Aramco to go it alone on Yanbu refinery

22 July 2010

State energy giant to award $7bn of construction contracts before end of July

State energy giant Saudi Aramco has decided to develop the $10bn Yanbu refinery without an international partner and will award six major construction contracts on the scheme by the end of July.

Aramco has formed a new company to develop the project at Yanbu Industrial City on the kingdom’s Red Sea coast, a spokesman tells MEED.

“Saudi Aramco is fully committed to developing the Yanbu export refinery project,” he says. “In this regard, the company has incorporated the Red Sea Refining Company to execute this landmark project.”

The project stalled in April following the decision by US energy major ConocoPhillips to walk away from the scheme. Later that month contractors bidding on deals worth around $7bn to develop the refinery were asked to extend the validity of their bids by two months to 25 July from while Aramco tried to decide how to continue with the project.

After several months of silence, the firm re-entered talks with contractors in July and has set a tentative deadline of 25-28 July for a formal contract signing ceremony. Letters of award have been sent out to some, although not all, of the company’s chosen bidders.

Aramco entered into talks with international oil companies including China Petroleum & Chemical Company (Sinopec) over taking ConocoPhillips’ place after the US firm quit the project, but finally decided in June that it would develop the scheme alone.

The decision to continue with the project came after Aramco decided that it would not be able to find a satisfactory partner for the project. Sinopec was the company’s favourite to work on the refinery as the two have an increasingly strong strategic alliance, but the Chinese refiner decided that the terms on offer were insufficiently attractive at a strategy meeting in early June, sources close to the company say.

Aramco is keen to push ahead with the project as soon as possible and wanted to award the contracts before Ramadan to be sure that the winning developers would be able to mobilise staff on the job before the end of the year, one executive with close ties to the Saudi oil firm says.

Aramco did not want to lose the “excellent” prices offered by contractors in a February bid round, which were up to 20 per cent under the budget it had set. It has since worried that costs could increase if firms were asked to resubmit prices at a later date and this may also have influenced its decision to move ahead alone, another executive working on the project says.

One banker close to the deal adds, “Aramco is faced with either going ahead on these prices, which were much lower than it was expecting, or potentially having to start all over again.”

Aramco has retained the right to use technology registered by ConocoPhillips for the plant, sources close to the scheme tell MEED. Without access to the ConocoPhillips technology Aramco would have been unable to go it alone on the scheme, and would have been forced to find another international partner with similar expertise. The Yanbu refinery will process up to 400,000 barrels a day (b/d) of crude oil, including viscous ‘heavy’ oil which is both hard to separate into saleable gasoline streams and has high sulphur content.

Contractors submitted price proposals for the main engineering, procurement and construction (EPC) deals on the export refinery on the Red Sea coast in January. The deals cover the construction of a $1.2bn coker unit, a $970m crude distillation unit, $2.3bn gasoline processing facilities, a $1.2bn hydrocracker, a $900m tank farm and a $100m network of pipelines.

The state energy giant then selected six contractors for the EPC deals in March. Spain’s Tecnicas Reunidas was selected to build the main coker unit at the refinery while South Korean firms were selected to complete the three other process packages on the project. SK Engineering & Construction is the favourite for the crude distillation unit, Daelim Corporation for the gasoline unit and GS Engineering & Construction for the hydrocracker.

Egypt’s Engineering for the Petroleum & Process Industries (Enppi) is Aramco’s favourite to build the main product storage facilities at the refinery, while Indian/local Dayim Punj Lloyd is out front for a deal to build the offsite pipelines at the plant.

In a further sign that Aramco is pushing ahead with the project, firms submitted bids for the EPC contract to build a solids handling unit on 6 July after a series of delays to the tender process. They had originally been asked to submit cost and engineering proposals for the package in February.

Firms that bid on this deal include:

  • Daelim Industrial (South Korea)
  • GS Engineering & Construction (South Korea
  • Hyundai Engineering & Construction (South Korea)
  • JGC Corporation (Japan)
  • Lurgi (Germany)
  • Petrofac (UK)
  • Saipem (Italy)
  • Techint (Italy)
  • Thyssenkrupp (Germany)

Contractors also expect Aramco to award a smaller EPC deal, covering the relocation of a 26 inch natural gas liquids pipeline at Yanbu as part of the project, by the end of July. Lebanon’s Contracting & Trading is the favourite to win this job, sources say.

The ConocoPhillips decision to quit the Yanbu project, was part of a spate of international firms walking out on oil and gas schemes in the region. ConocoPhillips also quit the $10bn Shah gas development scheme in Abu Dhabi in April, while in May the UK’s BG Group decided to relinquish its rights to the Block 60 exploration and production concession in Oman. The US’ ExxonMobil is also understood to be in the process of quitting a $6bn petrochemicals joint venture in Qatar.

Aramco declined to make any further comment on the project.

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