Strategy Note /
Saudi Arabia

Saudi: Gas prices outlook, impact and analysis

  • A new strategy regulating gas prices will be announced soon

  • Gas prices will remain unchanged for a period of 3 years for local industries

  • In general, the new pricing mechanism will ensure high competitiveness levels

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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SNB Capital
20 October 2022
Published bySNB Capital

In an television interview yesterday, the Minister of Energy discussed gas prices outlook, which we believe bodes well for the petrochemical sector in general.

Below are the key highlights:

  • A new strategy regulating gas prices will be announced soon.

  • Gas prices will remain unchanged for a period of 3 years for local industries.

  • In general, the new pricing mechanism will ensure high competitiveness levels. The minister highlighted that the cost of production in Saudi is low but the new pricing will not be as high as other markets in Asia.

  • Going forward, the Ministry of Energy and the Ministry of Industry will set guidelines of eligibility of gas allocation to different industries along with other preferences.

The impact on the petrochemicals sector

  • We believe these statements provide much needed clarity about future feedstock prices, particularly for the petrochemicals sector as many investors were anticipating an imminent increase in prices.

  • The statement provided visibility over the next 3 years as prices will remain unchanged and the announcement of the feedstock strategy will provide clarity on the future pricing mechanism.

  • Moreover, we expect the 3 years period were provided to enable companies to engage in cost efficiency programs to reduce the impact of any increases.

  • The statement also highlighted that more feedstock will be allocated which indicates more expansions by the sector.

  • We note that GCC countries have two pricing regimes, fixed prices that are higher than Saudi or variable prices linked to a benchmark (similar to propane and butane prices used in Saudi).

  • Below is the estimated impact of increasing ethane and methane costs by US$1 on total cost and net income based on 2021 figures. Moreover, the initial analysis shows that the impact will reduce fair value by c2%-6% across the sector without factoring any other cost reduction.

    *prior to additional ethane allocation