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Bloomberg: Shell Says Cost, Lack of Gas Are Slowing Saudi Plans (Update1)

By Oliver Klaus

Sept. 8 (Bloomberg) — Royal Dutch Shell Plc said a lack of natural gas and rising construction costs are slowing down the planned expansion of a chemicals plant in Saudi Arabia that it owns with Saudi Basic Industries Corp.

The plans call for expanding the Saudi Arabia Petrochemical Co., or Sadaf, petrochemicals complex in Jubail by adding a second plant for the production of ethylene, a gas derivative commonly used to make chemicals. The project is suffering from a shortage of natural gas in the country, said Robert Weener, the chairman of Shell Companies in Saudi Arabia, yesterday at a London conference.

Saudi Arabia, which holds a quarter of the world’s known oil reserves, excludes foreign companies from extracting them. Overseas companies like Shell are investing in the kingdom’s petrochemicals and refining industries in the hope they will be asked to develop the nation’s remaining oil resources.

Saudi Arabia’s gas consumption is rising as the country develops new industries that use gas to make chemicals and plastics. Cheap gas has made Saudi Arabia an attractive destination for international companies seeking to invest in petrochemicals. Gas production hasn’t kept up with demand, though.

“At this moment, Saudi Arabia is short of feedstock,” Weener said. “All that they have has already been spoken for.”

Empty Quarter

A Shell-led venture might help ease the situation if it finds gas in Saudi Arabia’s Empty Quarter desert, translated from its Arabic name Rub al-Khali. Shell and its partners in the venture, Total SA and state-owned Saudi Aramco, started drilling for gas in July and will drill a total of seven wells by 2009, Weener said

“If gas was found in the Rub al-Khali, this would give a real boost to further petrochemical investment,” Weener said. The chances of finding gas stand only at 20 percent, he said.

Another expansion of Sadaf’s existing styrene plant and isooctane units will go ahead, “provided that the overheated construction market cools down,” Weener said.

Construction costs are rising in the Persian Gulf amid shortages of equipment, labor and raw materials.

“There is no doubt that there is a shortage of material and equipment,” Colin Lothian, senior analyst for eMiddle East energy at Wood Mackenzie, said by phone from Edinburgh on Sept. 8. “This is very much a challenge in the industry.”

Saudi Arabia will spend $690 billion by 2020 developing its infrastructure and education and industries from oil and gas, petrochemicals, power and water to telecommunications, tourism, agriculture and information technology, John Sfakianakis, chief economist at SABB, a Saudi Bank, said at the London conference.

Weener and Sfakianakis spoke at the “Opportunity Arabia 3” conference organized by the Middle East Association in London.

To contact the reporter on this story: Oliver Klaus in London at [email protected]

Last Updated: September 8, 2006 08:11 EDT

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