Saudi Aramco is close to agreeing a deal with state-owned China Petroleum & Chemical Company (Sinopec) for it to become a joint venture partner on the development of the $10bn Yanbu refinery.

The deal would finally settle the future of the Yanbu project, which was thrown into doubt in April 2010 when US oil major ConocoPhillips abandoned the project.

Aramco owned refineries
Refinery Capacity (thousands of barrels-a-day)
Jeddah 88
Riyadh 120
Yanbu 235
Ras Tanura 550
Source: Saudi Aramco

Sources in Riyadh say that Aramco chief executive Khalid al-Falih held meetings with Chinese oil executives in late December to discuss the tie-up with Sinopec.

No deal has yet been signed, and it is understood that Sinopec has already walked away from negotiations once in mid-2010.

“Both parties are still talking and both want to make sure that every aspect of the deal is a good fit,” says an oil industry source in Saudi Arabia familiar with the potential deal. “Aramco does not want another situation like it had with ConocoPhillips, while Sinopec wants to make sure that the partnership is completely equal.”

The source adds that recent changes in the Sinopec hierarchy could also stall the deal slightly.

“There are some new officials who have only taken office quite recently so it may mean that they will need to be brought up to speed with the details before any actual decisions can be made,” says the source.

Aramco has already awarded eight of the main construction contracts on the Yanbu refinery project. In July, Aramco said it had established the Red Sea Refining Company to develop the project without an international partner (MEED 29:07:10).

When completed the facility will have a capacity of 400,000 barrels a day (b/d) of petroleum products that will be sold on the global market.

Sinopec is the world’s third largest refiner of oil behind the US’ ExxonMobil and the UK/Dutch Shell. In 2010, the company was ranked as the world’s seventh largest company by the US magazine Forbes.

The company already has a refinery joint venture with Aramco and the US’s ExxonMobil. In 2007, the three firms agreed a $3.5bn deal to increase the capacity of the Fujian refinery in south China to 240,000-b/d.

Questions remain over how Aramco plans to fund the scheme. Although the company has the finances available to fund the project, it had originally been planned to be financed by long-term project finance loans.

Aramco and ConocoPhillips had already got banks on board to fund the scheme in early 2010, but that deal has been on hold since the US firm exited the project. Bankers close to Aramco say that the Saudi energy major has made no communication with the lending group that was in place.

“Aramco will not use project finance for Yanbu now, they will just fund it through their own resources and through contributions from Sinopec,” says a Riyadh-based banker.

It is not clear if Aramco has made a final decision on the funding for the project yet.

The oil source in Saudi Arabia says that in regards to funding Sinopec would be able to meet almost any of the criteria set by Aramco.

“Cash is most definitely not a problem for Sinopec,” the source says. “It would probably want assurances in regards to managing the risk properly, but an investment such as the Yanbu refinery is well within its means.”

“However, it must be remembered that Aramco has the cash available to go it alone if required so … if it feels that is the best way forward then that is what it will do,” he adds

Saudi Aramco declined to comment when contacted by MEED.