At the same time as building and expanding refineries at home to meet local demand, GCC oil producers are investing in refineries overseas. The past few years have seen a series of announcements by national oil companies taking equity stakes in refining projects outside the region, and China has emerged as the market of choice.

Saudi Arabia is keen for the relationship with China to strengthen and one way to cement this is to make investments

Analyst based in Saudi Arabia

“The idea is to capture the full value chain. They are already extracting the crude, but they also want to refine it and capture that margin,” says John Tottie, a Riyadh-based energy analyst at the UK’s HSBC. “The challenge for refiners is that you want to be close to both the crude and the consumer. There are only so many places in the world where you have both the growing and expanding markets and also the crude.”

Major oil investors

According to Imad Nassif Makki, senior refining expert at the Kuwait-based Organisation of Arab Petroleum Exporting Countries, the biggest overseas investors are Saudi Arabia and Kuwait, and Qatar is now trying to match them.

Saudi Aramco is particularly focused on increasing its downstream footprint in China, which overtook Japan as the second largest consumer of crude in 2005 and is expected to overtake the US in the near future. In March, it signed a memorandum of understanding with PetroChina to build a 200,000 barrel-a-day (b/d) refinery in Yunnan province. This is the second Chinese refining project with Saudi Aramco involvement, after the Fujian refinery, a joint venture with Sinopec and the US’ ExxonMobil.

“Saudi Arabia is very keen for the relationship with China to strengthen and one way to cement this is to make investments,” says a Saudi Arabia-based analyst.  

“One advantage of [building refineries] in China rather than the Middle East is that probably capital costs are a bit lower for refining and chemical investments. And maybe China will cut them a sweat heart deal as their dependency on Saudi is increasing.”

Saudi Aramco has a 50 per cent equity stake in a US refining company. It jointly owns Motiva with the UK/Dutch Shell Group. Motiva has three refineries in the US (including the Port Arthur refinery), with a combined capacity of 740,000 b/d.

The Port Arthur refinery is currently undergoing a major expansion and once completed in 2012, the complex will have a capacity of 600,000 b/d, making it one of the largest refineries in the world.

Other GCC countries are following Aramco into China. Qatar Petroleum, together with Shell and Petrochina, is waiting for approval from the Chinese authorities to develop the proposed Taizhou refinery and petrochemicals complex.

Kuwait is also keen to develop a refining presence in China. Kuwait Petroleum Corporation (KPC) has already received approval to build a refining and petrochemicals plant in Zhanjiang. KPC is also looking to participate in a refinery project in Fujian led by Sinochem. Kuwait wants to break into the refining market in order to boost its crude exports to China. In 2010, it only had a market share of 4 per cent of Chinese oil imports.

The biggest reason is to secure exports and to control the oil prices in the international markets

Imad Nassif Makki

Abu Dhabi state-owned International Petroleum Investment Company (Ipic) has not made a foray into China. It is instead is looking to expand its refining capacity in the Middle East and Pakistan. Last year, it announced plans to develop refinery projects in Fujairah, Morocco, Oman and Pakistan. It also wants to invest in Jordan Petroleum Refining Company, which is planning a $2bn revamp of the country’s only refinery at Zarqa in the north east.

Middle East investments

Oman could be the next market in which Ipic adds refining capacity. The firm plans to develop a $7bn refining and petrochemical complex at Duqm in a joint venture with Oman Oil Company. The capacity of the complex has not yet been announced, but the project is currently at the feasibility stage with work on the front-end engineering and design due to be completed over the next 18 months.

In June, Ipic took full ownership of Spain’s second biggest energy firm Compania Espanola de Petroleos (Cepsa), buying the 49 per cent stake owned by France’s Total. Cepsa’s main activities are refining and fuel distribution in Spain and Portugal. It owns three refineries with a combined capacity of 26 million b/d. Ipic bought its initial stake in Cepsa in 1998.

Like KPC, Ipic’s prime motivation behind expanding its refining capacity abroad is to secure markets for crude exports. But adding to the bottom line by capturing refinery margins may well have been an added incentive. “It’s not profitable to build more refineries in Gulf countries, but in other Middle East countries, like Egypt, Jordan, Syria, Libya, Iraq, Algeria, it is very profitable,” says Makki.

Oil demand dynamics

Apart from gaining and securing access to markets, refineries can be a useful tool for exporters seeking to understand demand on the ground. “GCC countries are exporting to Asia, the US and Europe. If they have a refinery in Europe or US, it gives them a feel for what the needs are in the market,” says Christine Tiscareno, energy analyst at US rating agency Standard & Poor’s. “Whether there is a strong demand for their product or not, they would know where to shift their exports.”

Crude producers have an interest in price stability, says Makki. Before the oil price slumped during the global recession, a shortage in refinery capacity was fundamental in driving up oil prices on the back of high demand. In spite of the availability of crude, a bottleneck in the refining sector created a shortage, helping prices to rise to a record high of $140 a barrel.

“The biggest reason [behind GCC states investing in overseas refineries] is to secure exports and to control the oil prices in the international markets. With these refineries, they can control oil prices and prevent shocks from happening in the market,” says Makki.

The GCC countries investing heavily in expanding refining capacity run the risk of not getting a good return. Globally, refining margins are low by historical standards, averaging at little more than $4 a barrel in 2010. The question is whether margins will have recovered by the time the new refineries come online.

“There is a lot of dispute over whether margins are going up or down. I think the trend over the next couple of years is going to be supportive, especially for complex refineries that can process a variety of crudes and yield a high share of high-specification middle distillates,” says Tottie.

Economic viability

There are concerns that the overseas refining projects are initiated less on the basis of their commercial viability and more to strengthen market share and deepen economic ties. But government-owned refiners are not subject to shareholder pressure on short term profits and so they can afford to think strategically.

“What is not economical for an international oil company could be positive for a national oil company, they have a much longer term view, and they don’t have strict criteria in terms of returns,” says Tiscareno.

At a time when margins are tight, GCC states are able to buy up assets at a discount price, especially in Europe and North America where demand for gasoline is in decline. The long-term profit outlook in those markets is less favourable, however. “There could be some opportunities in Europe, Russian refiners have bought up some cheap assets there. The problem is that Europe is not exactly a growth market, it’s quite the opposite,” says Tottie.

The bulk of GCC investment in refineries is expected to remain in the region, but strategic overseas investments to foster ties with key growth markets is likely to continue.