More than two years after talks began, Saudi Aramco has finally confirmed that its two major export refineries at Jubail and Yanbu will go ahead. France’s Total and the US’ ConocoPhillips have been selected as Aramco’s joint venture partners on the two 400,000-barrel-a-day (b/d) facilities on the Gulf and Red Sea coasts.
Although Total and Aramco have yet to officially give a final investment figure on the Jubail refinery, industry sources put it at up to $12bn, compared with the initial budget of about $6bn.
The refinery, which is expected to process Arabian Heavy crude and a new grade of crude from the offshore Manifa field, will be split between Aramco (62.5 per cent) and Total (37.5 per cent). It is expected that Aramco will later offer 25 per cent of its shares to the public through the Saudi stock market (Tadawul), giving the two firms equal stakes.
Configured to maximise the production of diesel and jet fuels, the refinery will also produce 700,000 tonnes a year (t/y) of paraxylene, 140,000 t/y of benzene and 200,000 t/y of polymer-grade propylene.
Aramco will invite contracting firms to bid for the main engineering, procurement and construction (EPC) deals by the end of June, with a view to awarding all packages in the first quarter of 2009.
Orders for long-lead items will be placed as soon as the third quarter of 2008, while banks are to be consulted in the second half of 2008, with a targeted financial close in early 2009.
ConocoPhillips and Aramco are also proceeding with the Yanbu refinery, despite the project’s budget being hit by spiralling development costs. The overall cost of developing Yanbu is thought to have doubled to $12-13bn from the initial estimate of $6bn, when the memorandum of understanding was first signed with Aramco in May 2006.
Under the cost schedule, Conoco and Aramco’s rate of return is understood to be about half the 12-15 per cent margin expected for a project of this size. Aramco and Conoco will each be responsible for marketing one half of the refinery’s production, with start-up targeted for 2013.
The two firms plan to form a joint venture company, with equal interests, to own and operate the proposed refinery. Subject to regulatory approval, the parties then plan to offer an interest in the refinery to the Saudi public.
The refineries will increase Aramco’s domestic and international refining capacity to 3.2 million b/d by 2013 from about 2.4 million b/d currently, as part of a $70bn investment commitment over the next five years.
The massive ramp-up in supply comes at an uncertain time for refining margins worldwide, but Aramco is unphased by swings in the market. “We are in for the long haul,” says Khalid al-Buainain, senior vice-president for refining, marketing and international. “What we have seen now is that margins are not as strong as last year [and] the depth of the cycle is unknown for the time being. But we are not concerned about short-term volatility in the margins.”
For Aramco, the new slate of refined products from both Jubail and Yanbu will help create a market for its heavy oil reserves. By 2011, the Manifa field could be producing as much as 900,000 b/d of heavy oil, with further capacity available from the Zuluf and Marjan fields.
Because of its massive oil reserves, Saudi Arabia has always been able to produce large amounts of light oil, the most commercially attractive form of crude. However, with many of its fields ageing, the kingdom has had to start producing large amounts of heavier grades as it looks to increase production, and stem declines of up to 500,000 b/d.
Historically, heavy oil has been an unattractive option for most of Aramco’s importing nations as it produces fewer refined products, is more difficult to transport and is more expensive to refine than lighter oil grades.
The problem for Riyadh is that the importance of heavy oil is only ever going to increase as production from its already ageing Arabian Light-producing fields declines. If it cannot refine the heavier product itself, it runs the risk of losing flexibility in the way it prices its crude.
In an effort to exert greater control over pricing, Aramco has floated the idea of creating a pricing and trading mechanism to make the region a hub for buying and selling refined products such as fuel oil, gasoline and jet fuel.
Currently, the price of the Middle East’s refined products is largely determined by traders in Singapore, who dominate the market through a system known as ‘freight netback valuation’. In effect, they decide the price that firms such as Aramco receive for their refined goods.
Aramco argues that the Middle East is now such a powerful player in the import and export of oil products that it deserves its own regional pricing benchmarks, rather than relying on the current system. Other refinery projects around the kingdom are also being pushed ahead, albeit with different levels of success.
Aramco has teamed up with Japan’s Sumitomo Corporation for a $9.8bn expansion and upgrade of the Rabigh plant, transforming it into an integrated refinery.
In addition, the Ras Tanura integrated refinery is being developed with the US’ Dow Chemical as part of an upgrade to produce almost 1 million b/d and integrate it with a petro-chemicals facility. Feedstock will be supplied from the existing Ras Tanura refinery complex in addition to the Juaymah gas fractionation plant.
The trend towards integrated projects will become a new focus during the next phase of Aramco’s growth, according to Al-Buainain.
“An increasing proportion of our crude oil production will be feeding new petrochemical facilities, which are integrated with refining assets,” he says. “Our move into projects that tie refineries with petrochemical facilities [enables] us to benefit from the economic multiplier effect that comes with refining petrochemical integration.”
Aramco and Dow are scheduled to make a final investment decision on Ras Tanura in mid-2009, following the completion of a two-year front-end engineering and design process by the US’ KBR. Rising construction costs have raised questions over the economics of the project, although it is still expected to proceed.
“We are all aware of the spiralling costs of commodity materials, finished goods and engineering, procurement and construction services,” Al-Falih said at an industry conference in Bahrain on 25 May. “All around the world, the price tags for projects are growing and this means our investment decisions take on even greater significance.”
Aramco is also looking to group together with local partners to propel growth. The prospect of a joint venture agreement with Saudi Basic Industries Corporation (Sabic) to increase capacity at its existing Yanbu refinery is quietly taking shape. Aramco had planned to boost capacity from the Yanbu domestic oil refinery by 125,000 b/d in a bid to keep pace with spiralling local demand, but the upgrade was cancelled earlier this year. The move has increased speculation that it is considering a partnership with Sabic to integrate the refinery with a new petrochemicals complex.
“We are looking at it [and] we see it as an opportunity for growth similar to PetroRabigh and Ras Tanura,” says Al-Buainain. “Sabic is one of our candidates [to develop the refinery]. We would love to do business with Sabic.”
Contrary to the good progress of the Jubail and Yanbu facilities, Jizan, the kingdom’s only refinery venture not involving Aramco, is struggling to get off the ground. The Saudi Oil Ministry missed the end-of-May deadline for sending a request for proposals to oil majors on its Jizan refinery, citing procedural delays in receiving approval from the Supreme Petroleum Council (SPC).
Despite rumours suggesting Aramco would help progress the venture, Al-Buainain says it is not directly involved. “We have not been asked to look at Jizan,” he says. “It is a government-sponsored refinery for private investors. We are always ready to help.”
With its biggest ever increase in refining capacity, all eyes are on Saudi Aramco and its ability to deliver on billions of dollars worth of investment promises.