KSA's refinery boom

Saudi Arabia is launching a massive global refinery expansion programme that is shifting the centre of petrochemical production to the Middle East and eastern Asia, away from Europe and the United States.

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By  Adam Porter Published  April 4, 2006

1|~|Refineries-webby.jpg|~|KSA keen to clear refinery bottleneck. |~|In an ever-changing oil market, nothing stays still. With tight supply lines and bottlenecks in refinery operations, state and private oil companies are pushing for change and expansion.
Saudi Arabian refining operations look set to be part of that change. Several factors are influencing the new moves in Saudi refining.

Demographically, Saudi Arabia may be looking to service the needs of a growing population. Of its 9.5 million barrels per day of oil, currently around 7.9 million barrels are exported. The major buyers of Saudi crudes are the United States (18%), Japan (15%) and, increasingly, China (6.0%).
Yet its population is young. Nearly 40% of the population are under the age of 14.

Only 2.5% are over 65. Like other Middle Eastern countries, Saudi Arabia looks set to experience a demand-led boom. Growing urbanisation and a youthful population tend to mean dramatic increases in energy and hydrocarbon consumption.

As a result, the production of crude diminishes slightly in importance, whilst conversely, the production of finished fuels increases. This is set to put a greater strain on Saudi Arabian refining capacity.

Another factor pushing refining operations into Middle Eastern countries is the state of US and European new builds. Low profit margins combined with increased environmental legislation has meant new refining capacity is stymied in the industrialised world. Instead, the onus to produce refined products is being transferred to crude producing countries.
Saudi Arabia is thus faced with a double whammy, increased desire for refined products at home and abroad.

The controversy over refining bottlenecks has not been missed by the Saudi Arabian oil ministers or Opec. It is they who have been chiefly responsible for pushing the “bottleneck” concept and blaming high oil prices on refinery capacity instead of petroleum production levels.

Another factor in the need for new refineries is the desire of countries like Saudi Arabia to sell more heavy crudes onto the market place. With production of light sweet crudes maximised, at the moment, heavier brands are often left on the shelf. One can see from several examples, notably discounted supplies like the Saudi’s “Arabian Heavy,” which sells at around US $10 - 12 less than light sweet brands.
This has meant that new refineries, complex refineries to deal with all types of crude, are needed.

“Complex refineries can make fantastic profits,” says Mike Wittner, global head of energy analysis with CalyonBank in London.

“They can use the medium heavy sour crudes that are not so expensive and make high quality light products and middle distillates, which is really what the world wants right now. Capacity is stretched. It has been for more than a year, probably two, and that is where the global refining constraint comes from.”

The final key has been the high price of unrefined and refined products in the last three years. This has put a huge wedge of cash into the hands of the Saudi authorities. With this extra cash, many Opec countries are looking to make new investments, and refining is top of the list.

Saudi Arabia is planning a huge $8 billion project at Yanbu on the Red Sea. The location of the refinery is important. Its sea access will mean the refinery will be able to cope with export demand. Yanbu is also set to take heavier crude and will supply gasoline, diesel and naphtha to local markets, as well as to the United States, Europe and Asia. When completed, it should be able to produce around 400,000 barrels per day of products.

Saudi Arabia’s Oil Minister Ali Al Naimi said at last month’s Opec meeting in Vienna that ConocoPhillips had submitted the best tender for the Yanbu refinery, and Total SA’s bid for Aramco’s 400,000 bpd refinery at Jubail was also the best tender. Bids are still being assessed and no decision on the awarding of contracts has been made.

Another new refinery that will produce product for the plastics and general petrochemical industry is at Rabigh. Also on the Red Sea, the initial level of funding required for the expansion is around $5.8 billion. This is one of the joint ventures the Saudi Arabian state-owned oil company Saudi Aramco is investing in. Its partner is Sumitomo Chemicals from Japan.

The joint venture, called Petrorabigh, means that Aramco will send 400,000 barrels of crude to the refinery each day. In addition, they will also deliver 95 million cubic feet (cf) of ethane and 15,000 barrels per day of butane.

This all adds up to production of a stated 18 million tonnes of oil products, 1.3 million tonnes of ethylene and 900,000 tonnes of propylene each year after full completion, scheduled for 2008.

JGC Corp, Japan’s leading energy contractor, said last month it had received an order reportedly worth more than $860 million to build the refinery and a petrochemical complex building a high olefin fluid catalytic cracker and an ethane cracker. JGC was awarded the front-end engineering and design services contracts for the facility in late 2004.

The two companies announced last month that they have awarded Mitsui Engineering & Shipbuilding Company an $851.5 million contract to build two plants for the joint venture
The project is also interesting as it hopes to kick start some kind of industrial diversification for Saudi Arabia by producing cheaper base chemicals and products for the plastics industry.

With these new products, it is hoped that Saudi Arabia will be able to move away from it’s over-reliance on oil. Ninety percent of Saudi Arabia’s export revenue is currently in oil. The Kingdom hopes new plastics production will stimulate other Saudi industries down the chain, such as fibreglass, insulation and general plastic consumer goods.
Rabigh may also see an Initial Public Offering on the Saudi stock market. The result is that many banks have queued up to be part of the first tranche of funding. They include the Bank of Tokyo-Mitsubishi, BNP Paribas, Calyon, Citibank, HSBC, The Saudi British Bank, the Islamic Development Bank and several others.

To add to this, Aramco is also expanding refineries, such as Ras Tanura, at a cost of $1.3 billion. Refineries near Riyadh and Jeddah are also being given additional capacity to cater to that increasing domestic need.

One area where Aramco has been active is in joint ventures. This is something surprising given the statements recently by the head of BP, John Browne. In a speech given privately to the Energy Institute in London, Browne made a veiled attack on Saudi Arabia and the major reserve holding countries.
“The reality is that we have a serious problem,” said Browne to the audience of invited energy experts.

“Unless…geologists succeed in finding new and so far unidentified provinces…we will all be dependent on supplies from just three areas – West Africa, Russia and, most important of all, the five states around the Persian Gulf, led by Iran, Iraq and Saudi Arabia.

The resources on which we are going to rely are closed to investment by any private company. The decisions on investment and production are controlled by governments, which may not always be aligned with the interests of international consumers.

I believe it is natural for individuals and [Western] governments to distrust such dependence, and in recent weeks we have seen that distrust expressed in many different ways…. I believe the response to that distrust is the next great challenge facing the industry,” he said.

Far from being the case in Saudi Arabia, Saudi Aramco already have joint ventures in place, though none with Lord Browne’s BP. The Sasref refinery near Yanbu is a joint venture with Royal Dutch Shell, whilst the outlet at Samref is a joint venture with US company, ExxonMobil. Both these refineries are also in early stages of expansion.

One additional factor is an increasing desire by Aramco to invest in ventures overseas.
“Saudi Aramco are like anyone else,” says Bruce Evers, senior oil analyst at Investec Bank in London.

“Of course, they are looking to the emerging oil markets, and they want to do business there. These are the markets that are set to grow in the future. That will mean the whole of Asia, but especially China.”

This has meant Saudi Aramco moving towards joint ventures. They already produce some 1.6 million barrels per day of refined product in the US, Philippines, Greece and Korea. But increasingly they are looking to work with the Chinese state oil companies, like Sinopec. Alongside them, Aramco are looking to work on a project in Qindao at a cost of some US $1.2 billion. Already in place is a three-way operation concluded between Aramco, Sinopec and ExxonMobil.

Exxon and Aramco are to hold a 25% stake in a new refinery upgrade in Fujian province. At a price of some $3.5 billion, this refinery could prove a key pointer to the future of the Kingdom’s refining operations abroad.
The newly added parts of the Fujian refinery will be especially adapted to take Saudi Arabian heavy crude. Saudi Arabia is already the largest foreign supplier of crude to China, and that business looks set to grow. Sinopec will be in charge of distribution of the products once refined. The synergy is there; all that is needed are the personnel and political will to fulfil the promises.

“[Saudi Aramco] have realised that there needs to be some slack in the [global refining] system,” says Evers.

“Whether they can deliver on all their plans and promises is another matter; only time will tell on that one. After all they can talk until the cows come home. They are going to be hard-pressed to do everything they say on schedule. But yes, Saudi Arabia is the key to the world’s energy markets and could well become the key player in the world’s refinery business as well.”

As the Saudis strive to widen the global refinery bottleneck, they boost the shifting of global petrochemical production to Asia from the traditonal refining strongholds of the United States and Europe.||**||

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