Rabigh: a 50-50 refining and petrochemical complex with Saudi Aramco (2004)

The trap of a strategy that looks right

Taken element by element, the Rabigh decision was entirely reasonable. With feedstock costs rising, siting production in an oil-producing country and securing ethane at the official domestic price would open an overwhelming cost gap against Japanese rivals dependent on naphtha. The partner was the national oil company reckoned the strongest in the world, and the company it chose was Sumitomo Chemical, which had built a record in Singapore. In the anxiety that followed the collapse of the planned merger with Mitsui Chemicals, an entire route to standing alone among global players was compressed into this single move. Contemporaries who hailed it as a “great reversal” were not wide of the mark.

And yet the outcome shows how deep the pitfalls run beneath a strategy that looks right. A falling equity stake, ballooning construction costs, a troubled start-up, and then the shale revolution — a technological change no one had priced in — dismantled the premises of that advantage one by one. The more a joint venture with an oil state takes on the colour of a national project, the harder it becomes for a single company to correct course by its own hand. The logic of siting production at the feedstock was sound; the losses stacked up over twenty years were heavy. How to hold those two things together is a question that keeps returning whenever a chemical company from a country without resources looks abroad for a way through.