SABIC Declares Interest In Shale
BMI View: Saudi Basic Industries (SABIC) has outlined its intention to invest in US shale this year, with significant investments expected from 2017. The move highlights both the attractive environment for petrochemicals in the US and the long term confidence that this will remain a competitive market. Furthermore, a partnership between SABIC and a North American shale specialist could provide the company with an advantage if shale gas is more effectively promoted in its domestic market.
Saudi chemicals and plastics giant, Saudi Basic Industries (SABIC), is reportedly looking to enter the US shale market in 2014. Speaking at the World Economic Forum in Davos, chief executive of the company Mohamed Al-Mady said, 'We're currently in talks with a few big names in the US for investment in shale gas'.
The share price of both Range Resources and Chesapeake Energy spiked on the same day, indicating that the petrochemicals producer may be looking to shale acreage that is rich in natural gas liquids (NGL), which demand from the petrochemicals industry has seen strong growth. Chesapeake is the top acreage holder in both the Marcellus and Utica shales, while Range Resources holds the next best combined position in both plays ranking 4 th in the Utica and 5 th in the Marcellus. National Fuel Gas - through subsidiary Seneca Resources - which holds the third highest acreage in Marcellus, also saw a spike in stock price.
|Utica And Marcellus Could Be A Target For SABIC|
|Range Resources (LHC) and Chesapeake (RHC) Share Price, September 2013-Year-To-Date (US$)|
Al-Mady has previously highlighted the threat of the US shale boom to SABIC, which is comparatively underrepresented in North American markets. Outside of its Middle East base, the company has nine manufacturing centres in Asia and three petrochemical production sites in Europe. Currently, SABIC employs just 100 people at a technology centre in Texas and does not own production facilities in North America.
A slowdown in European and Asian demand impacted SABIC sales in 2013 hence the company's interest in expanding its business in more profitable areas, following in the footsteps of Dow Chemical and ExxonMobil. While Al-Mady noted he does not intend to initiate significant investment over the next two to three years, a substantial capital injection is expected by 2017.
From Subsidised Saudi To Open US
While no significant change in dynamics is expected in the global petrochemicals market, the shift of SABIC to the US market could see more Saudi firms follow suit, particularly as conditions in Saudi Arabia appear to be slowly deteriorating.
Feedstock costs in the company's home market of Saudi Arabia are low due to considerable government subsidy on natural gas and NGLs. However, strong domestic demand growth for natural gas from residential and power customers is limiting the availability for new feedstock. Furthermore, uncertainty remains regarding a gas price increase the government has been mulling for gas sold to petrochemical companies ( see, 'Petrochem Producers Nervous On Gas Price Increase', March 20 2013). Domestic opportunities therefore weigh increasingly to the downside and have already seen some producers increase their use of NGLs due to better availability over natural gas.
|Tight Gas Supply And Demand To Sustain|
|Saudi Arabia Natural Gas Production And Consumption (bcm)|
However, as Saudi Arabia mulls liquefied natural gas (LNG) and pipeline imports to meet domestic demand and the growing switch from oil-fired to gas-fired power generation, gas prices may have to rise. This would impact the profitability of Saudi petrochemical operations and slow growth in the Kingdom. In an effort to expand domestic production capacity and maintain gas availability, Saudi Aramco is considerably increasing offshore exploration in the hope of boosting gas output. The company is also embarking on a scheme to tap shale formations in Saudi Arabia, and plans to use shale gas to fire a power plant ( see, 'Aramco Plans Shale Gas Fuelled Power Plant', October 15 2013).
Opportunities With US Shale Firms
SABIC's move into the US shale market could therefore create improved relations between the company and a US shale specialist in its entry deal. If SABIC can form a partnership with a US company, the expertise could prove invaluable in its domestic market. While an initial deal to enter the US market is still to be made and would likely require time to take-off, the longer term relationship could pay dividends for the company.
The upstream sector in Saudi Arabia is dominated by state-owned Saudi Aramco and this will remain a hindrance to entry into the market. However, if gas shortages in the country escalate, tapping domestic shale gas resources may make more commercial sense than importing gas via expensive pipeline or LNG projects. The introduction of specialist companies to take advantage of the sizable shale resources could therefore improve the pace and lower the cost of developing shale in Saudi Arabia. SABIC may also be able to gain experience in optimal operating techniques from a US partner and, if permitted, replicate this knowledge domestically. Thus despite its proposed entry to the US market, SABIC could have a crucial advantage to boost domestic supply if shale development is promoted.
2014 is expected to be a key year for shale gas development in Saudi Arabia and could indicate the extent of Saudi Aramco's ability in developing unconventional resources. The company claims it is ready to start producing domestically after carrying out appraisal and testing at three sites around northwest and south Ghawar, as well as condensate-rich Rub Al-Khali. The company is hoping to complete its shale gas-supplied power project in Jizan by 2016. We have not yet altered our forecast to incorporate shale gas production but will keep a close eye on unconventional developments in Saudi Arabia and the Middle East over the coming year.