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Plastic plant gives BP a way in to Saudi Arabia

The Guardian: Plastic plant gives BP a way in to Saudi Arabia

Terry Macalister

Thursday June 9, 2005

BP has won a vital foothold in the world’s largest oil producing country, Saudi Arabia, by agreeing a $2bn (£1.1bn) deal to build one petrochemical plant there with the possibility of a second.

The move also promises to boost the chances of a successful stock market float for BP’s Innovene petrochemical business, which was hived off into a separate company in April.

A memorandum of understanding has been signed by Innovene with Saudi-based Delta International to construct a “cracker” unit able to convert cheap local natural gas into ethylene for plastic wrappers and other products.

BP said that manufacturing sites in Saudi Arabia would help its petrochemical and refining arm to capture new demand for its products in China and other buoyant Asian markets.

Ralph Alexander, the chief executive of Innovene, said this should be seen as “the first chapter in a long and fruitful partnership between Innovene and the Kingdom of Saudi Arabia”.

Fadel Gheit, an oil analyst with New York brokerage Oppenheimer & Co, believed the move was of much more value than just to help with the float of Innovene, which is expected later this year.

“This is an important foothold in Saudi Arabia, which in oil terms is the equivalent of a 42-tonne gorilla.

“It might be only a petrochemical venture, but any access into this country will be welcomed by BP whose origins were founded in the Middle East,” he said.

Lord Browne, the chief executive of Britain’s biggest company, has tended to play down the significance of the region, saying he was happy to concentrate on Russia, Angola and other newly developing oil regions.

But BP’s two main competitors, Shell and ExxonMobil, have had much stronger historical ties with Saudi Arabia.

Shell has a substantial petrochemical joint venture at Jubail while Exxon – through its acquisition of Mobil – has a major investment at Yanbu.

Saudi Arabia, which has the world’s largest oil reserves and is by far the most influential member of Opec, has still not allowed major foreign participation in the “upstream” oil or gas exploration and development sector.

But western oil firms always hold out the hope that one day this jewel will be open to them. Any involvement in Saudi Arabia – whether through petrochemicals or otherwise – offers the chance to build contacts and reputations in this relatively closed country, Mr Gheit said.

The ethylene cracker will probably be sited in Jubail and should start production in late 2008. It will produce 1.2m tonnes of ethylene a year, but Delta said in a statement that the long-term aim was to build two plants costing $2bn each.

Chicago-based Innovene already has production facilities in Europe, including Grangemouth in Scotland, but the Saudi plant will be close to the cheapest and most abundant gas stock.

Analysts expect BP to sell 20-30% of Innovene towards the end of this year through an initial public offering and believe the business could be valued at $8bn.

http://www.guardian.co.uk/business/story/0,,1502376,00.html

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