A NATIONAL Commercial Bank report says the Saudi petrochemical sector is well-established and driven by a positive demand outlook globally.

The report points out that recent discoveries of North American shale gas and oil are likely to have an effect on the local industry, compelling it to determine whether it should remain upstream or proceed downstream.

The kingdom has maintained its leading position as the region’s largest petrochemical producer with an annual 86.4 million tonnes of capacity, it said.

The expansion in ethylene production capacity has resulted in Saudi Arabia becoming the third largest producer worldwide, accounting for 11 per cent of global ethylene capacity.

Meanwhile, the Saudi petrochemical industry is not expected to see a massive rise in overall petrochemicals capacities until 2016, when the Sadara complex is due to come on-stream.

Banks in the kingdom have been strongly capitalised and have minimal Basel 3 implications and are able to lend with relative ease to projects in the petrochemical sector.

However, they have limited their exposure when financing mega-projects to the SR3 billion ($799.8 million) to SR4 billion range because of funding challenges that include concentration risk and the legal lending limit of not exceeding 25 per cent of their capital to a single borrower.

Export Credit Agencies have grown in popularity due to their experience and flexibility in financing complex projects given their focus on the due diligence and projects’ procurement phases.

Sukuk issuances have been on the rise as they allow for clearer identification of construction risk, certainty of execution and more robust disclosure and due diligence process.

The challenges include the rising prices of exploration and production of non-associated gas as well as potentially rising petrochemical capacity from global players, which will act to squeeze profit margins.