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Saudi to boost refining capacity by 1.6m bpd

Saudi Arabia is on the verge of launching multi-billion dollar projects to expand its oil refining production capacity by about 1.6 million barrels per day (bpd) within a massive hydrocarbon development programme, according to official data.

Saudi Arabia, which controls nearly a quarter of the world's recoverable crude resources, will construct four refineries with an output capacity of 400,000bpd each to expand output to nearly 3.7 million bpd in the next three years, according to figures by the Organisation of Arab Petroleum Exporting Countries (Oapec), which groups Saudi Arabia with 10 other Arab oil producers.

Industry sources said the four ventures had been delayed for two years because of soaring construction costs that pushed their total value to more than $50bn. But a fall in the costs after the international financial crisis and Riyadh's decision to retender some hydrocarbon projects had pushed that value below $30bn.

"The trend in Saudi now is that the government wants to benefit from the prevailing economic conditions and secure attractive bids to carry out the new projects in refining and other energy sectors," said Oapec.

"The current refining projects to be carried out by the kingdom in Yanbu, Jubail, Ras Tanura and Jizan will boost its total refining output capacity from about 2.098 million bpd to 3.698 million bpd when they are completed in 2012."

In a report from Riyadh this week, the Saudi daily Aleqtisadia said the Yanbu refinery would cost about $6bn compared with an estimated cost of $12 to $13bn in 2008. The paper said the government-owned Saudi Aramco and its partner in the refinery, Conoco Philips of the US, had set January 31 as a deadline for submitting bids for the project.

"This project had faced many obstacles and Conoco Philips was about to pull out of it because of its surging costs due to high construction costs and the location of Yanbu far away from the kingdom's oil fields in the Eastern region," it said.

"But the company later agreed to join Saudi Aramco as partner in the project after they managed to slash its costs following Aramco 's decision to retender or re-negotiate some of its hydrocarbon ventures to secure lower costs."

Saudi Aramco , the world's largest oil producing company, said in June it had extended some project tenders to take advantage of falling construction expenses and cut their costs after a sharp rise in late 2007 and 2008.

"Yes we have extended some project tenders but we are talking here about a period of weeks or months. We want to give contractors an opportunity to discuss these projects and update their costs," said Khalid Al Falih, Saudi Aramco 's President and Chief Executive.

"We have taken into consideration the recent decline in the prices of building materials and the cost of labour and project construction. The aim of these measures is to give ourselves a chance to take advantage of lower costs this year compared to that of last year's. At the same time we are giving contractors an opportunity to give the best offers in terms of prices and costs," he said.

Industry sources said Saudi Arabia currently has ample oil output capacity to feed the new refineries, referring to its ongoing programme to expand the existing capacity to more than 12 million bpd by the end of 2009. The kingdom had a sustainable crude production capacity of 11.3 million bpd at the end of 2008 but Saudi Arabia has said it would push ahead with the expansions despite slackening world demand due to the global crisis.

At just more than 12 million bpd, the kingdom's spare capacity will double to nearly four million bpd following a cut in its output of over one million bpd in line with a collective Opec agreement to trim supplies to support sagging prices.

Saudi Arabia, long dubbed the world's swing oil producer, has traditionally maintained a spare capacity of at least two million bpd as a cushion for any sharp fluctuation in the global supply-demand balance.

Besides those new refineries, Saudi Aramco is also carrying out projects to upgrade existing units, including its Mobil Refinery in Yanbu. The two-phase project involves the construction of hydrogen processing unit at a cost of $700m and a sulphur treatment unit at a cost of $800m.

By Nadim Kawach

© Emirates Business 24/7 2009