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Aug 29 2008

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Middle East economy: Heavy demand

The imminent start-up of the Jamnagar refinery in north-west India has created an important new market for heavy crude oil, which has hitherto been difficult to sell as refiners tend to prefer lighter grades. Much of the oil destined for Jamnagar will come from the Middle East. Regional oil exporters are at the same time seeking out fresh opportunities to sell heavy crude to China and a number of South-East Asian states.

Built by India's Reliance Petroleum adjacent to an existing facility and stretching over an area larger than London, the refinery will commence testing operations in late September. Commercial production is due to begin later this year, with capacity being gradually ramped up to 585,000 barrels/day (b/d), which will make it one of the largest refineries in the world. Its products will include ultra low-sulphur diesel tailored for EU specifications.

In anticipation of the start-up, shipments of various grades of crude from the Middle East, Latin America and Africa will soon be landing on Indian shores. Short-term contracts have already been signed with Saudi Aramco , National Iranian Oil Company and Kuwait Petroleum Corp (KPC) to lift extra-heavy sour crudes. However, with the new refinery being capable of operating on grades with an American Petroleum Institute (API) specification of 18 degrees, for the first time increased volumes of extra-heavy feedstock will also be imported from Latin American and Africa.

At the top of the list is Venezuela, which is now looking to export one very-large crude carrier (VLCC) load or 2m barrels each month. This is part of Venezuela's push to reduce its traditional dependence on the US market. In Africa, Reliance is in negotiations with fellow Indian firm ONGC Videsh (OVL) to procure some volumes of the Nile Blend grade produced in Sudan. ONGC has a minority stake in Sudan's largest upstream oil venture.

Going east

As well as supplying Jamnagar, Middle East crude exporters are also increasing their sales of heavy crude further afield in Asia. In late July, KPC delivered its first cargo of sour crude to PetroChina for the 410,000-b/d Dalian refinery in the northeast. Some 27,000 b/d of Kuwaiti heavy oil was offloaded for processing at the newly-built crude distillation unit (CDU) 7, which is designed to process sour crude.

Further, from early August PetroChina also started importing some volumes of Arabian Heavy crude from Saudi Aramco under a term deal signed in late 2007. Starting off with 65,000 b/d, the aim will be to increase offtake to 1m b/d by 2010 and finally 1.5 m b/d by 2015.

Dalian will be the second major Chinese refinery to begin processing Saudi crude. In May, Sinopec began purchasing Saudi crude for its new 200,000-b/d Qingdao refinery in the eastern Shandong province. Both PetroChina and Sinopec have been procuring small volumes of Arabian Heavy and Kuwait export crude (KEC) heavy grades from the spot market for the past few years, but this is the first time imports have been made under definitive commercial agreements.

Admittedly, compared with China’s total oil imports, the volume may still be small, but it is strategic. And, looking ahead, imports from Aramco and KPC may increase significantly, as refinery-operator PetroChina plans to install six more sour crude CDUs at Dalian. Prior to the modernisation programme, Dalian ran only on lighter types of crude. However, the seven new CDUs will have the capacity to process 310,000 b/d of sour crude.

Kuwait Petroleum International is also aiming to secure a market for Kuwaiti crude in Vietnam through investing some US$600m in the $5.8bn, 200,000-b/d Nghi Son refinery complex, with Japan’s Idemitsu, Mitsui Chemicals and state-owned PetroVietnam. It is scheduled to come on stream in 2013.

At home and abroad

In the Gulf region itself, national oil companies are having mixed fortunes in developing their own refining capacity, with a view to exporting as well as meeting increased domestic demand. Kuwait National Petroleum Company (KNPC) is planning to invest US$8bn to upgrade the Mina al-Ahmadi and Mina Abdullah refineries. The primary aim will be to reduce sulphur content in refined products by 2011 and find a bigger footing in the Asian market. More controversially, KNPC has been trying to make progress with the construction of a new 615,000-b/d, grassroots refinery at Al-Zour, which is expected to supply 375,000 b/d of clean products for export, mainly to Asia by 2012, with the remainder to be used for domestic power generation. However, the notoriously fractious Kuwaiti parliament has raised objections about the prices agreed for some of the main contracts, and the procedures for awarding them—the overall cost is now estimated at some US$16bn, more than three times the original budget. Escalating costs have also hampered progress with Saudi Arabia's plans to build two new 400,000-b/d export-oriented, heavy crude-processing refineries in joint venture with, respectively, Total and ConocoPhillips .

SOURCE: ViewsWire