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This article will begin with a broad look at the global oil and gas markets and the important position occupied by the Middle East in these markets, before turning to a discussion of petrochemical fuels and feedstocks with particular reference to the Middle East region. From my perspective, an understanding of the wider context of the oil and gas markets is a prerequisite for informed decision-making when it comes to petrochemicals, and I think it is particularly helpful in assessing the growing role that this region will play in the future of the petrochemicals industry.

By all estimates, oil demand is set to rise in the decades to come due to both global population growth and rising living standards throughout the developing world. In fact, most analysts predict that oil demand will rise steadily from around 86 million barrels per day at present to roughly 120 million barrels per day by 2030. Forecast growth of this magnitude has, unfortunately, re-invigorated the old issue of whether or not global oil reserves and resources are adequate to meet such demand. Over a dozen books trumpeting the so-called ‘peak oil’ theory of scarcity have been published in recent years; however, the empirical evidence makes it clear that there are indeed sufficient oil reserves left to be tapped.

The rising price of oil has been presented as evidence of oil supplies peaking. However, earlier in 2007, when political uncertainty somewhat receded, short-term growth in demand was moderated, supplies from outside the Organization of the Petroleum Exporting Countries (OPEC) grew and the price of Brent fell below US$50 per barrel – so much for the peak oil theory.

Judging by the 100-year history of our industry, I firmly believe that the technological advances needed to bring the extra barrels required to meet the aforementioned growing demand to the market efficiently and economically will be developed over time. There has been talk of an industry challenge to increase the world’s yet-to-be-produced recoverable oil resources to more than four trillion barrels. I believe this target can be met through currently proven oil reserves, discovering additional quantities of oil, increasing recovery from both known and yet-to-bediscovered fields and boosting recovery rates from unconventional heavy oil. In addition, there are also vast oil shale deposits around the world that could contribute to meeting increased demand in the longer term.

Realistically, however, the cost of developing some of these resources will be considerable, particularly when it comes to challenging Arctic and deep-sea fields and heavy crude oils. Growth in unconventional heavy oil will be slow given the need for additional technological developments related to its improved production, processing and increased recovery, besides the environmental issues and growing gas and water requirements associated with these resources. At the same time, future contributions from alternatives such as hydrogen and fuel cells will also take many years to come to fruition, as these sources face numerous technical and economic hurdles and will require significant investment in production infrastructure, distribution networks and end-use applications. Biofuels are gaining pace, but considering the world’s large total demand their contribution is expected to remain relatively modest.

As a result, the demand for Middle Eastern oil is set to grow substantially in the future. This is particularly true for the period beyond the coming decade, as many mature fields in the industrialised nations will increasingly come under downward pressure. Furthermore, if we exclude the heavy oil reserves of Canada, which are set for much slower growth, some two-thirds of the world’s conventional oil reserves are located in the Middle East, and must therefore account for an increasing proportion of global crude production.

Like the oil market, the gas market has experienced profound changes over the last decade or so, although gas has received only a small fraction of the media attention accorded to oil. Demand for gas has risen much more rapidly than supply, with industry and power generation being the highest consuming sectors. This has led to a tighter supply–demand balance and a steep rise in prices. In the US, for example, the wellhead price for gas has risen from around US$2 per 1,000 cubic feet roughly a decade ago to an average of about US$7 per 1,000 cubic feet at present.

Looking ahead, the International Energy Agency (IEA) predicts that global demand for gas will grow from the current 290 billion cubic feet per day to roughly 450 billion cubic feet per day in 2030, which represents an increase of approximately half as much again as current demand. This means that the trade in liquefied natural gas (LNG) and cross-border pipelines, where practical, should rise steadily. For instance, the US has been a nominal LNG consumer in the past, but is expected to become one of the largest consumers of LNG over the next decade. Also of note is that total gas reserves are expected to rise from 6.1 quadrillion cubic feet today to more than 10.3 quadrillion cubic feet in the next quarter-century.

In terms of the Middle East’s role in the gas market, here again the outlook is one of strong growth in supply. Almost 42% of the world’s current proven gas reserves are located in the Middle East, yet the region accounts for only about 9% of total gas production. The IEA predicts that Middle East gas production should double by 2030, from about 28 billion cubic feet per day to around 62 billion cubic feet per day. Given the region’s massive gas reserve base, that still leaves plenty of room for further expansion, and I believe the extended outlook for this area’s gas producers is bright.

However, it is important to recognise that, while crude oil is traded on a global, integrated market, gas markets are primarily regional in nature. This is due, in part, to the fact that the transportation of gas is difficult and expensive, as opposed to the relative ease with which crude oil is distributed by both maritime shipping and pipelines. Therefore, transportation issues assume a greater significance when it comes to supply and demand patterns for natural gas, with the supply surplus in some areas and the deficit in large consuming areas and the distances between the producing and consuming regions – factors that must be kept in mind when considering the long-term prospects of the Middle East’s gas sector.

Taken together, therefore, demand for oil and gas is set to increase considerably over the next several decades, and supply must expand accordingly. Given the essential role of energy in both maintaining the prosperity of developed nations and alleviating the poor living standards that affect billions of the world’s inhabitants, the issue of bolstering oil and gas supplies must be given more attention by the international community, just as environmental protection has risen to the top of the global policy agenda. Focusing exclusively on either economic development or environmental stewardship is folly; rather, we must balance both of these imperatives if we are to protect the planet while also providing future generations with the opportunities for better lives that they deserve.

The Middle East has an important role to play in achieving that desired balance, both as a producer of energy and as an energy consumer. The population of the Middle East region today is estimated at around 230 million people compared with about 300 million people in the US and a little over 450 million people in the EU. Although per capita gross domestic product (GDP) in the Middle East is lower than that of the US or Europe, it still constitutes a major consumer market, particularly given that living standards continue to rise. Furthermore, this is a young population, with approximately 100 million young people between the ages of 12 and 24 years in the Middle East and North Africa. This means there is a tremendous demand for employment opportunities in the region, which will only increase in the decades to come.

Middle Eastern nations are acutely aware of the need to create more jobs and to expand and diversify their economies. Given that the oil and gas industries are, generally speaking, far more capital-intensive than they are labour-intensive, the region is looking to increase the breadth and depth of its chemical and petrochemical industries, which are important sources of value addition as well as job creation. Therefore, I would now like to focus on the outlook for the petrochemical industry in the region and the important role this sector will play, not only in meeting the Middle East’s economic aspirations but also in increasing global demand for petrochemicals and for the fuel and feedstocks that they require.

The impact of the petrochemical sector is greatest in terms of both value addition and job creation in the downstream segment and the fabrication of finished products. Of course, chemicals are not only consumed by the chemical industry itself to manufacture end-use products, but are also required as inputs in a wide range of other industries. As such, the chemical sector is an enabling industry that underpins virtually all other sectors of the economy, meaning that as the petrochemical and chemical sector develops and expands, numerous other industries also flourish.

It is also important to realise the size and scale of the chemical industry and its contributions to economies around the globe. Today, chemicals are a roughly US$1.7 trillion global business and account for about 12% of the total value added by all of the EU’s manufacturing industries. Furthermore, average growth in the sector is around 5–6% per annum – well above forecasts for global economic growth. In terms of jobs, chemical companies employ over one million people in the US and nearly twice that number in the EU. It must also be considered that this workforce is generally more qualified, better trained and better paid than most other industrial workers. In the Middle East, the petrochemical sector is already the third key source of growth for the economies of the Gulf, after oil and natural gas.

Clearly, growth in the petrochemicals sector – and particularly in the tertiary chemicals and manufacturing segments of the business – is something this region needs. However, the global chemicals business has long been dominated by the ‘triad’ of the US, Europe and Japan. Why should that change now, and what does the Gulf have to offer leading petrochemicals companies and prospective investors from inside and outside the region?

First and foremost, the Middle East can offer an ‘energy advantage’, i.e. an abundance of the fuel and feedstock that constitute the lifeblood of the petrochemical industry. In terms of fuel, the Middle East region boasts abundant supplies of competitively priced gas and liquids, meaning reduced costs for petrochemical facilities as well as lower costs of electric power generation. These low energy costs constitute a tremendous competitive advantage, particularly in an energy-intensive business such as petrochemicals. For example, in the EU’s chemical industry energy as a whole accounts for between 10 and 60% of production costs for most products, meaning savings on energy expenditure can provide a tremendous edge over higher-cost competitors. Even more vital to the success of a petrochemical enterprise is the availability and cost of feedstocks, whether gas- or liquids-based. These factors are even more critical when we consider the healthy prices of crude oil in today’s international market, the rise in natural gas prices – especially outside the Middle East region – and the projected growth in demand for both oil and gas. Here again, the Gulf has considerable advantages when it comes to feedstock availability and costs, making the region a natural home for future petrochemical industry investment.

Investors continue to look for inexpensive gas for use in the manufacture of methanol and ammonia. In some cases, stranded gas has been the answer, as producers with gas resources located in remote areas have been willing to supply lower-priced gas in an effort to monetise these resources. With the rise of international gas prices, higher gas export prices and the growing domestic demand facing most large producers of gas, including those in the Middle East, producers are looking more carefully at the comparative economics of gas monetisation alternatives, including local use by utilities, exports of LNG, pipeline exports, methanol and ammonia production, clean fuel use in olefins manufacturing or metals production and even gas-to-liquid schemes. As a result, the petrochemical uses of gas, and in particular ammonia and methanol, will increasingly be in competition with other, more economically attractive, calls on available gas supplies. The desire among many gas producers to have a wider, less risky and less volatile portfolio of gas utilisation businesses, including the goal of adding value on their own shores, also comes into play.

Looking at ethane, competitively priced stocks of this product have been a key driver of growth in the Middle East olefins industry, and since ethane is sourced from both associated and non-associated gases it has been plentiful in the region. Consider the fact that the richer the raw gas is in ethane and liquids, the better it is from a petrochemical producer’s perspective and from the overall profitability perspective. Then consider that while oil production is set to grow in much of the Middle East, in many cases the production slate will become heavier, meaning there will be less associated gas produced because of lower gas-to-oil ratios. Furthermore, while non-associated gas production will also increase, some of this production will be in the form of leaner or drier nonassociated gases that contain less ethane. Therefore, future supplies of ethane in the region will depend on a combination of increasing non-associated gas production, the relative richness of this gas in terms of ethane and natural gas liquids (NGL) content and the nature of expanding crude oil production in the region. As a result, regional ethane supplies are expected to rise for quite some time before growth eventually begins to tail off.

The future of NGL supplies is subject to many of the same factors shaping future ethane stocks. Overall, the IEA forecasts growth in NGL supplies over the next quarter-century from something over five million barrels per day (bpd) at present to around 7 million bpd by 2030. Most of that growth is forecast to come from the Middle East and Eurasia, as a function of both the worldwide distribution of gas reserves and increases in oil production and thus associated gas supplies.

Let us now turn to refined product feedstocks in the region, which have thus far taken a back seat to the low-cost, gas-based feedstocks that have fuelled the growth of the region’s olefin, methanol and ammonia industries. In fact, the future of liquidsbased petrochemical enterprises in the region is very attractive, given the prospects for aromatics production – although there are also opportunities to crack naphtha in order to manufacture olefins, which may attract increased attention as the growth of ethane and NGLs moderates in the future.

There are two key factors that must be kept in mind when it comes to refined product feedstocks. First, oil supplies are expected to come increasingly from the Middle East, and therefore locating petrochemical plants in the region enables them to lock in steady, long-term supplies of oil and, by extension, refined products. Second, with the Middle East establishing itself as an important refining centre, the region will also offer a competitive advantage in terms of feedstock availability. In other words, besides locating petrochemical facilities in close proximity to their markets, it will make increasing economic sense to construct these plants nearer to their source for feedstocks, with the added benefits of low fuel and related energy costs, as mentioned above.

This is why we are seeing increasing interest in integrating refineries and petrochemical facilities, both to assure the easy and costeffective costeffective availability of feedstocks and to enhance the profitability of refineries by directing certain product streams to petrochemical manufacture, where these fuel streams will have a higher value. In addition, synergies can be harnessed when it comes to sharing utilities and overhead costs. Of course, for such refinery integration opportunities to manifest themselves as commercial realities, it is imperative that international partners and investors be willing to negotiate win–win deals and to bring their state-of-the-art, highvalue- addition technologies to such projects.

At Saudi Aramco, we are already working with such visionary partners and are in the process of implementing an integrated refinery–petrochemical megaproject at our Rabigh Refinery in partnership with Sumitomo Chemical of Japan. A similar integrated refining and petrochemical project is currently being considered for our Ras Tanura location in collaboration with another world-class partner. On the refining side, we are partnering with Total and ConocoPhillips on two export-orientated refineries with a total throughput of 800,000bpd.

These projects, and the involvement of the world-class companies associated with them, are testament to the tremendous prospects for the Middle East’s petrochemical sector. Just as the Middle East’s leading role as a producer of both crude oil and natural gas grows to meet expanding future global demand, this region will also assume a much higher profile in the petrochemical sector. In fact, we are already witnessing the beginning of a paradigm shift as petrochemical investments in the region start to accelerate.

Nevertheless, given the importance of this sector for our economies and societies, we must proceed carefully. We must make more judicious use of our valuable gas and gas-based petrochemical feedstocks, because although their supplies are abundant they are also finite and could be put to use in other competing applications. We also need to fully consider the role that gas liquid and refined product feedstocks can play in augmenting our gas-based industries, especially where the petrochemical type and project economics justify such an option. Furthermore, as in ecology, nutrition and the stock market, greater diversity and balance should be among our goals, with the understanding that a more mixed feedstock slate will lead us to a more versatile feedstock future.

I find no reason why the chemical industry in general, and the petrochemical industry in particular, could not and should not play a much more significant role in the Middle East’s economic development than they do today, and contribute more substantially to both job creation and value addition than at present. Given the Middle East’s abundant oil and gas resources, its existing hydrocarbon production and processing infrastructure and the slate of additional oil, gas and refining projects that will be coming onstream in the decade to come, this region’s distinct energy advantage will only grow over time.

This paper is based upon a recent speech presented at the Chemical Market Associates, Inc. (CMAI) and Purvin & Gertz Conference on ‘The Middle East Influence on Global Energy and Petrochemical Markets’ and is reproduced here with the kind permission of Saudi Aramco (www.saudiaramco.com).