Saudi Aramco’s bold move

20 July 2010

Foreign firms could lose out if Saudi energy major gains confidence: Yanbu project will be the first Saudi refinery developed solely by Aramco

The decision by ConocoPhillips to quit the $10bn Yanbu refinery project in April left Saudi Aramco in a quandary: should it find a new partner, put the project on hold, or push on alone?

Normally Aramco would prefer to work with an international partner. If Aramco awards the main construction contracts on the project by the end of July as planned, it will mark a change in the firm’s strategy for developing major new downstream facilities.

Aramco has traditionally developed its refining and petrochemicals projects in partnership with international companies, benefiting from their technology and expertise. In addition to the valuable support, technical know-how and technology, a partner also spreads the risk involved in taking on a costly project. But Aramco had its fingers burned by ConocoPhillips and the terms it offered to potential new stakeholders were insufficient to attract interest.

Putting the project on hold would have meant losing the enviable bids Aramco received for the main construction contracts, which were on average about 20 per cent under its budget.

Aramco’s decision to go it alone will see the company entering into largely uncharted territory by financing, managing and running the refinery on its own. Although it has run its oil exploration and production operations without assistance from outside, Aramco has yet to develop a downstream unit of this size alone.

The challenges are huge and the financial risks the company is accepting are significantly larger than they were when it had a partner. Taking on a project of this size, while working on a project of a similar size at Jubail and planning other major new schemes, will strain Aramco’s resources. If Aramco is successful, it will doubtless grow in confidence to build plants on its own. This could spell trouble for international oil firms: soon, they may no longer be needed for anything other than their technology.

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