Abdul Rahman Al-Rashid is chairman both of the Eastern Province Chamber of Commerce and Industry and of the Council of Saudi Chambers of Commerce and Industry. He is, effectively, the voice of the private sector in Saudi Arabia. In an interview with Arab News, he highlights high oil prices, growing local supplies of natural gas and increasing export opportunities resulting from entry into the World Trade Organization as the motors driving the growth of industry in Eastern Province. He reveals a scale of industrialization in the province that has the potential to make Saudi Arabia the petrochemicals leader of the world.

Excerpts from the interview:

Q: To what extent is Eastern Province still the hub of Saudi industry? Will it remain the hub given the planned new industrial cities elsewhere in the Kingdom?

A: Eastern Province has a headstart in the industrialization process. The oil boom of the mid-1970s inspired the first wave. The government’s policy of channeling surplus earnings from oil into nonoil development and the growing demands of the oil sector for oil-related products and services was a major boost to the initial growth of industries in the region.

The decision to use natural gas profitably, which initially used to be flared and wasted, not only as a fuel but also as feedstock for a range of new industries marked the beginning of a new phase of economic diversification in the Kingdom. Gas suddenly emerged as the springboard for industrial growth. Waste became wealth.

The first breakthrough in industry came with the establishment of the Saudi Basic Industries Corporation (SABIC) in 1976 and its launching of massive joint ventures mainly for basic petrochemicals in Jubail based on gas as the feedstock. SABIC also pioneered the steel and fertilizers industries. Meanwhile, the private sector rose to the occasion and, over a period, a large number of downstream units sprang up. The list of industries that came up alongside included cement, paint and metal-based goods, engineering goods, plastics products, food processing and more.

Today, Jubail is the showpiece of Saudi industry. It accounts for about 10 percent of global exports of petrochemicals. Jubail Industrial City, set up by the Royal Commission for Jubail and Yanbu, currently has 19 primary industries in addition to 162 secondary and light industries, together accounting for an investment of SR100 billion ($26.6 billion). Some 95 new factories, including 13 primary industries, are under various stages of construction. When completed, the total investments will be around SR200 billion ($53.3 billion).

The pressure of demand for industrial sites has grown and so the Royal Commission launched Jubail Industrial City II. The first stage of JIC-II, to be completed by 2009, will have nine primary petrochemical plants. These are the only ones planned for the first stage. The total investment by the private sector alone at this stage is expected to be another SR100 billion.

The expansion of the Jubail petrochemical sector has received fresh impetus with the gas initiative, and following Saudi entry into the WTO in 2005 the number of Saudi and foreign investors seeking low-cost feedstock has increased substantially.

Eastern Province can claim to have a pride of place in key base industries, such as petrochemicals, plastics, fertilizers, steel and cement, apart from downstream units and a wide range of conversion industries. A big breakthrough in export-oriented minerals-based industries — aluminum and phosphate fertilizers — is now expected as Maaden develops the Ras Azzour project, north of Jubail.

The prominence acquired over the years by the province will remain intact, given the pace of growth in Jubail, Ras Azzour and the two industrial cities in Dammam. Saudi Aramco’s new refinery in Jubail and the new petrochemical complex in Ras Tanura will further strengthen this industrialization drive, not to mention its oil expansion plans and the gas initiative.

In all, there were as of last year about 858 large industrial units in the province. That’s about 23 percent of the Saudi total. Eastern Province industrial units together have an investment of SR128 billion ($34.1 billion) — 48 percent of the total investment in industries in Saudi Arabia. Thus almost half of Saudi industrial investment is in Eastern Province. Obviously, the basic industries set up in the province are capital-intensive in nature and this is likely to continue in the future. Today, Eastern Province accounts for about 70 percent of the primary industries in the Kingdom and is, therefore, the source of strength for industry in other regions. The province has also the unique distinction of being the major center for nonoil exports — well over 70 percent.

There are major programs for industrial development in other regions of the Kingdom. This is as it should be. But these developments will only strengthen the process of development in Eastern Province. Petrochemicals or steel produced here have big markets in other parts of the country. It is wrong to look at these efforts in the various regions in terms of competition. They are complementary and their cumulative impact will be to create a prosperous Saudi Arabia.

Q: What new private and public industrial projects are planned in Eastern Province in the next two to three years and how much of that investment is local, national and foreign?

A: It is a long list. I am happy we are in a new golden era of development, particularly of private sector industries in the Eastern Province. The boom in oil earnings and Saudi Aramco’s drive to raise oil production — setting up new refineries and petrochemical complexes — and the gas initiative have enormously expanded the need for local supplies of equipment, products and services. The new Maaden and SABIC projects, as well as the boom in real estate and construction, have also created new business opportunities. The sharp rise in the Saudi population has boosted demand for various consumer goods, many of which are currently imported. Lastly, foreign investors, who had shied away, are now back after the WTO entry looking for low-energy-cost projects.

The private sector — Saudi and foreign investors — is looking at hundreds of projects, large, medium and small. Industrial licenses have been issued, although it is difficult to say how many because the traditional system of periodically announcing the list of new industrial licenses has been stopped. Information is, of course, available for large projects. Let me give you a broad outline.

The largest is the upgrading of the 550,000 bpd Ras Tanura oil refinery and the establishment of a petrochemical complex by Saudi Aramco jointly with Dow Chemical Co. The total cost for this project is estimated at SR60 billion ($16 billion). It is one of the world’s largest projects in the field. Saudi Aramco is also setting up with Total SA a 400,000 bpd oil refinery in Jubail at an estimated cost of SR22.5 billion ($6 billion).

The second largest is the SR30 billion Saudi Kayan Petrochemical Company plant in Jubail, in which local investors have a share of 20 percent and SABIC 35 percent. The balance is to be met through a public issue.

Then there’s the SR22 billion ($8 billion) China joint venture, currently being finalized by a consortium of three Saudi companies: Midroc, Sara Development and House of Invention. It is an investment of SR22 billion ($5.9 billion). The plant will have a total capacity of two million tons of basic and secondary petrochemical products — again at Jubail.

There’s the SR10 billion ($2.6 billion) Tasnee-Sahara-Basell petrochemical project to produce about one million tons of ethylene and just over a million tons of propylene. The project will be operational in the second half of 2008 in Jubail.

A French-Saudi petrochemical joint venture, Sinai Petrochemicals, with a capital of SR10.5 billion ($2.8 billion) has a project, also at Jubail, to produce propylene, polyethylene and methanol. It will be onstream in mid-2008. The French stake in the new company is 70 percent; the Saudi stake is 25 percent; the remaining five percent will be held by Bahraini investors.

Saudi Projects Management and Development Co. has a major SR13 billion ($3.5 billion) project in Jubail. It consists of a 1.35 million ton ethane/butane cracker along with downstream products, such as polyethylene, polypropylene, ethylene oxide and Bisphenol-A.

Another large project, progressing well, is a Saudi-US joint venture involving an investment of over SR7 billion ($1.9 billion). Delta International and Innovene are jointly executing a world-scale cracker and derivatives facility to produce HDPE, LDPE, acrylonitrile and polypropylene.

A new integrated propane-dehydrogenation and polypropylene plant is being put up by the National Polypropylene Co. with a capacity of 450,000 tons per year of polymers.

The projects I have listed here show the pattern of emerging industrial growth in the province. This also gives an indication of the fantastic range of raw materials, which will become available to the downstream units. This is a big challenge and a golden opportunity for Saudi and foreign investors.

In addition there is massive investment in the expansion of existing units that will increase exports. SABIC affiliate SADAF’s new plant for styrene will make it the largest simple complex producer of styrene in the world. There is SHARQ’s plan to add three million tons a year capacity for ethylene, propylene, polyethylene and ethylene glycol, as well as UNITED’s scheme to add 625,000 tons of annual capacity, which will make it the world’s largest producer of ethylene glycol used for polyester production and other industrial applications.

The Saudi Chevron Phillips Co. expansion is another ongoing mega project that deserves special mention. This Saudi-US joint venture, which started in 2000 with a SR2.5 billion ($667 million) petrochemical plant (benzene and cyclohexane), is spending SR4.5 billion ($1.2 billion) on an expansion project for a new integrated world class styrene facility, as well from expanding the existing production range.

Eastern Province will also benefit from what Maaden is planning for Ras Azzour. This desert area is going to become another Jubail. Maaden has plans to set up an aluminum plant and a fertilizer complex here, plus infrastructural facilities such as port development and the establishment of a desalination plant. Preparatory work is in full swing.

Besides oil, gas and petrochemicals, Eastern Province has a pride of place in the production of steel, fertilizers and cement. The total fertilizer production, about 5.5 million tons in 2005, is expected to shoot up to eight million tons this year thanks to a new SABIC unit going onstream. In steel also, the province has made a big contribution thanks mainly to HADEED, a SABIC affiliate, and the private sector Al-Tuwairqi Group.

In the private sector, there are also major developments in engineering industries, building materials and infrastructure. Dammam Industrial City II has become a beehive of engineering and chemicals downstream industries. About 300 new units are expected here in the next five years, in addition to the Technology Zone. The ongoing expansion of Saudi Cement will augment production in the province. The industrial scenario of Eastern Province has thus become dynamic. It is the multiplier effect. The new projects will, in turn, encourage the growth of downstream units and other service and support industries, giving a further boost to the nonoil diversification of the Saudi economy.

Q: How does investment by the private sector in Eastern Province compare to that by the state sector?

A: At present the large industrial projects coming up are mostly in the private sector, including joint ventures, while the state involvement is mainly in investment in infrastructure. In the petrochemical field, Saudi Aramco has now entered in a big way, but new joint venture companies are being set up for the purpose which will involve eventually public subscription, giving an opportunity for the citizens to participate in their ownership. SABIC, which had enjoyed a measure of monopoly in the early stages, is now exposed to open competition from the private sector. SABIC anyway is only partially state-owned. Under the present policy of privatization, ownership is bound to undergo further changes. The YANSAB IPO and the SABIC partnership in Kayan are indicators of this change.

Private sector investors, Saudi or foreign, have complete freedom to compete with the existing state sector enterprises. Therefore, the margin between the state and the private sector has blurred over the years and there is no longer any clear-cut distinction under the new era of economic liberalization and privatization.

Q: The current boom in the Kingdom is seen abroad as wholly due to the high price of oil. To what extent is this so?

A: High oil prices have had an impact on the overall economic life in the province. But it is not correct to attribute all industrial investment to them. They have certainly liberalized budgetary expenditure on infrastructure projects and investment in oil and gas projects, but their impact on private investments does not seem to be so decisive.

In the case of petrochemicals, where Saudi and foreign investments have increased substantially this year, many of the projects had been in the pipeline but they all suddenly came up for execution. This follows the favorable terms arrived at during the Saudi negotiations for entry into the WTO.

You will recall that some countries objected to what they called the dual pricing system for the Saudi feedstock — natural gas, NGL and naphtha. Saudi feedstock is, of course, substantially cheaper when compared to international prices. This, however, is the result of the bounty of nature and the resultant low cost of production — not domestic subsidy. The WTO ultimately accepted the Saudi position on this. It is this single factor which has opened the doors to a sudden increase in investment in this sector in Jubail in 2006. I would say that the local availability of low-cost feedstock has attracted most of recent investment, whether petrochemicals, fertilizers, nonferrous metals or other industries which are energy-intensive. These products have to face highly competitive world markets.

There are other factors influencing these investments, like the government’s policy on the role of the private sector and the extent of liberalization of the foreign-investment laws. It cannot, therefore, be argued that high oil prices have stimulated the inflow of these investments and any fall in prices would reverse the trend.

Q: What percentage of Eastern Province’s nonoil industrial products is sold domestically and how much exported?

A: Eastern Province has a unique role in the Saudi export trade. Oil has a lion’s share. For nonoil products too the province tops since it accounts for 70 percent of the total Saudi exports. The export proportion varies from industry to industry. Petrochemicals, including plastics and fertilizers, are export-oriented. In steel or cement, for which the domestic demand is high, the share of export is modest.

Q: What are the challenges for business and growth in Eastern Province?

A: The first and foremost challenge is the supply of feedstock for the petrochemical industry, the prime mover of the province. Unless Saudi Aramco and its joint venture partners involved in gas exploration succeed in increasing natural gas supplies as early as possible, a shortage situation can arise. There are, however, reasons to be optimistic on the basis of reports about gas exploration so far. Secondly, new projects have created shortages of not only qualified manpower, but also quality consultants and quality construction services as well as essential raw materials. As a result the cost of these projects has risen. Thirdly, there is still a lurking doubt about dumping and the impact of economic reforms under the WTO regime on the domestic business. Time alone will tell what their impact will be. Fourthly, for the long-term development of the export trade, there is need for constant overseas market research, product adaptation and innovations aimed at quality upgrading and cost reduction. There is neither adequate infrastructure nor coherent policy directions to solve these problems. Finally, on the political front, the Middle East geopolitical disturbances affect the morale of investors. One can only hope that peace will return to this region sooner than later.