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Jun 26 2009

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Saudi Arabia economy: Heading downstream

Having completed a series of major upstream oilfield developments, bringing capacity up to 12.5m barrels/day (b/d), Saudi Aramco is turning its attention to the refining sector. In a clear indication of confidence in the medium-term prospects for petroleum products demand, the Saudi national oil company and various international partners are now moving ahead with two new refinery projects, as well as embarking on an expansion of the Petro Rabigh refining and petrochemical complex, the first phase of which is set to start up in the next few weeks.

Saudi Aramco 's plans to invest in new refineries in the kingdom first came to light in 2006, at a time when oil prices were being driven up by—among other factors—a perceived shortage of global refining capacity. During that year the Saudi company announced that it had selected France's Total and ConocoPhillips of the US as its partners for refineries at Jubail (on the Gulf) and Yanbu (on the Red Sea), respectively. Both plants will process 400,000 b/d of heavy crude oil to make products tailored for export markets in Asia, Europe and the US.

Progress on these projects was initially impeded by the difficulty in setting their budgets, as construction and engineering costs escalated. More recently, questions have arisen over marketing prospects, as global energy demand has been eroded by the recession, and over the financing of these multibillion dollar projects.

Contract avalanche

Saudi Aramco and Total sought to lay these doubts to rest earlier this month, when their joint venture, Satorp , awarded 13 engineering, procurement and construction (EPC) contracts for the Jubail plant, worth an estimated US$9.6bn in total. The largest orders went to Technip of France and Tecnicas Reunidas of Spain; other winners included Samsung Corporation, Daelim Industrial and SK Engineering & Construction , all of South Korea, and Japan's Chiyoda Corporation. Saudi Aramco currently holds 62.5% of the equity, but it aims to bring its stake down to 37.5%, the same as that of Total , through selling shares to the Saudi public. The debt finance is likely to be a combination of loans from the Saudi Public Investment Fund and export credits. The plant will mainly produce diesel and jet fuel, but it will also make paraxylene, benzene and polypropylene. It is scheduled to start up in 2013.

Satorp is thought to have trimmed the prices for these contracts by some 10% during negotiations with the leading bidders. In return, contractors have been offered improvements in some of the commercial terms, including the payment schedules and performance bonds.

The Yanbu project is lagging behind Jubail, but Aramco and ConocoPhillips are now in the process of inviting contractors to bid on the main packages early next year.

Meanwhile, Petro Rabigh , a joint venture between Aramco and Sumitomo Corporation of Japan, is expected to start production of gasoline from its new refinery and petrochemical plant north of Jeddah during July. Petro Rabigh has also announced the award to JGC Corporation of Japan of a contract to conduct a detailed feasibility study on a second phase of the plant, which could include facilities to process a further 30m cu ft/day of ethane and 3m tonnes/year of naphtha. The study is to be completed by the third quarter of 2010, after which the partners will take a decision on whether to proceed with Phase 2.

Ready for the upturn

The spurt of activity in the Saudi downstream sector comes at a time when the bottlenecks that had previously affected the global refinery industry have eased thanks to lower demand and the addition of some 830,000 b/d of capacity last year, mainly in China and India. According to BP , the combination of increased capacity and lower consumption resulted in a fall in refinery utilisation in 2008 to 84.8%, the lowest level since 2003. This trend is likely to continue in 2009 and 2010. However, Aramco and its partners have clearly concluded that they will be able to find markets for their high-quality products when the Jubail and Yanbu refineries come on stream in four or five years time. The additional capacity at these two plants alone would be sufficient to propel Saudi Arabia up the rankings of the world's top oil refiners from ninth to equal fifth place with India, behind the US, China, Russia and Japan.