Saudi Arabia is maintaining its leading position as the region’s largest petrochemical producer with an annual 86.4 million tons of capacity, a report from the NCB’s Economics Department Research Team has confirmed.But it says the recent discovery of North American shale gas and oil is likely to have an effect on the Saudi petrochemical sector in its trajectory toward remaining upstream or moving downstream.The researchers, however, stressed that the Saudi petrochemical sector  remains well positioned regionally and is driven globally by a positive demand outlook.The expansion in ethylene production capacity has resulted in Saudi Arabia being the third largest producer worldwide, accounting for 11 percent of global ethylene capacity.According to the report, the Saudi petrochemicals industry is not expected to see a massive rise in overall petrochemicals capacities until 2016, when the Sadara petrochemicals complex is due to come on-stream.Ethylene is a key building block in the petrochemical industry. In recent years, the world has witnessed its largest ethylene capacity expansion, growing at a compound annual growth rate (CAGR) of 4 percent between 2007 and 2012, to reach 155.9 million tons in 2012. In 2012, worldwide capacity additions were much lower than the record additions registered in 2010 when 11.4 million tons/year of ethylene capacity was added. However, GCC capacity addition in 2012 trended downwards by 13 percent.The majority of capacity additions within the GCC between 2007 and 2012 took place in Saudi Arabia, which accounted for 64 percent of the regional capacity additions. With 17.5 million tons/year, Saudi Arabia is the largest ethylene producer in the region, accounting for 72 percent of the regional ethylene capacity, up by 7.7mn tons/year compared to five years ago. This massive expansion in ethylene production capacity has resulted in Saudi Arabia becoming the third largest producer worldwide, accounting for 11 percent of global ethylene capacity,Ethylene’s global cost curve reflects that the Middle East overall still has a comparative cost advantage. However, according to industry analysts, the recent leveling of US gas prices has the potential to render US ethylene more economically cost efficient than Saudi produced ethylene, with the transfer price for ethylene in Saudi Arabia and the US amounting to $466 per ton and $323 per ton, respectively.The NCB report added that Saudi banks are strongly capitalized and have minimal Basel3 implications and are able to lend with relative ease to projects in the petrochemical sector.However, banks have limited their exposure when financing mega projects to the SR3 billion — SR4 billion range to account for funding challenges that include concentration risk, and the legal lending limit of not exceeding 25 percent of their capital to a single borrower.The report said that export credit agencies have grown in popularity due to their experience and flexibility in financing complex projects given their focus on the due diligence and procurement phase of a project.In the medium term, researchers expect Saudi producers to perform better relative to global peers on the back of feedstock cost advantages, continued strong fundamentals and a diversified portfolio mix.However, the recent discovery of North American shale gas and oil,  especially in the US, is likely to have an impact on the Saudi petrochemical sector, albeit the technology needed to extract it efficiently and profitably, is still in its preliminary stages. Whether Saudi Arabia can retain its global leading position through technology differentiation while leveraging its natural resource abundance remains at the forefront of the sector’s concern, said the report.These new developments may affect Saudi Arabia’s comparative advantage as it grapples with the trajectory of the sector on either remaining upstream in the gas-to-market sector or continuing its downstream diversification policies.The Saudi petrochemical sector is characterized by three main factors. First, the Kingdom has substantial proven feedstock reserves, with 264 billion barrels of crude oil, 279.7 trillion cubic feet (tcf) of natural gas and an esti-mated 600 tcf of unconventional shale gas. Second, low feedstock and energy costs have, to-date, led to a comparative, and in turn, a competitive advantage for petro- chemical producers. Third, the Kingdom has strong industrial and regulatory infrastructure, which have been integrated into specially developed industrial cities.According to the Gulf Petrochemical and Chemical Association (GPCA), total GCC petrochemicals capacity reached 127.8 million tons in 2012, recording a 5.5 percent growth from the previous year. Saudi Arabia maintained its leading position as the region’s largest petrochemical producer with 86.4 million tons of capacity, representing 67.6 percent of the total regional capacity. In addition, during the same period, the Kingdom led production with 6 million tons coming on stream.The majority of Saudi’s nonoil exports consists of petrochemicals, which include downstream plastic production and building materials.