Expansion at home and abroad

29 March 1996

SAUDI Aramco, the world's largest oil company, is pressing ahead with a far-reaching programme to boost its refining capacity, both at home and abroad. Within the kingdom, refineries are being oriented towards meeting domestic demand growth, both from industrial and individual consumers. Abroad, the kingdom has at last gained a foothold in the European market and is seeking to broaden its presence in the Asian market.

At home, Saudi Aramco is taking a long look at its domestic refining and distribution system. The company took over responsibility for the downstream sector in 1993 from the now defunct Saudi Arabian Marketing & Refining Company. Following the take-over, Saudi Aramco cancelled a $6,000 million programme to boost exports from the kingdom's domestic refineries, enabling them to focus on growing domestic demand. The cut in subsidies on refined products introduced in the 1995 budget has helped both to cut demand growth and rationalise pricing.

The 95,000 barrel-a-day (b/d) Jeddah refinery is undergoing fundamental reform. By April, capacity will have been cut to 42,000 b/d as crude units are closed down. Only one crude unit, a cracker and platformers will remain. The refinery's city location has counted against it: after an economic review, Saudi Aramco has decided to shift production to the Rabigh refinery, where it assumed full ownership in 1995. Rabigh has a 325,000 bid capacity, but throughput has been limited to 250,000 b/d due to the heavy distillate orientation of the refinery. However, any major expansions will have to wait until the Ras Tanura project is completed.

In the meantime, Canada's SNC Lavalin International is preparing the designs for the scheme to install a digital control system covering the domestic refineries at Riyadh, Jeddah and Yanbu. The scheme, which may be extended to Rabigh, will enable Saudi Aramco to match domestic output with domestic demand.

The Ras Tanura refinery is undergoing a $1,000 million expansion which will increase capacity to 300,000 bid from 260,000 bid. The expansion includes a 100,000 b/d hydrocracker. The final package on the scheme was let in January.

Further expansions are under consideration at Ras Tanura, expected to cost SR 26,250 million ($7,000 million). A $2,000 million-2,500 million programme proposed for 2000-2003 will install distillate and kerosine production facilities. A third and even larger programme will raise capacity at the plant to 1 million bid between 20032007.

Abroad, the kingdom is focusing its attentions on two very different markets. Stiff competition in Europe's downstream market has not deterred Saudi Aramco from seeking a stake in the continent's refineries. In Asia, the kingdom is seeking to take advantage of the huge increase in demand expected in coming years.

In mid-March. Saudi Arabia made its entry into the European downstream market when Petroleum & Mineral Resources Minster Ali Naimi finally signed a deal to buy a 50 per cent stake in Greece's Motor Oil Hellas Corinth Refineries (MOHCR) and its marketing arm Avin. Greek press reports say the deal is worth $430 million.

The MOHCR deal has been a long time in the making. The purchase agreement was first signed in April 1995, with owners the Vardinoyannis Group. However the agreement almost came unstuck when a family feud broke out within the Vardinoyannis family about the sale. Family members sought to prevent two sons of founder Nikos Vardinoyannis from using their late father's voting rights to approve the sale. The two had been appointed temporary trustees of their father's shares. The feud was settled in August 1995 by a Greek court, which found that the sons had acted properly. However, the debacle led to a second study of the company's books, particularly regarding profitability.

The MOHCR deal is Saudi Aramco's first excursion into Europe's downstream market. The Greek company has a 100,000 bid refinery at Corinth and a chain of about 700 petrol stations.

A similar venture is being considered in Italy. Saudi Aramco is understood to have been negotiating since August 1995 with Italy's ERG about taking a minority stake in the Italian company. Again the negotiations have been delayed, in this case by the illness of King Fahd, head of the Supreme Petroleum Council which must approve the deal. Like MOHCR, ERG is a family company, owned by the Garrone family of Genoa. It controls 14 per cent of Italy's refining capacity through ERG Petroli, in which it has an 80 per cent stake.

ERG Petroli itself has an 80 per cent stake in the 230,000-b/d ISAB refinery in Prioli, Sicily, a 25 per cent stake in the Trecate refinery in the north of the country, and a 23 per cent stake in the Rome refinery. It also has a chain of 2,250 petrol stations across Italy which take about 6 per cent of the local market. Its 65 per cent stake in Tankersud gives it interests in shipping and storage around the Italian coast. The company has a balance sheet of IL 1.7 million ($1,805 million). ERG is expected to seek a bourse listing after the sale.

Saudi Aramco's presence in Asia is far more developed. The company already has a presence in China, South Korea and the Philippines. and is seeking to follow Kuwaiti and Omani companies into India, one of Asia's largest and fastest growing markets. Interest in acquiring refining capacity in Japan has been revived, but individual ventures have yet to be identified.

Saudi Aramco initialled an expression of interest in January for a joint-venture refinery proposed for Bhatinda in the northern Indian state of Punjab. The refinery is expected to have a capacity of 115,000 bid. Saudi Aramco and its partner the Indian Oil Corporation will each take a 26 per cent stake in the venture, with the remainder of the equity to be raised by public subscription. A pre-feasibility study for the Bhatinda scheme is likely to be launched soon.

Asian expansion

A second Indian refinery is also planned. India's Foreign Investment Promotion Board has approved a new joint venture proposed for the south of the country by Saudi Aramco and India's Hindustan Petroleum Corporation (HPC). Saudi Aramco will take a 26 per cent stake in the southern refinery, which will have a capacity of 120,000 bid. HPC will also take a 26 per cent share. The remainder will be open to public subscription. The total investment is put at Rs 45,000 million ($1,500 million). The scheme has yet to be approved by India's cabinet committee on economic affairs.

The India projects are unlikely to move quickly: several local/foreign joint-venture refineries are planned and none have yet been developed. However, with India's refining capacity falling far behind demand, the Indian government is showing new openness to private and foreign investment to bridge the gap.

Plans to expand existing capacity in China are set to go ahead. Expansion of the Thalin refinery is expected to begin this year. Saudi Aramco has a 45 per cent stake in the refinery along with the Chinese state oil company Sinopec and Ssangyong of South Korea. However, negotiations to increase Saudi Aramco's stake in the Maoming refinery have run into difficulties. The Chinese government has refused to allow the company to take a majority stake in the refinery, something which Saudi Aramco is seeking before agreeing to go ahead with expansions.

Asia is the real jewel for Saudi Aramco. The region's burgeoning economies are promising far faster demand growth than any other region of the world. Several new ventures are planned. Overseas refining ventures provide a double advantage for Saudi Aramco: the kingdom is guaranteed a market for its crude oil, while taking advantage of the added value of downstream activities in these markets.

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