Oil producers head downstream as peak oil approaches

18 October 2018
Plans are being laid for unprecedented investment in refining and petrochemicals industries across the region

The conventional wisdom is that world oil demand, forecast to average more than 100 million barrels a day (b/d) for the first time next year, will start falling after 2035.

For low-cost Gulf producers, that moment represents an opportunity as well as a challenge. Falling demand will hit others first and harder, and their market share will grow.

The challenge is to make more money out of the shrinking volumes they will, in due course, be able to sell.

That is why plans are being laid for unprecedented investment in downstream industries across the region. At least $200bn could be ploughed into the sector by 2025.

Every producer is expanding refining capacity to capture more of the value-added in the liquid fuel and feedstock supply chain. What is new is the focus on the opportunities for oil in petrochemicals.

The Paris-based International Energy Agency (IEA) unveiled in October a seminal report about prospects for liquid fuels needed to make petrochemicals. It forecast primary chemicals consumption will grow almost 60 per cent to 1 billion tonnes by 2050. Nearly 7 million b/d of the extra oil the world will need by then will be used by chemicals manufacturers.

Saudi Aramco, which is in the process of buying 70 per cent of Saudi Basic Industries Corporation (Sabic), is leading the way with a downstream investment plan estimated to be worth $100bn. Its latest project is a $9bn Jubail refining and petrochemicals joint venture with France’s Total, confirmed in August. Aramco aims to raise its global refining capacity to as much as 10 million b/d from about 5 million b/d now by the middle of the next decade.

The UAE’s Abu Dhabi National Oil Company (Adnoc) has announced it will invest $45bn to double refining capacity and triple petrochemicals capacity.

The downstream plans of both companies call for joint ventures, but of a different kind. Aramco is looking for partners in the world’s biggest and fastest-growing markets. In April, it agreed a 50 per cent stake in a $44bn refinery and petrochemicals complex in the Indian state of Maharashtra, which is due for completion in 2025. The following month, Adnoc joined the project. Half of the refinery’s 1.2 million-b/d crude feedstock needs will be met by the Gulf partners.

Adnoc CEO Sultan al-Jaber told a conference in London that the company hopes to co-invest with Aramco in further refining and petrochemicals projects in due course. This is raising expectations that the next target could be a refinery planned for Gwadar in Pakistan, which is designed to have a capacity of up to 500,000 b/d.

Kuwait is due to complete all the elements of its domestic refinery upgrade programme by 2020, and plans to invest $25bn to increase capacity by more than 100 per cent to 2 million b/d by 2035. Work has started on its joint-venture $7bn Duqm complex in Oman, which will process 230,000 b/d of crude. Kuwait, like Abu Dhabi and Saudi Arabia, is looking for more overseas downstream opportunities.

Iraq aims to triple domestic refining capacity to 1.5 million b/d by 2021, while Iran has 1.9 million b/d of installed capacity and wants more. Both are struggling to meet targets, but expansion is coming nevertheless.

Iran started exporting petroleum in 1911. More than a century later, the world has never been more dependent on Gulf oil. Global demand will begin its inexorable decline in less than two decades. But the Middle East downstream investment drive means this will be a date not a turning point for the region or the world.

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