While the recent development of natural gas has spurred investment in major petrochemicals programmes across the Middle East, most oil refineries in the region are slipping into old age. Ironically, some of the biggest producers, such as Iran, are now net importers of fuel oil.

The reason, as ever, is economic. ‘While it may cost $1.50 to transport a barrel of crude across the Atlantic, it can cost 20 times that to refine and ship the equivalent amount of product,’ says Philip Leighton of London-based Jacobs Consulting. ‘The margins dictate that no one is going to invest in a brand-new refinery again. The trend instead has been for Saudi Aramco and others to put their money into refining assets abroad.’

But if this economic argument is sound, what has motivated the governments of Kuwait, Qatar and Oman to press ahead with what appear to be grassroots refinery projects?

‘If you look at examples in the Gulf, at Sohar [in Oman] and the fourth refinery in Kuwait, you can see two main reasons for building a new refinery,’ says Leighton. ‘Sohar appears to be a grassroots refinery, but in effect it is an upgrading project. So although it is being built on a new site, it is still taking black oil from Mina al-Fahal [refinery] and converting it into white products. The main reason it is being built 260 kilometres away is political, as it forms part of the government’s plans to encourage industrial development in this region.’

The 116,000-barrel-a-day (b/d) refinery is part-financed by a $647 million commercial loan. Leighton says the financing structure backs up his argument. ‘Although this looks like straightforward project financing, in effect the project is financed against a heavily subsidised government tolling agreement. The government is taking all the risk.’

A unique set of circumstances also lies behind the decision in Qatar to build the grassroots Ras Laffan refinery. While a number of Gulf states have built condensate splitters in recent years, several are now struggling. The Dubai refinery, owned by Emirates National Oil Company (ENOC), is reckoned to be running at 50 per cent of capacity. The main problem facing the facility is the lack of captive feedstock, with ENOC having to source its supplies from regional suppliers. In contrast, Ras Laffan not only has its own captive supplies of feedstock – a by-product of Qatar’s burgeoning liquefied natural gas (LNG) industry – but has them in sufficient quantities to make a second 140,000-b/d train a viable proposition.


Kuwait and Saudi Arabia between them account for the bulk of the upgrading and modernisation projects. In both cases, the oil refinery projects are being driven forward by rising domestic fuel demand. ‘Saudi Arabia is short of gas, so it is burning a lot of fuel oil to provide power, especially in the West on the Red Sea coast. Kuwait is in an even worse position, as not only does it have even less gas, but it has got some of the worst quality crude and is at the wrong end of the Gulf for cheap transportation,’ says Leighton.

Refinery operators are also presented with a range of environmental pressures, led in part by European legislation that is tightening up restrictions on fuel emissions for generations of vehicles to come.

Most European car manufacturers are now in compliance with Euro 3, which introduced new specifications for the benzene and sulphur contents of petrol and diesel in 2000. Coming into effect in 2005, Euro 4 requires further tightening of sulphur and aromatics levels by the end of 2008, while Euro 5 will demand reduction of sulphur levels to 10 parts per million (ppm) or less by 2011. Environmental legislation in the US is less stringent, but pressure on Middle East and Asian refiners to upgrade will continue to grow over the next decade.

Digby Lidstone