* Development due to start operating in early 2016
* Announcement quells doubts over future of project
* Sumitomo says long-term market outlook is decent
* Key part of Saudi plans to diversify energy portfolio
(Adds detail from briefing, comment from analysts, background)
By Yuko Inoue and Yuka Obayashi
TOKYO, May 25 Saudi Aramco and
Sumitomo Chemical Co plan to go ahead with a $7 billion
expansion of a petrochemical project in the kingdom, the
Japanese firm said on Friday, quelling doubts over the future of
the delayed development.
Japan's Sumitomo said it was pressing on with the Rabigh II
project, due to start operations in early 2016, as it expects
the market to pull out of a recent slump due to long-term
economic growth in China and resilient demand in Europe.
The plastics industry is facing slowing demand as car sales
ease in large emerging markets such as India, while higher raw
material costs on the back of rising oil prices weigh on
"The industry is now at a low point, but we are not worried
about its long-term prospects," Osamu Ishitobi, vice president
of Sumitomo Chemical, told a news conference.
But one analyst said that competition from a possible
revival in the U.S. petrochemical industry driven by shale gas
could have been a factor in the decision.
"If they further delayed making a decision, that would offer
the U.S. industry a bigger chance of regaining its
competitiveness in the global market," said Osamu Fujisawa, an
independent oil economist based in Japan.
In Saudi Arabia, the price of ethane, a raw material used
for building plastics, is lower than international prices,
providing cheap fuel for petrochemical plants.
For state-run Saudi Aramco, it is a steady revenue source,
and part of its plan to expand its petrochemicals industry and
diversify its energy portfolio and boost earnings from
Under Rabigh II, an existing ethane cracker will be expanded
and a new aromatics complex will be built using around 3 million
tonnes per year of naphtha to make higher-value petrochemical
Another analyst questioned whether the project would come
online in 2016, however.
"The toughest question we face is when is the (market)
recovery due? Will demand recover fast enough? Aramco said the
project will now be in 2016, but I doubt that will happen," said
Mazlan Razak of Nexant Asia Inc.
Saudi Aramco and Sumitomo each own 37.5 percent of Rabigh
Refining & Petrochemical, better known as Petro Rabigh.
The phase I Rabigh project was completed in 2009 at a cost
of $10 billion. Aramco and Sumitomo signed an agreement on the
plant expansion in that year with contracts for the work due to
be announced by 2011.
In July last year, Dow Chemical Co announced a $20
billion investment with Saudi Aramco to build one of the world's
largest petrochemical facilities near Saudi Arabia's vast oil
and natural gas reserves. The joint venture, to be called Sadara
Chemical Co, will annually produce more than 3 million metric
tonnes of the chemical products and plastics used in packaging,
furniture, electronics and scores of other consumer goods.
(Additional reporting by Risa Maeda, Seng Li Peng, Florence
Tan; Writing by Michael Watson; Editing by Joseph Radford)