Saudi Arabia’s refining sector has witnessed investment of well over $30bn since 2009 in an expansion initiative that has placed downstream hydrocarbons at the very heart of Riyadh’s industrial diversification plans.

The need to meet rising domestic demand, improve product specifications and maintain its position in the international market has resulted in state oil company Saudi Aramco sinking huge sums into several projects. These include new-build schemes as well as the rehabilitation of existing assets.

Riyadh also has a vision of eventually utilising its vast network of oil refineries to drive job creation across the country by providing liquid feedstock to the kingdom’s expanding petrochemicals conversion industry.

New chapter

However, the oil price falling to the $50-$60 a barrel mark and the expectation that it will remain below $100 a barrel for some time opens up a new era for the hydrocarbons sector. One downstream scheme has already been postponed for a year as Aramco manages its cash flow during this leaner period by pushing back the delivery of some non-essential projects.

Saudi Arabia has more than 2.5 million barrels a day (b/d) of refining capacity that Aramco either wholly owns or operates as a joint venture. Another 400,000 b/d is expected onstream in 2015 and a further 400,000 b/d by 2018.   

After several years of stagnation in the kingdom’s oil and gas projects market, 2009 was a turning point for the downstream sector. Aiming to take advantage of extremely low prices for commodities such as steel and cement, Aramco initiated three world-scale refineries in three separate locations that would add a total of 1.2 million b/d of capacity.

Key fact

Aramco will become the world’s sixth-largest refiner when the Jizan refinery comes online in 2018

Source: MEED

The new refineries have all been designed to process heavier grades of crude in line with the more sulphur-rich oil that is contained in the kingdom’s newly producing fields such as Manifa and Khurais.  

Building a refinery to process heavy oil is more expensive, but the product slate is larger, with middle distillates such as gasoline and diesel, as well as products such as heavy fuel oil, which is used by the shipping industry to power extremely large maritime vessels. Petrochemicals such as paraxylene and propylene, as well as petroleum coke (petcoke), can also be produced.

The first of the new grassroots projects to become operational was the 400,000-b/d Saudi Aramco Total Refining & Petrochemical Company (Satorp) joint venture with France’s Total. The refinery is based in Jubail and cost just under $10bn to build. Full production started in 2014.

The complex was designed and built to be one of the new breed of refineries that Aramco hopes will make a far greater contribution to the kingdom’s economy than previous one, which aimed to just add some value to crude before it was exported overseas.

The $20bn Sadara Chemical Company, a huge petrochemicals complex, is being built by Aramco and the US’ Dow Chemical on a plot adjacent to Satorp. The new facility will take naphtha, paraxylene and propylene feedstock from the refinery when it starts operations in 2015/16.

This is exactly the type of symbiotic relationship between assets that Riyadh has been calling for, and Aramco is hoping to promote this integration strategy across its assets in the future.

Pairing assets

“[Aramco] gave this a lot of thought,” says a Saudi-based oil consultant. “Eventually they would like all of their downstream assets paired together this way.”

Aramco is hoping to emulate the success of Satorp on the Red Sea coast of Saudi Arabia with the Yanbu Aramco Sinopec Refining Company (Yasref) refinery, currently in its commissioning phase.

A joint venture with China’s Sinopec, Yasref is almost identical to Satorp, refining 400,000 b/d of heavy oil, the majority of which will be sourced from the offshore Manifa field. However, with no nearby petrochemicals complex to provide it with feedstock, the product slate is much more conventional and will focus primarily on producing large volumes of diesel and gasoline, as well as lesser amounts of benzene and petcoke.

Any non-essential project is being postponed…. This means Ras Tanura is back on the shelf

Saudi-based oil analyst

The first two of Aramco’s grassroots schemes are joint ventures and have been built in two firmly established industrial cities on either side of the kingdom. However, the third project under construction at Jizan in the southwest of the kingdom offers its own unique challenges and has fallen two years behind schedule as a result.

The 400,000-b/d Jizan project was to be the kingdom’s first independent refinery, but a lack of interest from potential owner-operators resulted in Aramco taking over the scheme in 2009. Work is now well under way, but Jizan’s extremely remote location of the project and issues with the integrated gasification combined-cycle (IGCC) power plant being built on the same site have put the scheme firmly behind schedule and $3bn over budget. 

The problems eventually led to the contactor responsible for the crude distillation/vacuum distillation unit, South Korea’s SK Engineering & Construction (SK E&C), being issued with a termination notice in December 2014, after demanding $1.2bn of additional funds to complete the work.

2018 finish

Aramco has now resolved the issues and all of the contractors, even SK E&C, have reached an agreement over additional funds to complete the refinery. However, the project will not become operational until 2018 at the earliest, a delay of two years.

“You have to remember that the Jizan Refinery is not being built because it makes sense from an operational standpoint,” says the Saudi-based oil consultant. “It is being built as a means to transform a very remote area, and this means it was never going to be an easy project.”

When it is finally completed, the facility should become the foundation for expansive industrial development over the next decade in the region. Aramco is already carrying out studies to determine the best strategy for petrochemicals production and, while there are no concrete plans in place as yet, there should be some progress by the end of the decade.

Jizan will draw a line under Aramco’s grassroots refinery building and, with the recent fall in oil prices, it is unlikely there will be any similar schemes being built in the foreseeable future.

Low oil prices have also meant Aramco’s largest downstream refinery project at the pre-execution stage has been shelved for at least 12 months.

The Ras Tanura complex in the Eastern Province is the kingdom’s largest refinery, with a capacity of 550,000 b/d, and has been earmarked for rehabilitation for several years.

As well as a clean fuels upgrade, the facility had also been cited as a prime location for petrochemicals integration as long ago as 2006.

However, due to concerns about escalating costs, the paraxylene package was cancelled in 2014 and the refinery was instead planned to focus on adding naphtha and toluene, as well as lowering the sulphur content of its product slate.

“Aramco is scaling back its capital investment, and this means any non-essential project is being postponed until there is less fluctuation in the market,” says a Saudi-based oil analyst. “This means Ras Tanura is back on the shelf.”

The scaling back of future downstream projects will also affect the kingdom’s refining petrochemicals integration initiative. This programme aims to foster industrial diversification using refineries by lengthening the hydrocarbons value chain. This would mean utilising liquid feedstock from refineries, thereby freeing up gas for power usage. The initiative would emulate the relationship between Satorp and Sadara across all of the country’s downstream facilities.

The Minister of Petroleum & Mineral Resources Ali al-Naimi has said he hopes that making feedstock available from refineries will encourage the private sector to explore opportunities in downstream conversion industries.

MEED reported in August 2013 that as much as $70bn would be invested in new petrochemicals facilities, including an oil-to-chemicals plant being constructed at Yanbu that would dwarf the Sadara complex in Jubail.

Oil-to-chemicals remains on the agenda, but is still in the study phase, while other petrochemicals projects are moving ahead, albeit at a slower pace than first envisaged.

“There is no doubt the long-term strategy is still in place,” says a senior executive from an engineering consultancy. “But everyone needs to realise that project spending will slow down over the next couple of years.”

Remarkable progress

Aramco has built up a formidable downstream sector and, as such, is the leading refiner in the Middle East and it should overtake South Korea as the world’s sixth-largest when the Jizan refinery comes online in late 2018.

Despite the turbulent oil prices stalling future schemes and the delays with Jizan, the kingdom has done a remarkable job with its downstream hydrocarbons projects.

Lower oil prices mean lengthening the hydrocarbons value chain is even more imperative for the government. Being able to utilise oil from initial upstream production in end-user products will insulate the kingdom from any future crude price fluctuations as well as create the hundreds of thousands of jobs that are required. 

Aramco has ushered in a new era where the reliance on gas feedstock for industrial use will be diminished and the foundations have been laid for liquid-focused industrial development.

Low oil prices may have stalled this strategy in the short term, but using the most abundant natural resource at its disposal to benefit the people of Saudi Arabia is Riyadh’s long-term vision.