On the path to becoming industrial: building the plants from scratch
Riyadh, Saudi Arabia
Abdulaziz Alzamil, managing director of Saudi Basic Industries Corporation, has had a pleasant surprise. When this state-owned company was set up in 1976 to join with foreign companies in establishing large-scale petrochemical, fertilizer, metallurgical, and other industries in the kingdom, mostly in two brand-new cities on the opposite sides of the Arabian Peninsula, it was reckoned the plants would be 35 to 45 percent more expensive to build than similar plants constructed on the Gulf Coast of the United States.
''Now we have finished some plants, and it is costing not more than 25 percent extra,'' Mr. Alzamil said.
Since Saudi Arabia is only just starting on a path of industrialization, successful cost control in Sabic's first 10 massive projects is especially satisfying for the Saudi executive. The plants are budgeted at a total cost of some 38 billion Saudi riyals ($11 billion), of which SR 12 billion has been spent so far. One reason for the lower-than-anticipated costs is the world recession.
''Very intensive international bidding made us realize some good savings,'' Mr. Alzamil noted. ''In the last two years, we have been getting more realistic quotes.''
Also, he adds, construction productivity was 94 percent of that on the Gulf Coast, whereas only 63 percent had been assumed.
These savings in capital costs will make the products of the petrochemical plants even more competitive on world markets. The Sabic plants already have the advantage of probably the world's cheapest feedstock - Saudi natural gas - which was once flared off as an unusable waste product.
Only two of the chemical plants, one making methanol, the other fertilizer, are in production so far. But after the last of the plants is in operation in 1985, Saudi petrochemicals are expected to fill 4 to 5 percent of the world market.
In today's depressed petrochemical markets, the prospect of a new flood of chemicals is not entirely welcome to many European and American petrochemical companies working at only 55 to 60 percent of capacity. Some may attempt to have their governments throw up trade barriers on the Saudi products.
But Mr. Alzamil regards the Saudi share as ''quite reasonable and minimal.''
He adds: ''Europe, Japan, the United States, will surely allow Saudi chemicals to enter. These are the only industrial products we are exporting.''
Saudi petrochemical exports may be worth around $5 billion a year, he calculates. Saudi Arabia imports some $30 billion of products from the industrial nations.
Mr. Alzamil holds that tariff rates of these nations are too high for petrochemicals - 8 to 19 percent - compared with 0 to 3 percent for Saudi tariffs.
To attract its 50 percent foreign partners - such companies as Shell, Mobil, and Exxon - Sabic offered two inducements: oil and cheap credit. They got the right to purchase 500 barrels a day for $1 million of investment. That may no longer seem so attractive, given the current oil glut. But oil market conditions could tighten later in the decade.
The credit terms were tempting: The foreign partner has to put up only 15 percent of the capital cost. Sabic puts up a similar percentage, the government finances 60 percent at 3 to 6 percent, and only the final 10 percent is borrowed from commercial banks.
''We are about the only country which is allowing up to 50 percent ownership of basic industries,'' Mr. Alzamil said. This policy has the advantage of Saudi Arabia's getting serious help in marketing the chemical products.
As for the Saudi Methanol Company plant in Jubayl, it has just signed a contract for half of its output of methanol. Sabic and its Japanese partners expect no problem in selling the rest in the Far East.
The 50-50 partnership system has also meant that each project is tackled efficiently on a decentralized basis by private companies. ''These projects could not be done by governments,'' the official said.
Mr. Alzamil, a graduate of the University of California, Los Angeles, says he is not much concerned about the possibility of a drop-off in Saudi oil production resulting in a shortage of related natural gas as feedstock for the petrochemical plants. ''For what we have planned, there is no problem,'' he says.
If oil production remained depressed, some fields of non-associated gas could be developed relatively quickly by Aramco, the government-owned oil company, he maintained.
Sabic expects that as its basic petrochemical plants are completed, new industries will spring up at home using these chemical building blocks. Three such projects have been announced. One plant will make polyvinyl chloride monomer for plastic pipes and conduits; another will make polystyrene; and a third, MBTE, an additive used in lead-free gasoline.
The long-term goal is an industrially diversified private sector, Mr. Alzamil said. ''The process has started. We must continue this pragmatic approach.''