Dr Abdulwahab Al Sadoun, secretary general of the GPCA, looks at how the downstream oil and gas sector can sharpen its competetive edge.
When we talk about competitiveness, more often than not we refer to the economic health of a nation’s traded sectors. The World Economic Forum’s Global Competitiveness Report defines competitiveness as ‘the set of institutions, policies and factors that determine the level of productivity of a country’.
Harvard’s Michael Porter, the leading authority on competitive strategy, said that: ‘National prosperity is not created, not inherited. It does not grow out of a country’s national endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.”
When we look at the competitiveness of the national economies in the GCC, the petrochemical industry emerges as a cornerstone in the diversification drive of our economies. And so, as governments in the Arabian Gulf take stock of continuing oil price turbulence, they continue to boost investments in the petrochemical industry - an industry that has seen spectacular growth over the past 30 years - to diversify income from fossil-fuel energy.
However, the competitive landscape of the worldwide chemical industry is also changing rapidly. The high-growth developing markets of China and India are now dominating the chemical sales world rankings and are embarking on ambitious self-sufficiency drives. On the other side, the United States continues to ride the shale gas boom, and although this advantage has been eroded by lower oil prices, in the long run, the US is expected to benefit from the abundance of low-cost natural gas liquids (ethane and propane).
The European chemical industry, meanwhile, has profited from this year’s lower feedstock prices, but suffers from a complex regulatory environment. Closer to home, the lifting of Iran’s oil sanctions has spurred the country on a mission to double its petrochemical capacity in the next 10 years.
Here in the Arabian Gulf region, lower energy prices and the global economy’s eastward shift are demanding the GCC chemical industry to change its formula for competitiveness and to ride the new market conditions to competitive advantage, something that we will discuss during the Annual GPCA Forum taking place 27-29 November 2016 in Dubai.
The GCC chemical industry has demonstrated its maturity and resilience during the recent macroeconomic headwinds, outpacing typical GDP growth. But with advantaged gas supplies expected to end in most countries in the region, the GCC industry will have to build up its export industry using crude oil derivatives such as naphtha instead of ethane.
While obtaining naphtha at advantaged prices would strengthen the GCC chemical industry’s competitive advantage, feedstock cost is just one component in the equation to work with, the other representing fixed costs and variable costs, meaning that GCC producers will have to increase efficiency in order to lower the variable costs.
Six concurrent components can speed us towards this destination:
Component #1: Vertical integration
One element to increase efficiency by lowering variable costs is to improve vertical integration between refining and petrochemical production. This allows us to capture the full potential of our resources, both physical and intellectual, and also to leverage the versatility and abundance of liquid feedstock (naphtha and NGLs) in the region to capture more value from the broader product slate. Restructuring and upgrading existing refineries to introduce greater feedstock flexibility is therefore needed.
Component #2: Industrial clusters
The second key component is to match these integrated plants with strong future demand for their output by developing competitive industrial clusters that are robust, well-integrated in terms of logistics and derivatives units. This will drive costs down and ensure the utilisation of full assets.
Component #3: Promoting tomorrow’s talent
As an industry that is growing in scale, depth and reach, the GCC petrochemical industry needs a sophisticated workforce. There are still many concerns about the wide spread culture of reliance on governments to provide employment for national citizens, and the education and skills of the regional workforce do not always match the needs of our industry. This leads to an uncompetitive workforce. To fill the employment gaps, our industry will have to become more proactive in developing regional skills and talent by investing in higher education, but also by focusing on vocational education and on-the-job training.
Component #4: Leveraging the power of partnership
We must build on the partnerships we have established in the past and continue to create new ones with the new emerging global leaders of our industry for the future, providing the GCC chemical industry with access to leading edge technologies and markets.
Component #5: Building local innovation capabilities
Another important component in riding the new market waves is to accelerate the regional industry’s ‘innovation engine’ to accomplish a leapfrog in knowledge intensity. While the region’s foremost petrochemical companies, including SABIC, Tasnee, Sipchem and Borouge, have invested heavily in creating dedicated R&D centers, GCC producers should increase their focus on ‘Open Innovation’ which would give them access to external ideas and capabilities. The industry should, for example, create a regional network for manufacturing innovation to bring emerging technologies to market.
Component #6: Formulating smart policy frameworks
Last but not least, GCC chemical producers should partner with their national governments to create supportive, transparent and coherent policies and efficient services to foster a competitive business climate. Crafting a consistent and predictable legislative framework will support attracting investment inflow from abroad.
At present, the GCC petrochemical industry is caught in the throes of fundamental transformation, a transformation that will take the GCC chemical industry to the next stage of development. To thrive, GCC producers will have to rethink and revise their business strategies, including:
- Increasing product differentiation, shifting from bulk to specialty chemicals, which solve societal and sustainability challenges;
- Pursuing right-sizing and integration, and – further downstream – by realising the value of byproducts;
- Creating of new, groundbreaking technologies to enhance the competitive position of liquid feedstock, oil-to-chemicals, for example;
- Deployment of more energy efficient facilities and technologies;
- Nurturing SMEs, including the strengthening of an entrepreneurial ecosystem;
- Leveraging the potential of digitalisation to add value to the business;
- Optimising functional excellence in manufacturing, marketing, supply chain, sourcing and service functions.
The GCC chemical industry’s future competitiveness therefore hinges on our ability to innovate, to keep ahead of the commodisation cure and to develop and deliver high-demand solutions. But, while realising there is substantial untapped potential in the Arabian Gulf chemical space, one of the most important realisations we must make is that our biggest asset might be the youth bulge the region is experiencing. As an industry, we should seize the opportunity and leverage our enviable competitive position of considerable resources and young talent.