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Pricing of Feedstock in the Gulf

A Policy Conundrum

World Refining Association.
12/13 November 2007

OUTLINE

11

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Stating
Stating the
the problem
problem

Main
Main argument
argument

WTO
WTO issues
issues

Feedstock
Feedstock pricing
pricing and
and cost
cost advantage
advantage

Summary
Summary

Country Strategies Group | Page 2

Stating the problem – current production patterns State producers vs. the private sector: State companies are prospering. – State companies have access to cheapest feedstock in the world – Are able to maximize the Natural Advantage of the Gulf countries – Leading to an enormous development • Gulf states likely to become largest producers of Chemicals by 2015 • Provide enough incentive for companies to go further and further downstream However... the private sector in the Gulf cannot compete in the Far East • Develop its own distribution • Especially SABIC develop its own R&D Country Strategies Group | Page 3 . – The private sector does not have access to the same advantage of low cost • Prices to the private sector are based on world prices minus a discount • Not directly related to the Natural advantage of the Gulf • With high EPC and distance to clients.

The Conundrum State producers vs.. it would reduce the profits of state-owned companies – Would impact state companies like Saudi Aramco. KPC – Would reduce the income of the States and limit State expenditures on the people – It will transfer more wealth in the pockets of the wealthy private investors and the foreign companies active in the region Country Strategies Group | Page 4 Source: Team analysis . ADNOC. QPC. SABIC. – Would provide much larger creation of jobs – Accelerator effect on the economies of the Gulf could be very large – Would make industrial development much deeper and complement the State owned firms However. the private sector: Should the States price feedstock for all local buyers at cost + a fair margin? It would allow the private sector to benefit from the Gulf’s natural advantage.

OUTLINE 11 22 33 44 55 Stating Stating the the problem problem Main Main argument argument WTO WTO issues issues Feedstock Feedstock pricing pricing and and cost cost advantage advantage Summary Summary Country Strategies Group | Page 5 .

50/ barrel or barrel equivalent – Associated gas = cost is that of gathering.The Vision The Gulf states need the private sector to achieve true industrial development Share advantage of low-cost feedstock – Create jobs Cost advantage – Oil between $1.5 and $4. treating – Energy advantage means cheapest feed-stocks in the world – Methane and Ethane sold at $0.75/MM btu to state companies The State – Create a deep industrial base in value added products – Limit dependence on non-renewable commodities: oil and gas Enhance and supplement the growth created by the state companies The Private Sector – Will invest in downstream chemicals – Will develop its own technologies – Will partner with high tech firms around the world Inject funds back into the national economy through investment Country Strategies Group | Page 6 .

State-owned companies ! Major developments by state owned/controlled firms based on their access to low cost feed stocks ! Exclusive access to low cost feedstock makes them vastly more competitive than the private sector – Take over the market from the private sector – Concentrate all growth in their organization The private sector ! Private firms get a discount from world prices ! However. discount does not cover the differences for – Higher EPC in the Gulf – Higher cost of operating far removed from the clients ! It makes private sector just as dependent of vagaries of world markets as the competition Better to be near the consumers: ie build plants in Asia • Lower EPC cost • Closeness to clients allows easier market share [BASF’s example] – Today Gulf private sector provides only 8% of chemical production – There are no private sector investments in the Gulf outside Saudi Arabia – This is against the goal of having a very deep-seated growth Country Strategies Group | Page 7 .What is the hold back..

Iran – Focus on downstream products – Help the Gulf countries protect & expand their worldwide market share – Fulfill the Gulf countries’ goal of building a major industrial power – Help promote sustainable economic growth Country Strategies Group | Page 8 ..The solution. A role for the private sector The private sector can then.. ! The private sector should have the same right as the public sector to access the Natural advantage of the Gulf ! Pricing policy should be changed – Cancel the discount approach – The state energy providers should sell on a cost + fair profit basis as per WTO agreements ! The pricing policy should apply to all investors in the Gulf as demanded by the WTO – Compete despite cheaper EPC in other countries. especially China – Compete despite lower labor costs in China.

Impact on economic development – Attractive pricing arrangements will encourage the private sector to invest in downstream chemicals This can give the incentive necessary to bring large investments: There are unlimited private (local and foreign) funds ready to invest in the chemicals industry Pricing policies must be defined to pass the cost advantage to the private sector: – New investments will create employment opportunities for nationals – Policies should be simple and consistent: “full cost + fair profit” – New private sector investments will have a large multiplier effect on GDP and BoP – Should be fair to all parties ! Each ton of feedstock will add to GDP a multiple of the potential loss to the state as a result of lower feedstock sale price – – Based on professional evaluations of costs – Should include some form of “Social Cost” now borne by the State Private sector is likely to focus on high value added downstream products. Country Strategies Group | Page 9 .

Propylene. Methane at $0. foreign or JVs Requirements Potential problems ! Define the cost of Feedstock at the state-owned companies for BTX. Ethylene obtained through Naphtha.Pricing policy: possibilities Policy Overview ! Policy should provide for feedstocks to be sold to the private sector at: – Full Cost + Fair Profit – Rather than at a discount from the most expensive foreign reference for Naphtha ! Policy should apply to all companies operating in the Kingdom whether local.5 to $4. ! Evaluate the cost of producing Naphtha – Use Oil at $1. etc.75/MM BTU ! Should apply to all products using local feedstock ! Define the idea of “fair profit” ! Should focus on protecting Gulf market share worldwide ! Evaluate the “Social Cost “ implied in present oil price ! How to define “social costs”? ! How to prevent the change in pricing from just being a transfer of wealth to large merchant families? ! Could be opposed by the operators today ! May not necessarily achieve the desired job-creation – Private sector is staffed mostly by foreign workers Country Strategies Group | Page 10 .50/b [$11 to $34/t] + Associated gas + processing to sell at world prices – Ethane.

Pricing policy: potential solutions 1. The “Private Sector” Solution – Provide private sector access to the Gulf’s natural advantage at par with state companies – Provide Feedstock at “Full Cost + Fair Profit” – Give private sector the opportunity to fully contribute to economic growth 3. The Kayan Solution – Only state-owned companies benefit from the Gulf’s natural advantage – Sooner or later all chemical companies may come under state companies – De facto nationalization of the industrial sector Potential solutions 2. Link the “cost +” feedstock prices to benchmarks – Manage and train local personnel – Develop extensive downstream production lines – Allows sharing of profit with the public at large – Use a sunset clause limiting the advantages of the Cost + solution to a certain period of time and then be re-evaluated Country Strategies Group | Page 11 .

OUTLINE 11 22 33 44 55 Stating Stating the the problem problem Main Main argument argument WTO WTO issues issues Feedstock Feedstock pricing pricing and and cost cost advantage advantage Summary Summary Country Strategies Group | Page 12 .

it could be a conflict between a state vs. regardless of whether it was internal or transnational. US SC 2006) . financial cost. Rumsfeld. training. etc.e. overhead. Definition of “Fair Profit” is according to standard practice in the industry – Allows a new formula to be defined Country Strategies Group | Page 13 * Most commonly interpreted as a conflict not between nations.Feedstock under the WTO ! Naphtha and other refined products [Gasoline. a rebel group (see Hamdan v. Kerosene. etc. includes depreciation. i.] are not subject to WTO rules except that of transfer at Full Cost + Fair Profit ! Final agreement with WTO provides for NGL feedstock can be sold at Full Cost + Fair Profit ! Double pricing of NGLs no longer an issue – Renders moot all pricing based on Tokyo prices for Naphtha -30% Definition of “Full Cost”. amortization.

OUTLINE 11 22 33 44 55 Stating Stating the the problem problem Main Main argument argument WTO WTO issues issues Feedstock Feedstock pricing pricing and and cost cost advantage advantage Summary Summary Country Strategies Group | Page 14 .

or used internally by SABIC and Saudi Aramco. Formula is meant to compensate for: _ Security of long term contract _ Savings by Saudi Aramco on long term storage for foreign markets _ Savings in Marketing ! Formula has little to do with actual market for NGLs _ Does cover the privates sector for differentials Propane-Naphtha price _ Is presently penalizing the Saudi firm _ Does not have market logic Ethane Sold to SABIC & other Ethane users at $0. Butane. or sold to private sector at world prices Country Strategies Group | Page 15 .75/MM btu ! Gives SABIC a major advantage in international markets ! Saudi Aramco new refineries will give it great flexibility in costing feedstock from Naphtha to its JVs at Petro Rabigh and at Ras Tannura Naphtha Base Products At this time BTX is mostly exported to Asia at world market prices.Current Saudi Pricing Policy Methane Sold to SABIC. Natural Gasoline: ! Price paid by the private sector is based on Naphtha in Tokyo minus 30% discount after freight.75/MM btu NGLs Propane. SEC. SWCC &Others at $0.

based on Saudi feedstock costs.2mmBTU/t [= $37/t] At suggested cost of Ethane of $55/t which includes 50% fair profit Using Ethane feedstock cost + 50% fair profit + $150/t social cost European production cost Note that all figures are rough estimates. All other costs (catalysts. depreciation.75/MMbtu & 49. utilities. Country Strategies Group | Page 16 .Effect of “cost + fair profit” on product: C2s (1/2) Ethylene Cost advantage of $113/t over European production cost $545 $233 $4 32 $210 $1070 SABIC’s cost @ $/0. etc) are based on costs in Europe.

2mmBTU/t =$37/t Using Ethane feedstock At suggested cost cost + 50% fair profit + of Ethane of $55/t which includes 50% $150/t social cost fair profit European production cost Note that all figures are rough estimates. utilities. All other costs (catalysts. based on Saudi feedstock costs. etc) are based on costs in Europe. depreciation. Country Strategies Group | Page 17 .Effect of “cost + fair profit” on product: C2s (2/2) HDPE Cost advantage of $115/t over European production cost $864 $546 $749 $522 SABIC’s cost @ $/0.75/MMbtu & 49.

Effect of “cost + fair profit” on product: C3s Polypropylene Cost advantage of $238/t over European production cost $1070 $832 $564 S.7MMbtu/t [=$60/t of propane] $842 $591 At cost of propane At cost + fair profit + $150/t social cost of $89/t which includes 50% fair profit Sale price to Saudi private sector @ 70% of Tokyo-NaphthaFreight S.25/MMbtu & 47. utilities. Aramco cost @ 1. Aramco posted price Note that all figures are rough estimates. based on Saudi feedstock costs. depreciation. All other costs (catalysts. Country Strategies Group | Page 18 . etc) are based on costs in Europe.

production cost/t $70 At suggested cost + fair profit/t $220 At cost + fair profit + $150/t social cost/t Price to Saudi private sector at 30%discount off Tokyo-Freight Est. Toluene.00. Cost 1b Naphtha= $5. export sale price/t • Note that all figures are rough estimates.resulting 2 b. based on Saudi feedstock costs. All other costs (catalysts. utilities. Value of low octane gasoline=$2. etc) are based on costs in Europe.Effect of “cost + fair profit” on product: C4s (1/2) Butane Cost advantage of $392/t over European production cost $612 $441 $47 Est. • PFC’s estimates based on SRI and PFC figures **Benzene. of low octane-low value gasoline.0 BTX cost results in 1b BTX @ $12. Naphtha + 10% of 1b for energy source . Xylenes.5/b=$100/t Country Strategies Group | Page 19 . depreciation. 1b BTX requires 3b.

etc) are based on costs in Europe. • PFC’s estimates based on SRI and PFC figures **Benzene. utilities.00. of low octane-low value gasoline. All other costs (catalysts. Xylenes. Toluene. Value of low octane gasoline=$2. export sale price/t • Note that all figures are rough estimates. based on Saudi feedstock costs. Cost 1b Naphtha= $5.0 BTX cost results in 1b BTX @ $12. 1b BTX requires 3b.resulting 2 b.Effect of “cost + fair profit” on product: C4s (2/2) BTX Cost advantage of $700/t over European production cost $1000 $150 $1000 $300 $100 Est.5/b=$100/t Country Strategies Group | Page 20 . production cost/t At suggested cost + fair profit/t At cost + fair profit + $150/t social cost/t Price to Saudi private sector at 30%discount off Tokyo-Freight Est. depreciation. Naphtha + 10% of 1b for energy source .

OUTLINE 11 22 33 44 55 Stating Stating the the problem problem Main Main argument argument WTO WTO issues issues Feedstock Feedstock pricing pricing and and cost cost advantage advantage Summary Summary Country Strategies Group | Page 21 .

Summary " Pricing at “Cost + fair profit” could generate hundreds of $billions in investments for local and foreign investors " Will equalize somewhat the cost advantage of State companies " Savings of feed-stocks will carry through the downstream products " Provides protection for increase in EPC costs " Provides sustainable long term economic growth Country Strategies Group | Page 22 .