Saudi Aramco: Getting more out of heavy oil

11 January 2008
As the kingdom turns to heavy crude to help meet rising global demand for oil, Saudi Aramco is expanding its refining capacity in an effort to maximise returns.

Saudi Aramco and the kingdom’s hydrocarbons sector as a whole have entered an era in which heavy oil has taken on particular strategic importance. The kingdom faces the challenge of reducing its reliance on exports of Arabian Light crude while deriving an economic return from its reserves of heavy oil.

Saudi Aramco is seeking to increase total crude production capacity to 12.5 million barrels a day (b/d) by 2009, and 15 million b/d by 2020, in response to rising global demand, and to protect its market position. But with many of the key light crude fields now ageing, some of the output boost will have to come from heavy oil reserves, which have so far been rele-gated to a subsidiary role.

Production increase

By 2011, the Manifa field could be producing as much as 900,000 b/d of heavy oil, with further capacity potentially available from the Zuluf and Marjan fields.

Sold as crude, heavy oil trades at a significant discount to light oil, which gives Aramco a powerful incentive to refine it into products that will fetch a superior price on international markets. It is this strategic imperative to extract better value for money from Manifa’s output that is driving Aramco’s expansion of its crude refining capacity.

Currently, Saudi Arabia can refine up to 2.1 million b/d. But the major projects now under discussion could increase this by more than 1 million b/d.

Further Aramco refineries are planned for the two industrial cities of Jubail and Yanbu, while the Oil Ministry is seeking to develop a plant at Jizan, in the far southwest, near to the border with Yemen.

Final decisions have yet to be taken on all of these schemes as price estimates have escalated because of soaring construction costs and equipment shortages. But the need to expand refining capacity is indisputable.

France’s Total and the US’ ConocoPhillips have been selected as potential joint venture partners for Saudi Aramco at Jubail and Yanbu respectively, but their continued involvement remains uncertain as project costs rise. Meanwhile, the Oil Ministry is seeking domestic investors to develop the Jizan plant, while a foreign partner is expected to be brought in. Saudi Aramco is not involved in Jizan, but the company accounts for all but 360,000 b/d of Saudi Arabia’s current 2.11 million b/d refining capacity.

Significant change

The development of the new refineries represents a significant change in the scale of activity, especially when seen alongside the upgrade of the refinery at Rabigh, and Aramco’s joint venture developments abroad.

Developing refineries overseas is also a key part of Aramco’s strategy. On 10 December, work began on the Motiva project, a $7bn joint venture with Shell to expand an existing plant at Port Arthur, Texas, into what will become the largest refinery in the US, with a capacity of 600,000 b/d. “We are the largest producer and the US is the largest consumer,” says Abdul-aziz al-Khayyal, senior vice-president, industrial relations, at Aramco. “We have always made a decision to be present in a significant way in all major markets.”

Meanwhile, the company is carving out a refining foothold in China, with 25 per cent stakes in both the 230,000-b/d Fujian refinery project being developed by Sinopec and Exxon-Mobil, and in Sinopec’s 200,000-b/d Qingdao plant. Thus Aramco is securing a solid downstream presence in both the world’s biggest economy and its most populous market.

“The kingdom is one of the key investors in refineries outside the region,” says Saudi Oil Minister Ali al-Naimi . “We have capacity now in the kingdom and outside to refine 3.2 million b/d. Over the coming five years, we will double that to about 6 million b/d.”

While joint venture partnerships have been a necessary route to overseas expansion, they are also an increasingly crucial tool in the development of refining capacity in Saudi Arabia itself. Aramco has teamed up with Sumitomo to carry through a $9.8bn expansion and upgrade of the Rabigh plant, transforming it into an integrated refinery.

As the onsite development work reaches completion, the partners in what is now known as Petro Rabigh launched an initial public offering (IPO) in the first week of the new year.

Meanwhile, Saudi Aramco awaits the final verdict from its private sector partners on the new Yanbu and Jubail projects. In both cases, the plan is to build a 400,000-b/d refinery of the deep conversion type - a refinery that is equipped to upgrade that segment of crude that a standard complex plant cannot process, transforming it into intermediates that are then further refined into normal transportation fuels, such as gasoline and diesel.

The capital cost of building such plants is higher than for less sophisticated units. The proposed Yanbu and Jubail projects could cost as much as $10bn each. It is expected that each project will be developed on a 50:50 basis.

So Total and ConocoPhillips face big decisions. Each will probably be liable for about $5bn in development costs, although the exact figures have yet to be finalised. Technip is carrying out the final engineering design for Total, while KBR is performing the same task for Conoco-Phillips.

“They are analysing the project configuration in detail, to arrive at final project costs, which will be inputs to the final investment decisions,” says Alan Gelder, vice-president of downstream oil consulting at Wood Mackenzie. “In assessing the business return these projects will offer, the key issue is how the capital development costs stack up against the margin generated by the export of high-quality transportation fuels [gasoline and diesel] from processing Arabian Heavy crude.”

Income generation

In broader strategic terms, participation in major Saudi downstream activities would have a clear attraction for both Total and Conoco-Phillips. The French group in particular is a leading player in the global refining business, with interests in 27 plants worldwide.

But some industry sources say that for Conoco-Phillips, the strategic logic may not be quite so strong. There have been suggestions that it is only projected to offer a 6 per cent rate of return, about half what it is believed to normally expect.

However, the wider context is encouraging, as witnessed by the strong international interest in the refinery the Oil Ministry plans for Jizan. “We understand that there is a long list of potential partners for Jizan,” says Gelder.

Regardless of whether ConocoPhillips or Total participate in the new refineries, Aramco is likely to press ahead with the schemes.

The only uncertainty is whether it will issue a new invitation for partners or develop the projects alone.

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