Chemical Industry in the Middle East Investments put to the Test: Low Crude Prices Undermine Middle Eastern Chemical Projects
The unexpected drop in global crude oil prices appears to have caught some chemical producers in the Middle East off guard: As prices for resources and feedstock remain low, companies have to rethink their investment strategy, new studies show.
Dubai – The significantly lower profits or losses of some chemical producers in the Middle east hreatens to undermine investments in new chemical projects in the region, says new analysis issued today by IHS: “It does appear that Middle East chemical producers were a bit surprised at just how far oil prices fell and how quickly their earnings were impacted,” said Sanjay Sharma, vice president, Middle East and India, at IHS Chemical.
“The region’s producers reported mixed third-quarter results, with a majority experiencing lower profits while others reported losses. Those companies with fixed feedstock costs were particularly hard hit by falling oil prices, and that lost income is, in turn, putting a squeeze on their expenses and capital budgets. This is impacting new planned projects in the region, so it has a snowball effect.”
Recent cancellation of the Al Sajeel and Al Karaana projects in the Middle East, Sharma said, are examples of how the oil price slowdown is already impacting specific investments in the region. He expects producers are going to be fairly cautious going forward with new investments until the market volatility becomes less of a threat. In addition, this rapid oil price decline comes after a period of exceptionally strong margins and higher producer costs, as overall spending increased with the enhanced margins.
Cutting Costs on All Fronts
“As a result,” Sharma said, “due to a sharp decline in revenue, the producers are not only faced with scaling back investments and adjusting to volatile energy market dynamics, but they also have to reel in costs at the same time and become more efficient. It is critical now, more than ever, that they improve operational excellence and control value leakage from production ventures. The oil and gas industry has been going through this same difficult exercise since the oil prices first began to drop significantly, but now the belt tightening is being experienced by chemical producers as well.”
Profits at SABIC, the region’s largest chemical player, began to decline, year-on-year, in the third quarter of 2014, and since then, others in the region have joined SABIC in watching their earnings decline, IHS said. Earlier this year, Gulf Cooperation Council (GCC), a group of chemical producers who depend on ethane feeds, temporarily relinquished their position as the world’s lowest-cost ethylene makers to producers based on liquefied petroleum gas (LPG) in North America and Europe. However, rising LPG prices have since reversed this position.