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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

United Arab Emirates Petrochemicals Report Q3 2009

© Business Monitor International Ltd Page 2



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



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



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



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.



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



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



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



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



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%



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



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



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



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



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



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.



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.



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



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



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.



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



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.



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



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



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.



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,



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.



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.



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



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



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



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



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



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



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.



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



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.



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



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



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



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



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



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.



Abu Dhabi Polymers (Borouge)


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



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



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.



Abu Dhabi Fertilizer Industries (Adfert)


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



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



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



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



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;



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.



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



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

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