The US$3.7 billion expansion of the Eastern Petrochemical Company (SHARQ) petrochemical facility may be dwarfed by the recent Rabigh mega-project but it cements the plant's position as one of the region's biggest petrochems projects

The third expansion of the facility - at the Jubail industrial complex on Saudi Arabia's eastern coast - will increase capacity to 4.9 million tonnes per year (mtpa) and its output of compounds polypropylene and ethylene glycol will outstrip those at the US$9.8bn Rabigh project by 2.5 mtpa.

The key driver behind the expansion of the SHARQ facility was an agreement with Saudi Aramco whereby the monopoly hydrocarbons firm would provide an increased ethane feedstock for an upgraded complex at Jubail.

Ethane is a basic building block in the constitution of most plastics and is more profitable than cracking propane. However, because it is gaseous at most temperatures and pressures, it cannot be readily exported. So Saudi petrochemical firms are subject to the universal price set by Saudi Aramco.

But the agreement with Saudi Aramco placed SHARQ on a more even footing with its competitors in the kingdom, allowing it to produce polypropylene for the first time using an ethylene cracker.

The project also highlights the cost inflation on Middle East projects.

 When the project was on the drawing board it was billed to be in the region of US$2bn, it has now closed at around US$3.7bn, due to rising global construction costs. It secured US$2.43bn of debt, provided by international commercial banks as well as public investment bodies at quite favourable rates.

Construction has already begun and will be completed by the first quarter of 2008. This extensive upgrade, including the establishment of an ethylene cracker, comes at a significant cost, of course.

The project structure

SHARQ brings Japanese technological expertise into the Saudi petrochemicals industry by way of a 50:50 joint venture between SABIC (Saudi Basic Industries Corporation) and Saudi Petrochemical Development Company (SPDC).

SABIC comprises:

• Saudi government (70 per cent)
• Private sector shareholders in Saudi and the GCC (30 per cent)

SPDC comprises:

• Mitsubishi (lead firm)
• JBIC (in the region of 20 per cent stake)
• Some 50 other Japanese firms

Contractual arrangements

Foster Wheeler is the project manager and did the front-end design. It has three EPC sub-contractors on board:

• Linde
• Samsung
• Stone & Webster

An innovative ‘convertible EPC contract structure’ was used. A source close to the deal said ‘this was a very fast-track project, rather than wait to complete the bidding process that would lead to a true fixed price, a decision was made to enter into contracts to get the project moving with the ability to convert into fixed price contracts at a later date.’

Elaborate provisions were included to determine how that would be done, including the use of price caps, in a structure which it is expected will be employed in future oil and gas and petrochemicals contracts in the region.

The plant will use several hundred megawatts of power and considerable water for cooling systems. Both these inputs and the steam will be bought in long-term contracts from Marafiq – the utility covering the Jubail industrial complex. The plant is to be compliant with the royal commission guidelines on Jubail and Yanbu.

The polypropylene and ethylene output are not sold by SHARQ, but by SABIC and SPDC under separate marketing arrangements. Most of it will go to Asia, via SABIC’s sales networks, where plastic consumption is set to grow substantially.

Polypropylene and ethylene glycol are currently on the high peak of the cycle – the price for the commodity grade of polypropylene is around US$1180/tonne – a peak which is set to taper off after 2008 due to overcapacity. Nevertheless the Saudi market will be the last to be hit, given the low cost feedstock allocation, making it a likely survivor of any market downturn.

Financing

With such a significant Saudi government interest and the presence of Japanese investors on board, SHARQ had no problem in securing the majority of the US$2.43bn debt between the Saudi Public Investment Fund (US$480m) and JBIC (US$1.17bn).

The remaining US$780m came from ten international commercial banks. The MLAs are as follows:

• BoTM
• Mizuho
• Citibank
• Apicorp
• WestLB

Lead arrangers:

• Shinsei
• SMBC

Arranger:

• ING

Co-arrangers:

• Bank Saudi Fransi
• Gulf International Bank

BoTM was also financial adviser to the sponsor and despite the participation of GCC banks, there is no Islamic financing component to this deal. There was no bookrunner.

All the facilities are priced at a flat rate of LIBOR plus 50bp, with the exception of the JBIC facility, which is provided at slightly more favourable terms. Pricing is LIBOR plus 55bp. The loans have a maturity in the region of 10 years from construction start, the PIF facility marginally longer than the others.

Debt: equity is 70:30 and there is a six-month DSRA on the project. The minimum DSCR is in the region of 1.75. No political insurance is taken.

Difficulties imposed by the Shari’a law system mean that as with other project finance deals in the kingdom, the contracts have a ‘hybrid structure’ which takes into account the difficulty of mortgaging the project assets.

Conclusion

The agreement between Saudi Aramco and SHARQ means that the firm will be placed on a more even footing vis-à-vis its competitors in the kingdom, establishing an ethylene cracker for the first time.

It has broken new ground in the establishment of a convertible EPC contract structure, which may be implemented in future deals in the region.

The project won’t be completed until 2008, so there are no new petrochemicals projects envisaged for the JV in the near future.

The Saudi market on the other hand will be awash with projects in the forthcoming years. Rumours suggest that SABIC, which has 14 JVs in the country scattered across Jubail, Dammam and Yanbu has several of these projects up its sleeve. There’s no doubt about it, the developers will just be waiting for the banks to catch up.

The project at a glance