To fund or not  to fund?

Building petrochemical plants demands billions of dollars in investment. It would be imprudent for any government or state-owned enterprise to finance such infrastructure without clear assurance of significant societal benefits.

Traditionally, policymakers have used cost-benefit analysis (CBA) to quantify the environmental and social impacts of large-scale infrastructure projects. Sectors that have widely adopted the use of CBA include public transport, utilities, waste management, energy, education, research, healthcare, and information technology. 

Researchers from KAPSARC have found that CBA may also be applied in assessing large-scale construction projects in the petrochemical sector. By using hypothetical ethylene production plants in Saudi Arabia, China, and Malaysia as a case study, they show that CBA provides relevant information and useful insights, especially when the projects are conducted in heavily regulated markets.

“The authors’ approach aligns well with evolving industry trends by broadening technology analysis to include adoption readiness factors,” notes energy policy and economics expert Steve Griffiths, who is Professor and Vice Chancellor for Research at the American University of Sharjah. “By considering economic, environmental, and social benefits alongside financial returns, this work provides a more complete basis for making final investment decisions.”

A versatile tool

The petrochemical industry often operates in a regulated market structure. To achieve their social development goals, many countries have implemented price controls for input fuels, feedstocks, and electricity—either through government-set prices, price caps or other non-market control mechanisms. On a global level, the sectoral interventions can further be exacerbated by foreign trade barriers, fixed exchange rates, and interest rates set by the government.

“Many industries confronting investment decisions, particularly with emerging decarbonization technologies, stand to gain from the CBA approach,” explains Griffiths. “Unlike traditional NPV-focused methods, CBA incorporates broader factors such as emissions reduction, energy efficiency, and regulatory alignment that can significantly shape financial and strategic decisions.”

Given the significant role of the petrochemical industry in global economies and development objectives, one can argue that the desired outcomes of governments may not be limited to their financial performance. New projects may bring macroeconomic gains—such as employment, economic diversification, and improved trade balance—as well as environmental benefits such as reaching sustainability targets set by authorities. 

“The CBA standards for specific sectors could contribute to methodological transparency and help address potential conflicts of interests,” says study lead author Philipp Galkin, a visiting researcher specializing in the economic and policy aspects of energy supply and trade. 

Cost estimation for large industrial facilities, particularly those in the oil and gas and petrochemical industries, can be done at many different levels of detail with varying levels of accuracy. The researchers applied a capacity-factored cost estimate in the study. Though this may not have the highest accuracy, it can support the assessment at screening level. 

The team assumed that the ethylene production plants—regardless of their location—use the same technologies and feedstocks, are the same size, and are constructed in the same year. In other words, the only items that needed to be adjusted in the CBA for each country are construction and operation costs, including natural gas tariffs, and electricity and shipping costs. 

Additionally, environmental factors are represented by the pollution costs, quantified based on the projected levels of certain pollutants and large particles produced by the project, and climate costs, calculated based on the CO₂ and NH₄ emissions from a comparable project.

A risk assessment was also performed for both traditional financial plans and CBA-adjusted projections. Using a sensitivity analysis, the researchers were able to identify critical factors and applied a qualitative risk assessment framework following European Commission guidelines for risk factors which were too difficult to quantify. 

“The starting points for this work were good, leveraging a number of quantifiable model parameters for which reliable data were available,” says Griffiths. “By integrating into the model energy costs, like those of electricity and natural gas, and environmental impacts, a solid framework is established for model-based investment decisions.”

Highlighting the impact of CBA for project evaluation

The team found that the general principles of CBA are applicable to the evaluation of petrochemical investments, especially in markets that are heavily regulated and where the government is a major investor. 

A case in point is Saudi Arabia, where CBA adjustments significantly affected the results. Here, the net present value (NPV) of the ethylene plant—which typically cost $7 billion to $30 billion—was reduced by $7.1 billion when CBA was applied. In addition, applying a cost-benefit analysis can help identify critical risk factors that may not be evident at the financial planning stage and quantify potential impacts—such as ethylene price, natural gas, and electricity tariffs.

“CBA is very useful for government-affiliated investors, where long-term strategic aspects are to be included,” says Galkin. “Net present value isn’t everything, and CBA also allows for a wider range of non-financial considerations.”

The researchers found that in the case of a joint international project, the perspectives of investors on certain CBA costs and externalities may not concur. The CBA standards for specific sectors could contribute to methodological transparency and help address potential conflicts of interests.

While CBA has been applied by private companies to assess petrochemical investments, such estimates and methodologies largely remain inaccessible to the public due to the sensitive and largely classified nature of investment and financing decisions. KAPSARC’s study represents the first transparent case study of applying CBA principles to public-sector petrochemical investments. 

“Enhancing industrial capacity collaboration with partner countries is a critical element in China’s Belt and Road Initiative. . . . Saudi Vision 2030 envisions the important role the petrochemicals sector could play in economic diversification.” 

The authors were also able to show the impact of CBA on potential project outcomes. The most beneficial project location from the purely financial NPV perspective—Saudi Arabia—would yield negative NPV if CBA principles are applied. The resulting outcome would still be more favorable than developing the project in China, however, it would make Saudi Arabia a less attractive project location than Malaysia.

“Enhancing industrial capacity collaboration with partner countries is a critical element in China’s Belt and Road Initiative,” explains Dongmei Chen, a research fellow at KAPSARC’s Oil and Gas department. “This aligns well with the strategic priority of Saudi Vision 2030, which envisions the important role the petrochemicals sector could play in economic diversification,” adds Chen, who served as head of the Institute of Industrial Productivity China Office and director of the Climate Change and Energy Program for World Wide Fund for Nature, China, before joining KAPSARC. 

With China and Saudi Arabia recently sealing $65 billion in deals, CBA can help ensure that good investment opportunities will not be missed.

Limitations and future research

KAPSARC’s CBA framework offers valuable insights for analyzing potential projects in sectors of the economy beyond its traditional applications. Its relevance becomes particularly pronounced in these contexts.

In an environment where non-financial factors—including energy security, climate goals and local content priorities—increasingly drive economic policy and investment, CBA provides a broader assessment of the project outcomes and can help align the interests of investors and policymakers. 

While other methods could arguably provide better visibility for certain outcomes of specific projects, at present, CBA remains the most established method applied for these purposes and is already a compulsory requirement for project approval and financing in many countries and international institutions. 

But CBA methodology does have several inherent limitations. Quantifying the environmental and social impacts of large-scale infrastructure projects using CBA remains difficult if not controversial. Assigning a monetary value or ‘price tag’ to non-financial impacts, such as energy security and climate goals, is more art than science, often giving investors a false sense of accuracy. Moreover, analysts tend to use a high discount rate when calculating the NPV, which can undermine benefits that accrue over longer periods of time. 

The goal of this study was to illustrate the usefulness of CBA in assessing petrochemical investments and not necessarily to advise potential investment decisions, for which a much more detailed and sophisticated financial planning and forecasting process would be required.

“The paper’s most significant contribution is its comprehensive investment evaluation approach, which can reveal previously overlooked economic, social, and environmental costs and benefits,” concludes Griffiths. “This research provides an excellent framework for evaluating investments not just in petrochemicals, but potentially across many other carbon-intensive industries.”

Further research in this domain can focus on developing industry guidelines which would apply standardized CBA principles in the project planning process.