State oil giant Saudi Aramco [IPO-ARMO.SE] and petrochemical producer Saudi Basic Industries Corp (SABIC) signed a preliminary deal on Sunday to build a $20 billion complex to convert crude oil to chemicals.
The project, which the partners said would be the largest crude-to-chemicals facility in the world and the first in the kingdom, are part of the Saudi government`s effort to diversify the economy beyond exporting crude.
Private investment has slowed in the kingdom in the last few years due to low oil prices and government austerity, so Riyadh wants to develop manufacturing industries, including chemicals.
After signing the memorandum of understanding, Aramco Chief Executive Amin Nasser told reporters a final decision on whether to go ahead with the project would be made by the end of 2019.
Investment costs for the complex, which could start production in 2025, would be shared equally.
"The two companies can pool their expertise and, given the large size of the capex, partnering hedges their risk," said Michael Arne, head of emerging technologies research at IHS Markit.
Aramco, the world`s largest oil company, has been developing its downstream business as the government prepares to sell up to 5 percent of its shares next year in an initial public offering (IPO).
The CEOs of both firms said they were considering locating the complex at the Red Sea port city and industrial centre of Yanbu. But Nasser said there were also other options, with factors such as proximity to markets guiding a decision.
Yousef al-Benyan, SABIC`s CEO said the two companies would examine the best technology to use, after they had been working on different technologies to convert crude to chemicals before deciding to team up.
Benyan said the project could involve two or three crackers, which are used to break heavy hydrocarbons into petrochemicals. The use of so-called flexi-crackers would enable the firms to break down a range of feeds - oil, gas or naphtha.
The complex would process crude at international prices to make polyethylene, polypropylene, xylene, benzene and other products, Nasser said.
The Saudi project would process about 400,000 barrels per day (bpd) of Arabian light crude oil to make about 9 million tonnes of chemicals and base oils a year, plus 200,000 bpd of diesel for domestic use.
The new complex would create an estimated 30,000 jobs directly and indirectly, adding 1.5 percent to Saudi Arabia`s gross domestic product by 2030, the companies said.
The venture would help SABIC expand operations in the kingdom and give it more feedstock options, Benyan said.
SABIC has been diversifying its feed base. In China, it plans to make chemicals from coal. In the United States, it wants to build a plant with Exxon Mobil that uses shale gas.