Newsletter No. 208
March 8, 2006

 

THE PETRORABIGH PROJECT GETS FINANCING AS CONSTRUCTION COSTS RISE

Shingetsu Newsletter No. 56 reported last August about the joint venture between Saudi Aramco and Sumitomo Chemical to build a huge refining and petrochemical complex at Rabigh, near the Red Sea coast of Saudi Arabia. Even at that time, the total price tag of the deal was expected to be US$8.5 billion, making it one of the largest such projects in the world.

This week an event was held in London that added some new bits of information to the story. First of all, a group consisting of 19 financial institutions has agreed to provide US$5.8 billion in loans to finance the PetroRabigh project. The largest-single contribution from this group (US$2.5 billion) comes from the Japan Bank for International Cooperation (JBIC), thus signaling Japanese government support.

However, it has also been noted that soaring construction costs mean that the deal is now estimated to be worth about US$9.8 billion -- a US$1.4 billion increase since last August.

It is also mentioned that the Saudi government is planning to build an industrial city at Rabigh to support the project and increase Saudi employment. The hope is that the massive size of the project will eventually allow economies of scale that will make the project very competitive economically when it finally begins operations.

Some reports mention that a US$600 million “Islamic Facility” will also be built at Rabigh, although I’m not exactly sure what “Islamic Facility” means.

The PetroRabigh project appears to be a keynote issue for future Japan-Saudi relations. Much like the ill-fated IJPC project of the 1970s, or the current Azadegan project, the PetroRabigh project is one of the main Japanese investments in West Asia that we will need to keep a close eye on. It could prove to be a major success that consolidates the bonds between Japan and Saudi Arabia; or it could become another high-profile fiasco if it is hit by terrorism (like the al-Qaida attempt at Abqaiq in eastern Saudi Arabia last month), or if the Saudi monarchy itself begins to unravel. This is a high-risk, high-return kind of venture for Japan.