nominal GDP, US$bn 2 138.4 170.1 198.7 269.9 240.0 275.4 316.7 356.7 377.7
Real GDP growth, % change y-o-y 3 4.5 9.4 7.6 6.6 1.0.0 3.4 4.5 4.3 5.2
GDP per capita, US$ 2 33,703 40,218 44,254 57,249 51,430 57,849 63,965 69,274 70,540
Population, mn 3 4.1 4.2 4.5 4.7 4.7 4.8 5.0 5.1 5.4
e/f = estimate/forecast. Source: 1 Central Bank of the UAE; 2 Central Bank of the UAE, BMI; 3 Ministry of Economy
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Company Profiles
Abu Dhabi National Oil Company (Adnoc)
Overview Company Data
Adnoc is an integrated oil company established in 1971 by the emirate of Abu
Dhabi, the site of 94% of the UAE's crude reserves. The company and its
subsidiaries are responsible for the exploration and production of oil and gas,
providing support services to the hydrocarbons industry, the operation of oil
refineries and gas processing facilities, chemicals and petrochemicals plants
and the storage and distribution of refined products.
Adnoc’s chemicals directorate was formed to implement the company’s
diversification plans in the petrochemicals sector. The business objectives of
the directorate are to add value to Adnoc’s natural resources through
petrochemicals/chemicals establishments, identify market opportunities,
develop strategic business plans, negotiate with potential JV partners, co-
ordinate with the existing ones and implement research and development
(R&D) programmes.
In the petrochemicals sector, Adnoc operates a 60:40 JV with Denmark’s
Borealis, known as Borouge, which has 600,000tpa of ethylene capacity and
450,000tpa of PE capacity.
Ruwais Fertiliser Industries (Fertil), a 67:33 JV between Adnoc and Total,
operates a nitrogen fertiliser plant and markets ammonia and urea primarily to
customers in Asia. Adnoc holds a two-thirds stake, with the remainder held by
the French major. The Fertil plant was commissioned in December 1983 and
is the sole producer of ammonia and urea in the UAE. Located in the Ruwais
Industrial Zone, close to Adnoc’s Jebel Dhanna oil terminal, Fertil was
established to produce fertilisers for local use and export, using onshore
associated lean gas from the Bah and Asab oil fields, as well as non-
associated gas from the Thammama field. In July 2007, Pakistan’s Descon
Engineering signed a contract with Ruwais Fertiliser Industries for engineering,
procurement and construction (EPC) works. The project will increase the urea
production capacity of Fertil by 50% and the project will be completed within
two years. The EPC contract is worth US$177mn.
The plants have fully integrated utility units with storage facilities. At present,
ammonia production has reached 1,340 tonnes per day (tpd), and urea
1,850tpd. The company had granted a project management contract, worth
US$3mn, to Worley Parsons to debottleneck the company’s 690,000tpa urea
unit by 90,000tpa, and to revamp its 350tpd carbon dioxide recovery unit in
Abu Dhabi. The projects were likely to be completed by the end of 2008.
The company exports about 600,000 tonnes of urea annually, including
surplus ammonia. Fertil’s export markets change from year to year, as many
Address
Abu Dhabi National Oil Company (Adnoc) PO Box 898 Abu Dhabi United Arab Emirates
Tel: +971 (2) 602 0000
Fax: +971 (2) 602 3389
Web: www.adnoc.co.ae
Key Statistics
Year established: 1971
Key Personnel
Chairman: HH Sheikh Khalifa Bin Zayed Al-Nahyan
Chief Executive Officer (CEO): Mr Yousef Omair Bin Yousef
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buyers look for short-term contracts or spot deliveries.
The company sells through traders, including ConAgra and Toepfer, to
customers in most countries, while India and Sri Lanka use tenders to
purchase urea. India is expected to become an important market for Fertil in
the future as insufficient gas supplies are likely to make it necessary for India
to import more urea. Further, the domestic UAE agricultural market reportedly
purchases about 12-15% of Fertil’s annual urea production.
Adnoc and Austria-based AMI are to build a US$200mn melamine plant in
Ruwais. Due onstream in the second quarter of 2009, it will produce 80,000tpa
using urea feedstock from Fertil.
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Abu Dhabi Polymers (Borouge)
Overview Company Data
Borouge was established in 1998 to manufacture and sell PE for use in
technically demanding applications, primarily in the flexible and rigid
packaging and construction industries. Borouge is a JV owned by Adnoc and
European polyolefins producer Borealis. Borealis was formed in 1994 when
the Norwegian company Statoil and the Finnish oil company Neste merged
their European petrochemicals operations. Borouge sources feedstock from
the adjacent Adnoc refinery and Gasco plants.
In October 2005, IPIC and OMV acquired 50% of Borealis from Norway-based
Statoil for about US$1.11bn. The increase in IPIC’s stake to 65% from 25%,
and OMV’s stake to 35% from 25%, makes both the companies complete
owners of Borealis. Statoil is expected to remain as a long-term feedstock
supplier to Borealis.
Borouge has invested US$40mn to expand its PE capacity in a US$1.2bn
petrochemicals complex in Abu Dhabi, and produce 580,000tpa of PE. Due to
this expansion, the company fully converted its ethylene production into PE
products, which helped in meeting the needs of the packaging and pipe
industries in regions such as East Africa, Middle East and the Pacific, along
with the North East and South East Asia. The facility comprises a 600,000
tonne ethane-based ethylene cracker and two PE plants, each with an annual
production capacity of 225,000 tonnes of linear high, medium and low-density
PE.
Borouge planned to increase its polyolefins production capacity to 600,000tpa
in 2007 and 620,000tpa in 2008, from 574,000tpa in 2006 and 518,000tpa in
2005. Increased capacity will be provided by the installation of a sixth furnace,
which will provide extra ethylene. It is targeting production at 2mn tpa by 2010
at its Ruwais plant. The Borouge 2 cracker, due onstream in 2010, is set to
provide much of the feedstock for the increase capacity. The new facilities will
also produce PP, although the exact figure is not known. The expanded
complex will be the largest plastics and petrochemicals complex in the Middle
East and one of the largest in the world. Presently, Borouge supplies 35% of
its output to the Middle East with the rest exported to Asian markets. The
company is hoping that Asian markets will absorb the increase in output.
Borouge’s products are used for the manufacture of plastic film and moulding
packaging for the pharmaceuticals, food and beverages, cosmetics and
chemicals industries. The products are also used for the manufacture of high-
pressure pipes, agriculture, mining, water, gas and sewage distribution, as
well as coating of steel pipelines. In addition to promoting its own PE products,
Borouge also oversees the distribution and marketing of Borealis’s speciality
polyolefins in the Middle East and Asia Pacific.
Address
Abu Dhabi Polymers Borouge Tower, Shaikh Khalifa Energy Complex Corniche Road Abu Dhabi U A E
Tel: +971 2 6070300
Fax: +971 2 6070999
Web: www.borouge.com
Key Personnel
CEO: Abdulaziz Alhajri
Vice-President, Corporate Support: Laurence Jones
Vice-President, Supply Chain Management: Mohamed al-Rayyes
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Borouge 2 is due for completion in 2010. The project will raise production
capacity from the current 600,000tpa to 2mn tpa of enhanced polyolefins. It
will include one 540,000tpa Borstar technology-enhanced PE unit and two
400,000tpa Borstar PP units. Borouge 2 is a multi-billion dollar project – one of
the largest petrochemical projects in the Middle East. The new expansion will
be located next to Borouge’s existing petrochemical complex in Ruwais, and is
expected to be complete in 2010. The new capacity will be marketed mainly to
the Middle East and Asia Pacific, targeting high-end applications in the pipe
and high performance packaging areas. The work for the front-end
engineering design (FEED) for an olefins conversion unit was awarded to ABB
Lummus Global. Meanwhile, the FEED for the polyolefin units was awarded to
Fluor Mideast. Maersk Logistics is acting as Borouge’s consultant to advise on
the supply chain concept for Borouge 2 products.
In January 2007, Borouge began the first stage of the construction process,
when it formally signed a US$1.3bn contract with Linde Engineering/CCC for
the construction of a new ethylene cracker. The contract was awarded to
Linde/CCC on a lump sum turnkey basis, with preliminary work already under
way and completion scheduled for 2010. In June 2007, Borouge signed
US$3.1bn of contracts for the Borouge 2 complex, with Tecnimont (Italy) and
Tecnicas Reunidas (Spain). The contract with Tecnimont, worth approximately
US$1.86bn, is for the construction of three new Borstar technology polyolefins
units and associated material handling facilities, laboratory facilities and
marine works. The contract with Tecnicas Reunidas, worth an estimated
US$1.23bn, is for the construction of the offsite and utility facilities for the
expanded plant, and is awarded on a convertible lump sum turnkey basis.
Preliminary work began in mid-2007 and both contracts are scheduled to be
completed in 2010. Also in July, Samsung Engineering won an order worth
US$300mn to build an olefins conversion unit, which is scheduled for
completion by mid-2010. These contracts increase the momentum of the
Borouge 2 expansion. Meanwhile, tenders to develop an ABB Lummus
Global-process metathesis facility at the planned Borouge 2 complex have
been submitted by CTCI, Petrofac International, Daelim Industrial and
Samsung Engineering. The plant will make 750,000tpa of propylene. Borouge
has already signed a US$1.3bn contract with Linde Engineering for the
construction of a new 1.5mn tpa ethylene cracker.
In June 2008, Abu Dhabi Ports Company (ADPC) announced that it had
signed a memorandum of understanding (MoU) with Borouge to provide port
services at ADPC’s Khalifa Port, which is currently in development. Khalifa
Port is part of one of the largest offshore port and industrial zone
developments in the world, and is being designed to serve the growing
industrial and commercial sectors in Abu Dhabi. Under the agreement with
Borouge, ADPC will ensure that there are sufficient facilities at the new port to
cope with Borouge’s throughput. Borouge currently has a throughput of around
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600,000 tonnes of polyethelene per year at the Mina Zayed port
In October 2008, Borouge announced that it was building a logistics hub
Guangzhou China. The new facility will begin operations when Borouge 2
comes online and will ensure local logistics services for Borouge’s Chinese
customers. Borouge is looking to expand in China and in February 2009,
announced that it was planning a 50,000 tonne plastics plant in the country.
In December 2008, Borouge began construction on a new logistics hub and
compounding facility in Shanghai, China. The logistics hub, due to begin
operations in May 2010, will receive 600,000tpa. The plant will produce
50,000tpa and serve the automotive and electrical appliance sectors. Borouge
also announced plans in October 2008 to build a logistics hub in Guangzhou,
China.
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Abu Dhabi Fertilizer Industries (Adfert)
Overview Company Data
Adfert was established by ITT Emirates (64%) in association with Chilean
fertiliser producer SQM (36%). Adfert ranks among the 20 leading UAE
businesses in terms of net worth. The company started commercial production
in 1997.
It has a production capacity of 60,000tpa of water-soluble fertilisers, and
140,000tpa of granular compound fertilisers. The company also produces
liquid and suspension fertilisers. About 70% of its production is consumed
locally, with its clients being private farmers and the Ministry of Agriculture and
Fisheries.
In order to minimise imports, Adfert started producing raw materials at its
AED20mn (US$5.44mn) facility in mid-2001. The raw materials include mono-
ammonium phosphate, urea phosphate, mono-potassium and trace elements.
It exports its output mainly to other GCC countries, including Syria, Lebanon,
Egypt, Iraq, Turkey, Greece and Italy.
The company currently has a capacity of approximately 96,000 mt, which is
broken down as follows: water soluble fertilizer, 48,000mt; NPK granular
fertilizer, 40,000mt (the production line was introduced in 2007); liquid and
suspension capacity, 7,000mt; and trace element and foliar capacity, 1000mt.
In 2007, the company launched a new granular fertilizer production line.
Address
Abu Dhabi Fertilizer Industries Corniche Street, P.O.Box 71871 Abu Dhabi United Arab Emirates
Tel: +971 (2) 551 1700
Fax: +971 (2) 551 1702
Web: www.adfert.com
Key Statistics
No. of employees: 350
Year established: 1997
Key Personnel
General Manager: Yousef al-Tawil
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Country Snapshot: UAE Demographic Data Section 1: Population
Source: UN Population Division
Table: Demographic Indicators, 2005-2030
2005 2010f 2020f 2030f
Dependent population, % of total 26.9 27.5 20.9 20.3
Dependent population, total, ‘000 858 959 1,212 1,373
Active population, % of total 73.0 72.3 79.0 79.6
Active population, total, ‘000 2,323 2,516 4,561 5,381
Youth population*, % of total 23.4 22.4 18.9 15.9
Youth population*, total, ‘000 746 780 1,091 1,075
Pensionable population, % of total 3.5 5.1 2.1 4.4
Pensionable population, total, ‘000 112 179 121 298
f = forecast. * Youth = under 15. Source: UN Population Division
-0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 0.25
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
Population By Age, 2005 (mn)
Male Female
-0.40 -0.20 0.00 0.20 0.40 0.60 0.80
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
Population By Age, 2005 And 2030 (mn, total)
2030 2005
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Table: Rural/Urban Breakdown, 2005-2030
2005 2010f 2020f 2030f
Urban population, % of total 85.5 86.3 80.0 82.4
Rural population, % of total 14.5 13.7 20.0 17.6
Urban population, total, ‘000 3,843 4,347 4,618 5,568
Rural population, total, ‘000 653 687 1,157 1,186
Total population, '000 4,496 5,034 5,775 6,754
f = forecast. Source: UN Population Division
Section 2: Education And Healthcare
Table: Education, 2002-2005
2002/03 2004/05
Gross enrolment, primary 84 101
Gross enrolment, secondary 66 86
Gross enrolment, tertiary 23 na
Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO
Table: Vital Statistics, 2005-2030
2005 2010f 2020f 2030f
Life expectancy at birth (years) males 76.3 77.4 78.4 79.6
Life expectancy at birth (years) females 80.6 82.2 82.8 84
Life expectancy estimated at 2005. f = forecast. Source: UNESCO
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Section 3: Labour Market And Spending Power
Table: Employment Indicators, 2000-2004
2000 2001 2002 2003 2004
Employment, '000 1,779 na na na na
– male 1,553 na na na na
– female 226 na na na na
— female, % of total 12.7 na na na na
Unemployment, '000 41 na na na na
– male 35 na na na na
– female 6 na na na na
– unemployment rate, % 2.3 na na na na
na = not available. Source: ILO
Table: Consumer Expenditure, 2000-2012 (US$)
2000 2007 2008e 2009f 2010f 2012f
Consumer expenditure per capita 11,021 26,273 28,769 32,231 35,923 42,758
Consumer expenditure per capita, purchasing power parity 12,809 22,075 23,089 na na na
e/f = estimate/forecast. na = not available. Source: World Bank, Country data; BMI calculation
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BMI Forecast Modelling
How We Generate Our Industry Forecasts
BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The
precise form of time-series model we use varies from industry to industry, in each case being determined,
as per standard practice, by the prevailing features of the industry data being examined. For example, data
for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries,
there may be pronounced non-linearity, whereby large recessions, for example, may occur more
frequently than cyclical booms.
Our approach varies from industry to industry. Common to our analysis of every industry, however, is the
use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the
variable’s own history as explanatory information. For example, when forecasting oil prices, we can
include information about oil consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable’s own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient
historic data or data quality is poor. In such cases, we use either traditional decomposition methods or
smoothing methods as a basis for analysis and forecasting.
It must be remembered that human intervention plays a necessary and desirable part of all our industry
forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,
anomalous data, turning points and seasonal features where a purely mechanical forecasting process
would not.
Chemicals And Petrochemicals Industry
Plant Capacity
The ability of a country to produce basic chemical products depends on domestic plant capacity. The
number and size of ethylene crackers determines both a country’s likely output, and also its relative
efficiency as a producer. We therefore examine:
Stated year-end capacity for key petrochemicals products, mainly ethylene, but also propylene,
polypropylene, polyethylene and so forth. Government, company and third-party sources are used;
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Specific company and/or government capacity expansion projects aimed at increasing the number
and/or size of crackers and downstream processing facilities.
Chemicals Supply
A mixture of methods is used to generate supply forecasts, applied as appropriate to each individual
country:
Basic plant capacity and historic utilisation rates. Unless a company imports chemicals products for
domestic re-sale, supply is expected to be governed by production capacity;
Underlying economic growth trends. The chemicals industry is highly cyclical. Strong domestic or
regional demand should be met by increased supply and higher plant utilisation rates;
Third-party projections from national and international industry trade associations.
Chemicals Demand
Various methods are used to generate demand forecasts, applied as appropriate to each individual
country:
Underlying economic growth trends. The chemicals industry is highly cyclical. Strong domestic or
regional demand is expected to require larger volumes of either domestically produced or imported
olefins (ethylene, propylene), polyolefins (PE, PP) or downstream products;
Trends in end-user industries. Strong demand for motor vehicles, construction materials, packaging
products and pharmaceuticals imply rising demand for basic chemicals;
Government/industry projections;
Third-party forecasts from national and international industry trade associations etc.
Cross Checks
Whenever possible, we compare government and/or third party agency projections with the reported
spending and capacity expansion plans of the companies operating in each individual country. Where
there are discrepancies, we use company-specific data, such as physical spending patterns ultimately
determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand
projections to check the chemicals balance of each country. Where the data suggest imports or exports,
we check that necessary capacity exists or that the required investment in infrastructure is taking place.
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Business Environment Ratings
BMI’s Petrochemicals Business Environment Rating has three objectives. First, we have defined the risks
rated in order to accurately capture the operational dangers to companies operating in this industry
globally. Second, we have, where possible, identified objective indicators. Finally, we have used BMI’s
proprietary Country Risk Ratings (CRR) in a nuanced manner in order to ensure that only the aspects
most relevant to the industry have been included. Overall, the ratings system – which integrates with
those of all 16 Industries covered by BMI – offers an industry-leading insight into the prospects/risks for
companies across the globe.
Conceptually, the ratings system divides into two distinct areas, with the indicators included in each area
stated below:
Limits of Potential Returns
Evaluation of sector’s size and growth potential in each state, and also broader industry/state
characteristics that may inhibit its development.
Risks to Realisation of Returns
Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile
that call into question the likelihood of anticipated returns being realised over the assessed time period.
Indicators
The following indicators have been used. Overall, the rating uses three subjectively measured indicators,
and 41separate indicators/datasets.
Table: Petrochemicals Business Environment Indicators And Rationale
Limits to potential returns Rationale
Market structure
Cracker capacity, current year Objective measure of sector size
Cracker capacity, 2011 Forecast of sector development
Downstream capacity, current year Objective measure of domestic demand
Country structure
Financial infrastructure
Rating from BMI’s Country Risk Rating (CRR) to denote ease of obtaining investment finance. Poor availability of finance will hinder company operations
across the economy
Trade bureaucracy Rating from CRR. Low trade restrictions are essential for this export-based
industry
Physical infrastructure Rating from CRR. Given size of manufacturing units, sector development
requires strong supporting power/water/transport infrastructure
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Risks to potential returns
Market risk
Industry regulatory environment Subjective evaluation against BMI-defined criteria. This indicator evaluates
predictability of operating environment
Country risk
Structure of economy
Rating from CRR, to denote health of underlying economic structure, including 7 indicators such as volatility of growth; reliance on commodity imports,
reliance on single sector for exports
Long-term external economic risk Rating from CRR, to denote vulnerability to external shock – principal cause of
economic crises
Long-term external financial risk Rating from CRR, to denote vulnerability of currency/stability of financial sector
Institutions Subjective rating from CRR, to denote strength of bureaucracy and legal
framework. Also evaluates level of corruption
Long-term political risk Rating from CRR, to denote strength of political environment
Source: BMI
Weighting
Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-
components equal weight. Consequently, the following weight has been adopted.
Table: Weighting Of Indicators
Component Weighting
Limits of potential returns 70%, of which
Petrochemicals market 65%
Country structure 35%
Risks to realisation of potential returns 30%, of which
Market risk 30%
Country risk 70%
Source: BMI