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Japan’s Sumitomo undecided on Saudi expansion plan

Japan’s Sumitomo undecided on Saudi expansion plan

Sumitomo Chemical hopes to go ahead with the expansion of the Petro Rabigh petrochemical complex with Saudi Aramco but is still unsure if it makes economic sense, a senior executive at the Japanese firm told Reuters.

February 22, 2012 1:00 by

Sumitomo and state-run oil giant Saudi Aramco said when they signed the agreement in 2009 to expand the plant in Saudi Arabia that the feasibility study would be completed by the third quarter of 2010 and Aramco officials said a final investment decision (FID) would be taken by the end of 2011.

But foreign contractors who have already bid to build it are likely to be left waiting until after their current bids expire in April while Sumitomo revises the economics of the multi-billion dollar investment.

“I can’t say when as we are still trying to figure out if the project is feasible… Economic and petrochemical market conditions have been changing,” the senior Sumitomo source said when asked how long the review would take.

“We think we are still in the middle of the feasibility process… We make tough negotiations to the very last detail, we want to make the project work,” he said.

Feasibility studies typically precede front-end engineering and design (FEED) work and Engineering Procurement Construction (EPC) contract tenders, but potential investors will review feasibility studies if market conditions shift.

Sources in Saudi Arabia said stiff competition and an uncertain outlook in the petrochemicals sector could be behind Sumitomo’s sluggish decision making, but South Korean companies submitted such low bids to do it that they could encourage Sumitomo to press on.

“The lowest price offered was unbelievably cheap, they have to reconsider how much sales, gain from the plant, consider the income, recalculate carefully – nobody knows which direction it will go,” said an industry source in Saudi Arabia.

Another industry source in the oil-exporting country said the Japanese partner should be in a position to decide once and for all whether to go ahead with the project now it has a clearer view of the costs involved.

“They should be able to evaluate better but they are late, this should have been completed months ago,” he said.

Under Rabigh II – which is expected to cost $6-$8 billion – the existing ethane cracker would be expanded as well as a new aromatics complex using around 3 million tonnes per year of naphtha and various units of petrochemical products of higher value and specialty including EPR (ethylene propylene rubber), Methyl Methacrylate (MMA).

The Sumitomo executive said his company was still in the middle of the review and not about to pull out.

“We established a very close relationship with Aramco getting through phase one… We’re committed to working together,” he said.

“We realize they probably want to move faster… But we’re working hard on this feasibility study on the assumption that we will work together.”

Sources in Saudi Arabia said Aramco would press ahead with the project as it is a key part of Saudi plans to diversify its energy portfolio and maximize profits from downstream activities.

Aramco says it is still working with Sumitomo on completing the project.

“Saudi Aramco remains committed to the realization of the Petro Rabigh expansion project and is engaged with Sumitomo Chemical to optimize project execution in a manner that will ensure the project will achieve the aspirations of all of Petro Rabigh’s shareholders and other stakeholders,” Aramco said in a statement on Tuesday.

None of the sources could say whether financial problems or lower-than expected-revenues from Rabigh I were behind the delay.

“PetroRabigh (I) will need time to achieve financial stability, I don’t expect that before 2013,” said Hisham Tuffaha, head of research at Bakheet Investment Group in Riyadh.

“The financial performance of PetroRabigh has fluctuated a lot… Results have been less than expectations.” (Additional reporting by Osamu Tsukimori, editing by Daniel Fineren)

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