SABIC Petrochemical Manufacturing Company

 SABIC Petrochemical Manufacturing Company

Introduction

In mid-October 2020, the Saudi Basic Industries Corporation (SABIC) signed a formative agreement with Russia’s ESN Group for a possible investment in a methanol plant in Russia. The deal is one of the many that the giant company signed when President Putin of Russia visited Saudi Arabia in 2019. In the treaty, SABIC expressed the intention of building and operating a 2 million tones per annum capacity methanol plant in the Amur region of Russia (Gnana, 2019). The agreement is in line with SABIC’s ambitious objective of expanding its petrochemical business in the international market. SABIC seeks to get new investment opportunities, diversify operations, and enhance its standing in the global petrochemical market.

Currently, SABIC is Saudi Arabia’s largest petrochemical firm, and one of the largest in the world. The company is involved in different businesses, among them manufacturing of metals, plastics, Agri-nutrients, and specialties. It is publicly listed and is headquartered in Saudi Arabia’s city of Riyadh. 70% of SABIC’s shares are held by the government, with just 30% being traded on the Saudi Stock exchange (SABIC, 2020). SABIC has more than 30,000 employees working in more than 50 countries across the world.

The planned methanol project is supported by the Russian government because it will boost tax revenues and help create additional employment in East Russia. On the other hand, SABIC sees the project as an important step in its expansion goals. In 2019, the firm decided to significantly increase its methanol portfolio, an objective that involved the signing of the agreement with the Russian organization ESN Group. Yousef Al-Banyan, the vice chairman and CEO of SABIC, stated that the project is “……..an important milestone in our global growth strategy” (Menachery, 2019). The statement reveals SABIC’s perception of the project as an essential step towards achieving its expansion objective. The expansion goal also motivated the firm to sign several other contracts. In January 2019, for instance, SABIC signed another formative deal with South Louisiana Methanol to build a chemical factory in the US to maximize the growing gas production in North American. On the same front, SABIC raised its stake in Arrazi Methanol Company by acquiring shares previously held by Japan Saudi Arabia Methanol Company at $150 million (Gnana, 2019). Thus, investing in methanol and other downstream segments of the energy industry has increasingly become attractive to SABIC and other Middle East oil companies in their bid to derive revenue from higher-value goods.

However, such investments must be made with caution, especially when it involves a country like Russia. The country is a bit protective and confusing economy as far as foreign direct investment is concerned.  This case study seeks to examine and analyze Russia as regards the business environment it presents to SABIC in its quest to establish a methanol plant there. This paper explores the SABIC’s culture, economy, environment, natural resources, health issues, political environment, and regulations concerning methanol production.

Details about Sabic Company

Nature of business

SABIC is one of the leading petrochemical manufacturers in the world. It is a public company headquartered in Saudi Arabia’s city of Riyadh (SABIC, 2020). 70% of SABIC’s shares are held by the government, with only 30% being traded on the Saudi Stock exchange (SABIC, 2020). The company was started in 1976 through a royal decree. Over time, the firm has experienced tremendous growth.

The company has four major strategic business units; metals, Agri-nutrients, Specialties, and, most importantly, petrochemicals (SABIC, 2020). Petrochemicals account for the most significant business unit, accounting for the bulk of its revenue.  An Executive Vice President heads each of these four units. Each of the groups supports customers through the identification and development of opportunities in key end-markets like medical devices, construction, packaging, electrical, electronics, and clean energy and packaging. SABIC’s main products include ethylene, methanol, polyethylene, MTBE, ethylene, and engineering plastics (SABIC, 2020). The products fall into five major categories; polymers, chemicals, agri-nutrients, metals, and specialties.

Polymer products are organized into foam products, automotive products, pipe segments, and lightweight products used in a wide range of industrial and consumer products (SABIC, 2020). On the other hand, chemical products vary from plastics and other materials used in day to day life across the world. On the contrary, SABIC Agri-nutrients manufactures a wide range of fertilizers and different types of agricultural products which are supplied across the globe. They include ammonia, urea, and other nitrogen-based inorganic products. These nutrients help support the world’s ever-expanding need for food.

On the other hand, SABIC’s metals are produced through the company’s subsidiary called Hadeed. Being a leader in the Gulf in terms of metals manufacturing, Hadeed produces top-quality minerals, which play a leading role in the industrialization and construction of some of the fastest-growing economies of the world (SABIC, 2020). In addition to all these, SABIC’S specialties business creates highly differentiated business products, including thermostatic resins, thermosets, specialty engineering, and additives, among others.

Location and Number of Employees

The principle headquarters and corporate offices of SABIC are located in Saudi Arabia’s Riyadh city. It also has major industrial operations in Al-Jubail, an industrial town in the Arabian Gulf, as well as Yanbu, located in the Red Sea. However, the company has other operational locations in many places across the world. It has more than 33,000 employees located in more than 50 nations across the globe (SABIC, 2020). This global presence is continuing to align with the organization’s ambitious plan for expansion. Indeed, the company has invested in the development of massive infrastructure across the world, including manufacturing plants, distribution centers, storage facilities, and technology centers (SABIC, 2020). The worldwide presence enables it to effectively respond to the market and customer needs across the world. The company has 64 world-standard compounding and manufacturing plants located across the Americas, Asia, Europe, and the Middle East, among other regions. To manage its worldwide network of operations, SABIC has four regional offices; in the Americas, in Europe, in the Middle East & Africa, and Asia (SABIC, 2020). The regional offices enhance the efficiency of decision making and coordination of the organization in its worldwide operations. Even though the management is divided into four levels,  communication happens both vertically and horizontally to enhance efficiency and productivity.

Vision and mission

SABIC’s vision is to be “the preferred world leader in chemicals” (SABIC, 2020). What this means is that the company’s primary goal is to increase its competitive advantage through the production of high-quality chemical products.

On the other hand, SABIC’s mission is “to responsibly produce quality products and services through innovation, learning, and operational excellence while sustaining maximum value for the shareholders” (SABIC, 2020). To achieve this mission and vision, the firm optimizes its capacity through the adoption of advanced production technologies. In the same regard, it has also embarked on the optimal application of its natural resources as well as investing in its employees. This promotes innovation and enhances productivity.

 Management structure

Generally, the management of SABIC is structured into four levels. At the top is the Board of directors led by the chairman, followed by the senior management led by the CEO. The board chairman is called Dr. Abdulaziz Saleh Aljarbou, while the Vice-Chairman & Chief Executive Officer is Mr. Yousef Abdullah Al-Benyan (SABIC, 2020). The chairman and the CEO form two of the 7 Board of Directors who come from both the private sector and the government. The board of directors supervises the management to ensure that the operations of the firm meet the set governance and corporate standards. They define the broad objectives of the company and spearhead its diversification priorities (SABIC, 2020). As such, the board monitors its competitors in the various markets segments the world in order to identify threats and opportunities for the company.

On the other hand, the senior management led by the CEO is in charge of the overall running of the company. Below the top management is the strategic management level heading the six different segments of the firm. Each section is overseen by an executive vice-president in charge of a management team. The role of the strategic management team and the executive vice-president is to position the business against its rivals attractively. The strategic management team for the respective segments also implement marketing and operations strategies to ensure they work towards promoting the segment’s objectives. The segment’s management team also monitors fluctuations in the demand of products as well as other external forces that may affect the operations of the business and make necessary adjustments (SABIC, 2020). This move enables the segment to make the required adjustments in their strategies to accommodate the changes.

Below, the strategic level of management is the functional level of control. At this level, the administration is made up of experts whose primary role is to implement specific duties including human resource, marketing, financial management, research & design, and production management, among others. Each business segment has dedicated production and marketing departments. For instance, the metal and the Agri-business segment have their production and marketing departments.

The Business Environment in Russia

The Russian culture

The culture of a country has been found to have a great influence on the success of a business. This is because of culture influence business values, attitudes, and behaviors (Kuznetsov & Kuznetsova, 2005). Culture does not just affect businesses but also affects entire economies. It does this by influencing some universal principles and values that shape the economy. As such, the culture of a given society may enhance or constrain the economy of a country and, by extension, the businesses within the economy (Kuznetsov & Kuznetsova, 2005). It is, therefore, essential that a reflection of SABIC’s business environment in Russia also considers the country’s culture.

Located in Northeastern Eurasia, Russia is the largest country in the world by area, making up an eighth of the globe’s landmass by city (Diversicare, 2015). It is also among the most populous nations of the world, with 143 million people living there. Russia is also one of the leading oil and mineral producers in the world. More importantly, Russia is one of the most diverse societies in the world, with more than 160 ethnic groups speaking 27 different languages in addition to the official Russian language (Diversicare, 2015). The country is also a culturally rich country, with about 25% of the world’s scientific literature coming from it. Being the official national language, Russian is used as the vessel of coding and storing knowledge. The Russian language is also one of the official languages of the United Nations.

Russia has a sumptuous cuisine that includes poultry, mushrooms, fish, berries, and honey. One of the unique foods from the country is black bread, which is more popular here than in any other part of the world (Diversicare, 2015). Flavored soups and stews, including ukha, solyanka, shchi, and okroshka, are also prominent features of the Russian cuisine.

Russia also has fascinating social traditions. One of them is washing in a hot steam bath called banya (Diversicare, 2015). They also observe religions. The majority of Russians have been Christians since ancient times. Christianity, mainly Catholic and Russian Orthodoxy (see figure 1), is still the dominant religion in the country, with two theories dominating the origin of Christianity there. One of the two suggests that Russia began as a Catholic society, while the second one describes the community as a conservative society. Apart from Christianity, other religions like Islam, Judaism, and Buddhism are also practiced in Russia.

Figure 1: Major Religions in Russia

Source: https://www.pinterest.com/

It is evident from figure 1 that Christianity (made of Catholic and Russian Orthodox) is the dominant religion in Russia. It is also apparent that not everyone in Russia is religions. About 18% of Russians are believed to be nonbelievers.

Russians have a special relationship with their homes. They view their homes from a spiritual perspective. They believe that a home should not be established close to places where tragedies have occurred or next to cemeteries (Singleton, 1997). Russians perceive the home as a sacred resting place.

Russian economy relating to methanol plants 

In 2019, Russia had a GDP of 1,660 billion US$ and a GNI per capita of 10,230 US$ (World Bank, 2019). The GDP represents 2.67% of the world’s total GDP. The country’s GDP has been growing almost consistently since 2016 when it had a GDP of about 1,282.7 billion US$ (See figure 2).

Figure 2: A graph illustrating Russia’s economic growth in the last ten years

Source: https://tradingeconomics.com

As can be seen from the graph, the Russian economy’s GDP has been experiencing some consistent growth since 2016. The economy is expected to experience further growth in 2020.

The Russian economy is highly dependent on its oil and gas industry. Russia’s economic fortune is pegged on the oil and gas industry since it is the undisputed leader in gas exports and a top exporter of oil (Downs, 2016). Russia’s fortunes in the oil and gas industry began in the 19th century, and ever since, they have been increased considerably.

However, the petrochemical sector of the Russian economy can be considered a sleeping giant. This view is because while the country has one of the largest reserves of hydrocarbons in the globe, it only holds a small share (1-2%) in the production of chemicals (Lenkova et al., 2017). The domestic chemical industry has not made any significant strides from the 1990 levels. In 2008, for instance, only three out of all the major sectors in the industry managed to surpass the Soviet Union peak, production of synthetic resins, processing of plastics, and production of mineral fertilizers (Lenkova et al., 2017). On the other hand, other significant subsectors like synthetic fibers, artificial fibers, varnishes, paints, and plant protection products experienced a 10-20 times decline in production volumes. This action demonstrates how the Russian economy is slowly losing some of the essential subsectors in the petrochemical sector. It has made the economy to partly rely on imports for some of the chemical products used for both consumptions and in industries.

Two primary reasons have been blamed for the underperformance of Russia’s petrochemical industry. One of them is narrowing in the domestic demand for petrochemical products and institutional factors (Lenkova et al., 2017). The institutional factors are the abandonment of systemic regulation amid lack of market regulation, change in property ownership, and privatization, among others.

Environment and weather in Russia

Russia is an essential country in the world as far as the environment is concerned. This idea is because it has 19% of all of the globe’s forest reserves (Smith, 2015). Additionally, with its 210,000 rivers and 2 million lakes, Russia supplies 25% of the globe’s total freshwater (Smith, 2015). However, these statistics come with additional burdens for the country. Being a leader in the globe’s total forest reserves, it is also a leading victim of deforestation and the resultant carbon dioxide pollution. It is estimated that deforestation in Russia contributes 300-600 million tons of the world’s 1.5 billion tons of carbon dioxide production every year (Smith, 2015). This move is a big challenge for the country and the globe at large as far as environmental conservation is concerned. However, it does not stop there.

Russia is also struggling to maintain the freshness of its clean water reserves due to human activities. For instance, hydro-electric production along the Volga Riva has worked-down on the river’s volume making the level of pollutants in the rivers to increase (Smith, 2015). In addition to that, water contamination in the Moscow capital and other cities across the country has become a significant reason for concern. For example, a recent study found the level of mercury in the Moska River to be 20 times the recommended levels (Smith, 2015). These high levels of environmental pollution is a threat to the country’s health and wellness.

The above environmental challenges made the Russian government put in place strict laws and regulations in an attempt to preserve the environment, including considering clean energy. However, environmental activists and other observers are not convinced that the Russian government is doing enough to protect its environment (Smith, 2015). More is supposed to be done.

As regards to weather, Russia is very dynamic because of its large size. The country spans several environmental zones, and hence the weather depends on the region of the country. The central European territory of Russia, where Moscow is located, has four seasons of Winter, Summer, Fall, and Spring, while the northern parts of the country have long winters and short summers. The Far East, where SABIC is eyeing, is colder than most of the other regions and experiences frequent typhoons (Nikitina, 2019). On the other hand, the Southern parts of Russia are warmer with hot summer and mild winters. SABIC needs to keep these facts in mind when analyzing its decision of venturing into East Russia for methanol production.

Natural resources related to methanol

Russia is extremely rich in natural resources. Some of the natural resources essential for the manufacture of methanol are oil, coal, and biomass. Russia mines coal from 118 individual coal deposits from 22 coal basins spread across the country (Samarina et al., 2019). Russia produces about 4% of the world’s total coal production. The entire coal resources in Russia are estimated at 200 billion tons (This amount can produce methanol to satisfy the world’s growing demand. More interesting is the fact that the production of coal in the federation has been increasing and is expected to continue rising. For instance, the total output in 2017 was 205.800 TOE mn, which grew to 220.154 TOE mn in 2018, an all-time high (Samarina et al., 2019). Figure 3 below illustrates the consistent increase in Russia’s coal production.

Figure 3: Russia’s coal production over the years

Source: Www.ceicdata.com

It is evident from the value that the amount of coal produced by Russia has been consistently increasing in the recent past. The level is expected to increase even further shortly. The rise illustrates the country’s richness in terms of coal, an essential precursor for the manufacture of methanol. is an itimportant impetus for SABIC to invest in methanol production in Russia.

Interestingly, coal is not the only methanol feedstock that is naturally abundant in Russia; the country is also rich in oil, another essential ingredient for the production of methanol. Russia is among the top 3 producers of oil in the whole world, rivaling Saudi Arabia for the number one spot and accounting for more than 12 % of the world’s oil supplies (Downs, 2006). As of 2016, the country had held 80,000,000,000 barrels of oil reserves, accounting for close to 5% of the world’s total oil reserves. Russia’s energy production is concentrated in Volga-Ural oil and gas provinces, as well as West Siberia. The Russian economy is highly dependent on oil, with Russia has been the second leading exporter of oil in 2018. The country’s abundant oil resources, therefore, makes it an excellent destination for SABIC’s methanol production outside Saudi Arabia.

Health issues

Russia’s overall health outlook is ambiguous. The country had a life expectancy of 66 and 77 years for males and females, respectively, in 2016 with the probability of dying under the age of 5 being 7 out of 1000 live births (World Health Organization, 2020). The country spends 7.1% of its GDP on healthcare, something that has helped improve the country’s health over the years. Indeed, the country’s life expectancy has been rising steadily over the years. This argument is illustrated in figure 4 below.

Figure 4: A graph showing the consistent rise of life expectancy in Russia over the past two decades.

Source: http://www.healthdata.org

The figure proves that the country’s life expectancy has consistently been increasing, especially in the past decade. However, this consistent rise in life expectancy over the past few years hides some severe health problems that the country is facing, one of them being deaths from preventable causes like cigarette smoking. For instance, about 400,000 people die from cigarette smoking-related causes each year (Chelala, 2015). On the other hand, more than 2 million Russian men are living with HIV compared to about 1.2 people in the US, which has more than double the Russian population. Even more heartbreaking is the fact that 80% of those infected with HIV are under the age of 30 years (Chelala, 2015). Other health issues affecting Russia are Multidrug-resistant TB, cutting of funding for healthcare, and high prevalence of diabetes, among others.

Political issues

Over the last few years, Russia has ranked alongside China and the United States as one of the most attractive destinations of foreign direct investment (Kusznir, 2016). it is attractive for international businesses like SABIC, which intend to do business there. However, the political environment is also characterized by corruption, which has become a significant obstacle for international organizations looking forward to doing business in the country. In addition to that, the Russian economy has a few super-large firms in crucial sectors like energy and manufacturing, where the state holds significant stakes. Such firms are often treated with favoritism making it hard for international competitors to thrive (Kusznir, 2016). SABIC should be well aware of these political facts as it produces an entry into East Russia.

Regulations concerning Methanol Plants

Given that energy is a leading sector in the Russian economy, the Russian government tightly regulates it. The objectives of the regulations are to; promote innovation and efficiency in energy development, enhance the scale of production of energy resources, create a competitive market in the energy sector and integrate the Russian energy sector with the rest of the world energy system (Josefson, Rotar & Rice, 2018). The laws and regulations of methanol plants and the petrochemical sector in general touch on various aspects of the industry, among them; exploration, manufacturing, transportation, exportation, taxation, ownership, lease, licensing, safety, environment, waste management, fines, and insurance among others. Given a large number of these regulations, a detailed discussion of the same is beyond the scope of this case study. Nevertheless, SABIC has to keep them in mind when venturing into Russia.

Possible competitors for SABIC in Russia

As much as the petrochemical industry in Russia can be considered a sleeping giant, there are still some players that SABIC will have to contend with when it enters the Russian market. Three major players in the country’s petrochemical industry can pause considerable competition to SABIC; Lukoil, Nizhnekamskneftekhim, and Sibur.

Headquartered in Moscow, Russia, Lukoil is one of the largest energy corporations accounting for the production of 1% of the world’s hydrocarbon products and 2% of the world’s oil production (Lukoil, 2020). The company is more significant than SABIC in several aspects as it operates in more than 100 countries and employs more than 100 people from across the globe. However, unlike SABIC, whose main segment is the production of petrochemicals, Lukoil’s significant portion is oil refining and gas processing (Lukoil, 2020). Other sections of Lukoil are petrochemicals, power generation, wholesale and trading, and premium sales channels.

Unlike Lukoil, Nizhnekamskneftekhim (abbreviated as NKNH) is more specifically a petrochemical company headquartered in Russia’s Nizhnekamsk city. It is a leading petrochemical company not just in Russia but in entire Europe. The company is a leader in the production of plastics and rubber. Other products produced by NKNHare general purpose rubber, plastics like polystyrene, monomers, and other petrochemical products like ethylene oxide.

However, SIBUR is arguably SABIC’s leading competitor in Russia as far as the petrochemical industry is concerned. SIBUR is the largest petrochemical company in Russia (Vmware, 2019). The company processes and sells petrochemicals in both Russia and international markets. Unlike SABIC, which has six business segments, SIBUR has just two; olefin & polyolefins on the one hand and elastomers, plastics, and other intermediate products on the other. The leading customers for SIBUR’s products are automotive industries, construction industries, chemical industries, and energy industries. Even though it specializes in petrochemicals, SIBUR operates in 80 countries across the world. In Russia alone, SIBUR employs more than 27,000 specialists who work in more than 20 regions (Vmware, 2019). Currently, the company is seeking to improve its efficiency through technological improvements. Among the efforts are; improving production efficiency, using cutting edge digital tools in production, integrating standard manufacturing processes in manufacturing, using advanced analytics tools in monitoring and using VR technology.

Questions

Russian Culture

1. How is the Russian culture an impediment to SABIC’s methanol project in East Russia?
2. How can SABIC take advantage of Russia’s culture in its methanol venture in East Russia?

Russian Economy

1. How will SABIC’s methanol venture in Russia contribute to the country’s economy?
2. What aspects of the Russian economy constrains SABIC’s methanol venture in East Russia?

Environment and Weather

1. What challenge is East Russia’s weather likely to cause on SABIC’s operations.
2. How can SABIC minimize negative environmental impacts in its operations in Russia?

Natural resources

1. What is the implication of Russia’s plentiful coal and oil on SABIC’s methanol dreams in the country?
2. What challenges do Russia’s abundant coal and oil resources pose to SABIC?

Health Issues 

1. What is the impact of Russia’s negative health issues on SABIC’s operations?
2. What role can SABIC play to improve Russia’s health status?

Political environment

1. What opportunities does Russia’s political climate pose to SABIC’s methanol venture?
2. What challenges does Russia’s political climate pose to SABIC’s methanol venture?

Regulations

1. How can SABIC ensure full adherence to the rules governing the methanol industry in Russia?
2. Do the numerous regulations on the methanol industry pose any specific challenge to SABIC’s venture in Russia?

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