May 12 (Bloomberg) -- Dow Chemical Co. agreed to partner with Saudi Aramco, the largest state-owned oil company, to build a chemicals complex in Saudi Arabia that will use low-cost raw materials from adjacent oil and natural gas plants.

The companies signed a memorandum of understanding to develop one of the world's largest sites for making chemicals and plastics through a 50-50 joint venture, Midland, Michigan-based Dow and Dharan-based Saudi Aramco said today in a statement posted on Aramco's Web site. Production at Ras Tanura, in the kingdom's Eastern Province, near the Persian Gulf, is slated to begin in the second quarter of 2012.

Dow, the largest U.S. chemical maker, is partnering with companies in the Middle East to access cheaper chemical ingredients after costs surged to $22 billion last year from $8 billion three years ago. The venture allows Saudi Arabia, the world's biggest oil exporter, to create jobs and boost revenue by converting its petroleum into higher-value products.

``This should help Dow's margins going forward in that they are sourcing from a very low-cost area,'' Gene Pisasale, a senior analyst who helps manage $25 billion, including Dow shares, at Mercantile Bankshares Corp. in Baltimore, said yesterday. ``The industry is moving away from high-cost areas to places where raw materials are plentiful and cheap.''

The cost of the project will be about $20 billion in total, the Financial Times reported yesterday, without citing anyone. Today's statement didn't specify a value.

Public Offering

The companies plan to sell a 30 percent stake in the venture through a public offering in the kingdom, Dow spokesman Chris Huntley said.

The complex will include factories that make ethylene and polyethylene plastic; chlorine and caustic soda, known collectively as chlor-alkali; propylene oxide and propylene glycol; vinyl chloride; epoxy resins; polyurethanes; polycarbonate, and other basic chemicals and plastics.

Dow is the world's largest producer of ethylene, polyethylene, polystyrene, chlorine and caustic soda.

The factories will be built adjacent to the Ras Tanura refinery, Saudi Aramco's biggest asset, and the Ju'ayamah gas- processing plant. Raw materials will include ethane and natural gas liquids, Huntley said. Ethane is a raw material for making ethylene, a key ingredient in plastics.

Natural gas in Saudi Arabia is about one-tenth the U.S. cost, which allows ethylene to be made for about half the U.S. cost, HSBC Securities analyst Hassan Ahmed said.

Sabic Partnership

``This is clearly the right move for Dow to make,'' Ahmed said yesterday. ``What better partner to have than Saudi Aramco?''

The venture also helps Saudi Aramco, which is diversifying away from energy production and expanding beyond chemical partnerships with Saudi Basic Industries Corp., known as Sabic, Ahmed said. The partnership positions Saudi Aramco to partner with Dow to produce higher-value specialty products, he said.

``The wide range of chemical materials and plastics to be produced by the joint venture will help spawn other downstream chemical conversion industries, thus strengthening the role of the chemical sector as a key enabler of many future investments in the kingdom,'' Saudi Aramco Chief Executive Officer Abdallah S. Jum'ah said in the statement.

The complex, which the companies have been publicly discussing since July 2006, ultimately will rival the size of Dow's facilities in Freeport, Texas, where 75 factories account for nearly a quarter of the company's output. Dow had sales of $49.1 billion last year.

Takeover Speculation

``This site will become the Freeport, Texas, of the emerging world,'' Dow Chief Executive Officer Andrew Liveris said Jan. 25 on a conference call with analysts and investors.

Liveris, 52, is fending off speculation that Dow may be bought as he moves commodity assets into joint ventures and boosts spending on specialty chemicals less affected by wide swings in raw material costs.

Dow has ventures with state-owned companies in Kuwait, Malaysia, Oman and Libya. Liveris in April also announced a North American plastics venture with Chevron Phillips Chemical Co.

The Middle East ventures have better access to rapidly growing markets in Asia, particularly China, than Dow's U.S. assets.

``What better place to build an enormous chemical plant than a place where economic growth is three times the rest of the world,'' Pisasale said, referring to China.

To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net.

Last Updated: May 12, 2007 07:01 EDT