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Saudi petchems firms fear new year gas price rise
November 20, 2012 / 2:41 PM / 5 years ago

Saudi petchems firms fear new year gas price rise

RIYADH (Reuters) - Some Saudi petrochemical producers fear a possible rise in the price they pay for gas will impact profits starting early next year, Saudi Industrial Investment Group (SIIG) 2250.SE managing director Suliman al-Mandeel told Reuters on Tuesday.

The domestic price at which Saudi Arabian Oil Co (Saudi Aramco) sells its gas was set in 2001 and expires early next year after being rolled over at the end of 2011, Mandeel said, prompting speculation from customers of an increase.

Saudi petrochemical companies, whose development the government encouraged as part of its long-term strategy to diversify away from oil revenue, enjoy a big competitive advantage over some foreign rivals due to low gas prices.

“We are due to have a new pricing policy from the government... we are expecting this to increase so it’s going to affect the margins somewhat but hopefully it will be reasonable enough to still make the industry competitive versus the rest of the world,” Mandeel said at the Reuters Middle East Investment Summit.

An industry source familiar with the matter said no decision had yet been taken on whether to change the gas price or by how much.

The world’s top oil exporter faces gas supply constrictions at a time when the product is needed to fuel rapidly growing domestic electricity consumption and a petrochemical sector the government sees as strategically important.

Analysts and economists have blamed internationally low gas prices of $0.75 a million British thermal units (MMBTU) for ethane and methane for discouraging both gas production and efficient consumption.

Butane, propane and liquid gas prices are set at a discount of 27 percent below the international trading prices on the Tokyo stock exchange, Mandeel said.

Mandeel said all prices are due to come under review except the ethane price. A 2008 prospectus for Aramco affiliate Petro Rabigh said ethane prices had been set until December 2015.

Mandeel added that SIIG and similar producers could live with prices of $1.50 per MMBTU for ethane and methane, and a discount on the other gas products of 20 percent.

“We are ready for ethane at $1.50. Less than 20 percent discount (on the other products) would be detrimental to the industry,” he said. “I‘m optimistic the government will be reasonable.”


A lack of readily available gas supplies has constricted expansion plans by petrochemical producers and industries that rely on low-cost energy generated by gas-fuelled power plants, including cement manufacturers.

“It’s a reality that there is no more gas. You can’t expand if you don’t have gas,” said Mandeel.

Some other petrochemical producers have also complained to the World Trade Organisation (WTO) that low Saudi gas prices constitute an illegal government subsidy, a charge the government contests.

Gas feedstock for its mix of olefins and aromatics output represents 88 percent of SIIG’s costs, Mandeel said, implying any rise could significantly cut into future profits.

However SIIG will likely not suffer a fall in net income next year, he said, with the introduction of a new 1.2 million-tonnes-a-year ethane cracker which might hit full production in the coming weeks following early maintenance.

“If things go right I think it is a dramatic increase. Almost double in profits,” he said.

Saudi Oil Minister Ali Naimi told U.S. diplomats he agreed with their assessment that “local price mechanisms severely undercut attempts to improve energy efficiency” but he foresaw few changes soon, according to an August 2009 embassy cable released by WikiLeaks.

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Reporting By Angus McDowall and Asma Alsharif; Additional reporting by Amena Bakr and Reem Shamseddine

Our Standards:The Thomson Reuters Trust Principles.
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