Gulf states and other Arab oil producers need to push ahead with costly petrochemical projects to diversify their economies despite the ongoing global financial crisis, according to an official study.

Although the tightening in the world credit markets could hamper the implementation of some of those projects, Arab states could still resort to the equity option by inviting more foreign partners into such ventures to secure funds, said the study by the 10-nation Organisation of Arab of Petroleum Exporting Countries (Oapec).

In its latest monthly bulletin, Oapec said petrochemical producers in the Arab world have achieved substantial progress in their drive to build petrochemical industries over the past two decades and new projects could allow them to maintain their position as key global players in the industry.

In the next two years, the six Gulf Cooperation Council (GCC) countries and other Arab oil producers are expected to account for nearly 50 per cent of the new petrochemical output capacity to be added worldwide, it said.

Saudi Arabia, the world's oil superpower which controls nearly a quarter of the global crude deposits, is projected to pump nearly 15 per cent of the world's petrochemical production by 2015 as the Kingdom is pressing ahead with mega projects in collaboration with foreign partners.

The expansions are expected to boost the output of petrochemicals, fertilizers and other products by the Kingdom's government-controlled petrochemicals giant Sabic to more than 60 million tonnes in 2008 and 100m tonnes in 2010 from around 55m tonnes in 2007.

The surge in Sabic's output in 2007 allied with a sharp rise in petrochemical prices to push up its net profits to a record SR21.7 billion in the first nine months of 2008 and the income is set to touch SR30bn through the year.

Citing figures by its affiliate, the Arab Petroleum Investment Corporation (Apicorp), Oapec said Arab nations invested in excess of $57 billion in energy projects in 2006 and nearly 82 per cent of the allocations covered petrochemicals, fertilizers and petroleum products.

"The Arab countries have many resources that enable them to set up an integrated petrochemical industry. They include feedstock in the form of natural gas and oil derivatives, a market with high consumption rates, a location midway between the east and the west, and basic infrastructure that is continually being improved," the Kuwait-based Oapec said.

"Investment in the petrochemical industry of Arab countries is attractive to both local and foreign investors. Some international companies have started to move their industrial facilities to the region, which requires concerted efforts to maintain security and economic stability and keep the region clear of geopolitical tensions. Oapec looks forward to the establishment of more joint ventures, cooperation, and skills transfer between Arab countries and with other partners… this will help overcome all technical obstacles and cut investment risks in the form of unforeseen circumstances."

According to the study, the petrochemical industry is a major global industry, and a cornerstone of industrial development. It said petrochemical projects require huge investments and advanced technology and added they play a vital role in supporting economic diversification plans in member states.

"They give high returns, since basic petrochemicals are seven times the price of oil, intermediate petrochemicals are 10-100 times, and final petrochemicals are 30-500 times…. these good economic indicators have encouraged the Arab countries to embark on large petrochemical projects," it said.

"Moreover, they have sophisticated economic policies aimed at achieving several strategic goals. These include diversification of revenue sources, optimal investment of resources by boosting the value added, attracting modern technology, developing the skills of the national workforce, expanding the establishment of secondary industries, and promoting trade with various countries, including East Asian developing countries that are rapidly becoming industrialised… such a climate will allow this and other industries to establish a foothold and become firm pillars of sustainable development in Oapec member countries."

In a recent study, the Dammam-based Apicorp said petrochemicals and other downstream gas projects in the Arab region and North Africa are expected to receive the lion's share of the total energy investments in the next five years.

It estimated the capital needed for those downstream projects at around $141bn during 2008-2012, nearly 30 per cent of the total energy investments of around $490bn during that period.

But the study noted that securing funding for such massive projects would be difficult in the present situation while other studies expected some petrochemicals and other downstream ventures to be shelved.

" Although the overall capital structure has slightly shifted to equity, securing the appropriate amount and mix of debt will be considerably more challenging… despite that shift, loans sought for projects in the region surged by nearly 25 per cent last year to around $49bn in 2007," Apicorp said.

"With growing risk aversion, the appetite for debt issued in the region may be subdued… the market for project finance is in severe dislocation… local banks tend to concentrate on local currency denominated tranches while regional banks' lending capacity has overall been reduced by current financial turmoil."