Gulf refining boom to fill demand gap

By Ian Simm

An unprecedented rise in the number of refineries throughout the Middle East is set to cut the region’s reliance on imported petrol and diesel in a move that could transform the global products market.

“The Gulf is generally short on petrol and diesel, and that is set to change in the coming years,” Robin Mills at Dubai-based Manaar Energy Consulting and Project Management said in a recent interview with Bloomberg. “They are putting more refining capacity into an oversupplied market.”

Increasing capacity

Saudi Arabia is close to completing the 400,000 barrel per day Saudi Aramco Total Refinery & Petrochemicals (Satorp) refinery at Jubail in order to slash its imports of fuel products, while two more projects with the same capacity are also under development in Yanbu and Jazan.

The latter, which includes a sea terminal, is worth around US$6 billion in contracts and is the first in a number of facilities that Saudi Arabia is planning that will lead to the development of the southwestern part of the country.

Contracts for the work went to South Korean firms Hanwha Engineering and Construction, SK Engineering and Construction and Hyundai, Japan’s JGC Corp. and Hitachi Plant Technologies, the UK’s Petrofac and Spanish firm Tecnicas Reunidas.

Saudi firm Al-Ali Al Ajmi Group will prepare the site, which covers a 12-square km area. A number of Saudi officials attended the signing ceremony and commented on the importance of the project for the development of the industrial city and surrounding area.

Downstream capabilities

The Jazan unit will be designed to process Arab Medium and Arab Heavy crudes and produce petrol, ultra-low sulphur diesel, benzene and paraxylene (PX). Products from the refinery will supply the Jazan, Asir and Najran areas and also be exported through the new marine terminal, which will supply the refinery with crude oil and export refined products.

Jazan will be in addition to four refineries owned and operated by Saudi Aramco in the country that have a total production capacity of 1 million bpd. The firm also holds interests in the Saudi Aramco Mobil Refinery Company (Samref) in Yanbu, in partnership with ExxonMobil, and in the Saudi Aramco Shell Refinery (Sasref) in Jubail, with Shell.

The latter units have a combined capacity of 700,000 bpd. Furthermore, Saudi Aramco holds an interest in the Petro Rabigh refinery which has a 400,000 bpd capacity, giving the leader of the Organisation of Petroleum Exporting Countries (OPEC) a refining capacity of more than 2 million bpd.

The Yanbu and Jubail facilities will also process heavy crudes for export. Operations resumed at Yanbu last week after two months of maintenance work.

In January, Fereidun Fesharaki, chairman of Facts Global Energy, said in a report that “despite growing demand at home, most of the products will go to exports and have a regional impact on product markets and the flow of products globally”.

Following the trend

Other Gulf countries are also following a similar pattern. The UAE, Kuwait and Oman are planning a number of new facilities in order to keep up with rising domestic demand and to diversify their economies.

In mid-June, the Kuwait National Petroleum Company (KNPC) intends to award a major engineering, procurement and construction (EPC) contract to build new sulphur-handling and marine export facilities at its Mina-al-Ahmadi refinery in the southeast of the country.

In late April, the state-run Oman Oil Company (OOC) announced that it was seeking a US$4 billion bank loan to build a large export refinery and petrochemical complex at Duqm in the south of the country.

The Duqm Port & Drydock project will host a planned US$6 billion refinery with a capacity of 230,000 bpd and will be commissioned in 2017. OOC – which owns a 50% stake in the Duqm Refinery and Petrochemical Industries Company (DRPIC) – recently appointed Shaw Energy and Chemicals as PMC to oversee the greenfield scheme.

The remaining 50% is owned by Abu Dhabi’s International Petroleum Investment Company (IPIC).

Up the coast from Duqm, Oman Oil Refineries and Petroleum Industries (ORPIC) is carrying out an expansion project on the Sohar refinery, which is due to be ready in 2016.

The expansion will add around 60,000 bpd, to take the total capacity to just under 180,000 bpd.

Deeper into the Gulf, state-run Qatar Petroleum (QP) last month announced a US$1.5 billion joint venture agreement for its Laffan Refinery 2 (LR2) project in Ras Laffan. At the time, the company said that the 146,000 bpd plant would boost the country’s export capacity, further adding to the threat of oversupply in the Gulf market.

The Middle East’s push to increase refining capacity is one that will have an impact on oil and product markets around the world.

While Saudi and its neighbours’ efforts to cater to growing domestic demand may result in a dip in available crude oil for the global market, the downstream facilities will also produce sizeable levels of refined products, a large amount of which will be available for export.

As European refineries continue to be mothballed or closed permanently, mega-refineries throughout the Middle East and Asia are filling the void left by these ageing beasts, creating a new dynamic.

The Middle East’s increasing capacity allows for healthy economies of scale that make it cheaper for European end users to import high-grade fuels and petrochemical products rather than refining crude closer to home.