Petroleum industry in Saudi Arabia
Saudia Arabia is home to more than a quarter of the world’s oil reserves, approximately the country boost about 257.8 trillion cubic feet of the worlds’ gas reserve. Forty percent of these reserves are non-associated and this makes it necessary to pay attention to the capability and possible expansion of this industry. Petroleum industry of Saudi Arabia ranks fourth in the world’s gas reserves after Russia, Iran and Qatar. 95 percent of Saudi Arabia petrochemicals are deprived from methane and natural gases. Therefore to improve competitive advantage in global petrochemicals market the country must its infrastructure that is likely to affect natural gases.
According to the research by Royal Commission, Saudi Arabia produces 49 unique petrochemical products. Though there are multiple petrochemical companies in the country most of them are public companies and highly depend on upstream base chemicals and polymers. Due to the multiple technological advancement and campaigns on environmental preservation the country is embracing the change from upstream base chemical to downstream base chemicals. As a result, the country has currently launched several petrochemical projects valued at approximately $48 billion to embrace the change in chemical based products. Research shows that the two largest petrochemical companies in the country that is The PetroRaigh Petrochemical Complex and Saudi Kayan Petrochemical Complex will produce products purely on downstream chemicals by next year and this will dramatically change the future of the petrochemical industry worldwide.
Industry life cycle
Before considering profitability of an industry the first step is to understand the stage it is in that particular time in relation to industry life cycle. There are mainly four stages in the industry life cycle; that is the introduction stage, growth stage, maturity stage and then the decline stage. All these stages are crucial in all industry and heavily contribute to the profitability index of the industry as well as its competitive advantage globally. The introduction stage is the developmental stage, at this stage companies in the industry strive to develop new products while still identifying markets. This first stage is associated with handling obstacles that may arise such as insufficient production, inability to meet demand, distribution obstacles and customer resistance. This stage is closely followed by the growth stage which marks the stage that the new products are successful. At this stage the industry begins to grow and attract new competitors. Though the growth stage is a mark of success the industry still needs substantial effort to ensure it is profitable multiple competitors who may come in as well as the high demands of cash outlay. The third stage is the maturity stage and represents the standardization of the industry. An industry at is at this stage which is quite rare to achieve in most industries, the industry has a stable market and channels of distribution. At this stage, though competition may be too high the industry will be able to comfortably achieve competitive advantage because production rate grow steadily as well as sales growth thus leading to economic growth. The final stage in the industry life cycle is the decline stage. This is the stage that the industry becomes obsolete, demand of its products begins to decline drastically and the profit margins decline as well. Eventually the products are considered retired and customers consider their products to be of low technological advancement.
The four stage industry life cycle is the same cycle that the Petrochemical industry of Saudi Arabia is expected to follow. Currently the industry is at the growth stage, and strongly ensuring that it does not reach the decline stage too rapidly. The reason as to why it is right to say that the Pertochemical industry in Saudi Arabi is at the growth stage is because we are constantly seen the industry introducing new products that are embracing new technological knowhow. For instance has already introduced 80 new chemical plants within the last two years. According to the country recent budget, the government plans to spend $91 billion over the next ten years to start up new plants, expansion of the existing plants and in the integration of refineries. To counter the global economic downtown that the industry seems to be achieving as evidenced by the volumes of petrochemical products exported from the country the top two companies in the industry have recently partnered. These are SABIC and Saudi Aramco and the partnership has brought about the start of multiple chemical projects which are expected to assist the industry greatly in embracing the new technology of using downstream chemicals in production.
Industry responsiveness to the economic cycle
Different from most industries the Petrochemical industry in Saudi Arabia is quite responsive to the economic cycle, in fact it can easily the regarded as a cyclical industry. This is because even with the rapid economic changes and the downturn economic effects, the industry still manages to embrace innovation and technological changes fast. As a result, the industry is able has been able to triple despite of the current global economic downturn. The main reason as to why the industry has been able to maintain the cyclical nature is the recent inclusion of the private sector. For years, the Petrochemical industry in Saudi Arabia was managed and owned by the public sector therefore funded Saudi Arabia General Investment Authority which is simply the government. This meant that innovation was not only slow but also attracted less competition. With the introduction of the private sector, several foreign investors have come in. harmonizing the public and private sectors in the industry has encouraged investments therefore boosting the kingdom’s petrochemical industry to one of the giant industry globally.
Constituents of the industry sector on TADAWUL and its performance
The Petrochemical industry has been doing well in Saudi Arabia for a long period of time and the past three years have not been any different. Since the year 2010 the industry has shown a constant increase of 3% according to the country’s TADAWUL. Though the industry lacks third in the country market analysis consumption of its main products ethanolamine, surfactants and mono-ethylene are still the most highly consumed products in relation to their target market. Fuel demand in the region continues to grow at a 6% even year and this is likely to pose a challenge to the industry if it does not embrace new technological production methods such as downscale which concentrate on raw materials maximization. The suggested new technologies in production are mainly to ensure significant increase in supply of chemical products. It also worth noting that researchers expect the industry growth rate to increase to 4% by the year 2017 because by this time, the industry will have gained surfactants markets as well as handled overcapacity problem through introducing technological and innovation based changes. Introduction of economic diversification program different from hydrocarbon beginning in 1987 is the main reason behind the continuous success of the industry. However factors such as domestic embracing low energy costs, steady supply of raw materials and rapidly increasing population are just a few of other factors that have assisted in retaining a continuous growth of the industry.
Saudi Arabia as a country has the largest oil reserves in the world and is also the highest oil exporter globally. The kingdoms oil reserves total to 18% of world’s petroleum reserves. Most of the country’s oil actually 90% in exported to other regions and that makes it the leading country in OPEC. 75% of these oil reserves are managed by the government and the same percentage is used as government revenues. Due to the opportunities in the country brought about by the existence of oil demand and constant support of the government, the country intends to launch 6 economic cities by the year 2020 to increase development and diversification. The new cities are expected to contribute in projecting the gross domestic product to $150 billion as a result of constant increase in capital income. It is also worth noting that the petrochemical industry has the strengths of growing as an industry due to the increase dependency on oil and gas. It is evidence that the country or even the entire globe usage of the petrochemical products will continue to rise as depicted by the economic reforms, market liberalization and the rapid growth of the private sector. Another strength noted on this industry is the existence of strong trading partners such as the United Kingdom and it is also the largest foreign investor in the Middle East.
The weakness and threats associated with the industry are mainly related to the weak and poor administration of the country. The education system in Saudi Arabia is weak and poorly structured while compared to that of the western world. Therefore it does not equip the citizens especially those that would like to take part in this industry with necessary technical and business skills. Due to the low levels of technical knowhow the industry struggles hard to compete in the global economy. The industry is also current facing financial issues since the government is burdened with the task of funding most improvement decisions relating to the industry. Considering that the kingdoms oil prices are quite low the government does not find enough revenue to provide for adequate revenue to cater for development while still improving the standards of living in the kingdom. Another major weakness encountered by the industry is on the instability of oil prices. Since the structure of the industry is too petroleum centered the other industries in the region are quite weak thus leaving the petroleum industry the sole contributor to industrial production and GDP.
Competition environment in the industry
The industry has a significant competitive advantage not only in the Saudi Arabia Kingdom but also in the entire globe. It ranks 17th out of 142 countries globally on the competitiveness index, this actually a high rank. Due to the growth in petrochemical products demand several local companies in the region even those from other industries as well as the international market such as United States, Europe and Asian counterparts have began joint venture with the Petrochemical industry in Saudi Arabia thus providing additional resources. The main support behind the competitive advantage of the industry is the government. The industry projects benefit from government incentives, for instance, the industry was granted a 10 year tax holiday since three years ago and this has seen the industry increase its profit margin significantly. In addition the main companies in the industry Saudi Aramco and SABIC have been provided with low cost feedstock and favorable loans. With the start of a strong private sector and the stability of Saudi Industrial Development Fund the industry can comfortably engage in manufacturing, supply and innovation of petrochemical products comfortably globally.
The market of the petrochemical industry is mainly related to the marketing of petroleum, natural gas, iron ore, gold and copper. The target market of this industry is mainly the external market meaning that most of the products are exported to United Sated, China, Italy, India, South Korea and Japan. Most of the transactions in the industry are carried out using the Saudi riyal currency but at time it also exchanged at a rate of 0.267 to the USD. Over the past three years the industry has recorded increase in export of product and local sales totaling at 237.4 million in the year 2010, 182.1 million in 2011 and 276.3 in 2012. With this trend it is expected that the industry will continue experiencing slow growth but consistent for a longer period of time. The growth is backed by the fact that the industry products are still of high demand.
In conclusion the Petrochemical industry in Saudi Arabia is one of the most stable industries in the entire globe. This is because of the high demand of its products, government support and existence of strong partners such as the United Kingdom. However, we do note that the growth of the industry is quite slow. For the past 7 years the industry has recorded a total growth rate of 6% which is quite slow for a competitive industry. Therefore, I would strongly suggest that the industry to focus more on embracing downstream technology which is quite efficient in improving production capacity, cost effective and high quality assuring.
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Matar, S and Hatch, L. (2001). Chemistry of Petrochemical Processes. Gulf Professional Publishing