Oil Infidels

A pair of al Qaeda attacks last month in Saudi Arabia--one targeting a petrochemical complex--mark an escalation of the terrorist group's strategy to drive much-needed foreign oil workers from that country. However, despite the panic such incidents cause, the development of the Middle East petrochemical industry is not likely to stop.

The chemical industry has experienced injury and loss of life, but never before has a chemical plant been the scene of such maliciousness and violence as on May 1 in Yanbu, Saudi Arabia. Early that morning, four armed men with identification badges infiltrated the complex of the Yanpet ethylene joint venture between ExxonMobil Chemical and Saudi Basic Industries Co. They opened fire on the on-site offices of engineering firm ABB Lummus, which was working on a $100 million upgrade of the unit. Six ABB employees were killed.

Then on May 29, gunmen fired on the Al-Khobar offices of Arab Petroleum Investments Corp. before fleeing to a residential compound housing mostly foreign oil workers. They scaled the fences and took hostages. After a 25-hour standoff, Saudi commandos freed some 41 hostages. In the weekend of violence, some 22 people, including 19 foreigners, were killed, and 25 people were injured.

Whether al Qaeda knows it or not, it has hit the chemical industry in a sensitive spot. Because of its abundance of cheap hydrocarbon feedstocks, the Middle East is the world's lowest cost place to produce ethylene. No other region is adding new petrochemical capacity as quickly. Industry consultants at Chemical Market Associates Inc. forecast that 40% of the new ethylene capacity expected globally between 2000 and 2010 will be built in the Middle East, giving the region a 17% share of a 140 million-metric-ton-per-year market.

Though it may seem callous, it is reasonable to ask about the influence the recent attacks may have on this growth.

ABB postponed the Yanbu upgrade and pulled 90 of its employees out of the country. The Al-Khobar attacks are causing more companies to rethink their operations in the country. Japan's Nippon Oil is said to be considering a pullout.

After each attack, the U.S. Embassy in Saudi Arabia reiterated an April 15 State Department travel warning that ordered nonemergency government employees to leave the country and urged private citizens to do the same.

A statement purported to be from the al Qaeda leader for Saudi Arabia was posted on the Internet after the Yanbu attack, praising the perpetrators. "They kept their promise to us and chose their target well because it was the site of many Western oil firms occupying our land economically and stealing its wealth," the statement said. Statements after the Al-Khobar attack echoed the theme.

However, the Yanbu attack, though deadly, was contained. ExxonMobil told C&EN that the Yanpet joint venture continued to run after the incident, as did oil installations in Yanbu. ABB says it hasn't pulled employees from other projects in the country. It also says work on the Yanpet upgrade will continue following talks with the joint venture's owners.

In a note to investors following the attack, Fulcrum Global Partners stock analyst Frank J. Mitsch said the Yanbu attack could indirectly benefit U.S. companies because it might slow the onslaught of new capacity expected in the Middle East over several years. "It is not a stretch of the imagination that other projects may similarly be delayed," he wrote.

Actually, it takes a big stretch of the imagination. Some individual projects may face delays, but most won't. The expansions aren't only in Saudi Arabia. They are spread out over Iran, Kuwait, Qatar, the United Arab Emirates, and other countries with varying degrees of risk.

More attacks are inevitable, but individual incidents won't change the region's huge advantage in feedstock costs, which spurs investments. It would take something like the overthrow of a host government or a severe deterioration of security throughout the region--neither out of the question--to put a damper on Middle Eastern investment. And any upside then for U.S. producers would be whittled away by the high oil prices that would result from such an event.

But a major disruption of supply is unlikely. Saudi national security consultant Nawaf Obaid, writing in security journal Jane's Intelligence Review, points out that at any given time, some 30,000 guards protect the Saudi oil infrastructure.

However, because Americans are singled out as targets, U.S. companies may now be in a weakened position in negotiating contracts for new plants. Last month, on a visit to Saudi Arabia, French Foreign Trade Minister François Loos was asked whether France has the same security concerns as the U.S. and the U.K. He answered, "It may be that the Americans feel they are in a different political situation than us."

Moreover, if chemical plants in the Middle East are considered more vulnerable to terrorism than they used to be, costs will rise for services such as insurance, security, employment, and contract work as foreign workers continue to shun the region.

In light of the recent attacks, executives will pursue these investments more cautiously than they used to. However, business will go on, especially in the chemical industry's most profitable region.

Views expressed on this page are those of the author and not necessarily those of ACS.