For decades, Saudi Arabia has set the pace for the development of the region’s oil, gas, and petrochemicals industry and its plans for new multibillion-dollar facilities across the kingdom were meant to continue the trend for many years to come.
$60bn: Amount Saudi Aramco plans to invest in new capacity up to 2016
$17bn: Estimated value of Aramco’s joint venture with Dow Chemical at Ras Tanura
But the effects of the global financial crisis of 2008-09 have touched even the world’s most powerful oil company, Saudi Aramco, and the energy giant finds its downstream plans in disarray in 2010.
In 2006, Aramco laid the foundations for a major revamp of the kingdom’s downstream oil industry and a shift into producing more refined petroleum products, such as gasoline, both to meet local demand and meet increasing global appetite for fuels.
|Saudi Aramco Refinery Schemes|
|Project||Owners||Value ($bn)||Capacity (barrels a day)|
|Ras Tanura refinery expansion||Saudi Aramco (100 per cent)||8||400,000|
|Jubail Export Refinery||Aramco (62.5 per cent ) /Total||10||400,000|
|Yanbu export refinery||Aramco (62.5 per cent) / ConocoPhillips)||19||400,000|
|Jizan refinery||Saudi Aramco (100 per cent)||7||400,000|
|Source: MEED Projects|
At the same time, the company also started working on plans for the development of the kingdom’s petrochemicals industry, considered a major driver for both job creation and the diversification of Saudi Arabia’s economy. Traditionally the reserve of the local Saudi Basic Industries Corporation (Sabic), Aramco’s decision to enter into the petrochemicals sector came as part of a change in the kingdom’s feedstock strategy for the industry.
In the past low-cost ethane gas had been available to make basic plastics, such as polyethylene, at far lower prices than almost anywhere else in the world – ethane cost $0.75 a BTU in Saudi Arabia as opposed to as much as $7-9 a BTU elsewhere at the time – by the mid-2005 supplies were beginning to tighten.
Aramco resolved to start producing a wider slate of petrochemical products using the gasoline product naphtha as a feedstock. But since naphtha is sold on international markets with its value linked to the price of crude oil, the plants would be less competitive than the earlier ethane-fed facilities.
The solution was to build massive new production complexes integrated with huge export refineries. This cuts out costs related to transporting feedstocks and creates economies of scale, with large, efficient plants producing petrochemicals at a lower overall cost than smaller, less efficient facilities. This would in turn require the direct involvement of Aramco, which controls all the kingdom’s refineries, rather than Sabic.
With soaring oil and gasoline prices and refining margins approaching record highs, these plants seemed the perfect way to make even more money from the kingdom’s most abundant natural resource.
Bringing in investors
To attract investment into Saudi Arabia and get partners with experience of the technology and management of integrated complexes like those being planned, along with the necessary global marketing presence, Aramco decided to work together with international oil and petrochemicals producers on its new projects.
As a sweetener for the deals, the petrochemicals complexes were planned to use a combination of the less competitive naphtha feedstock and cheap ethane gas.
In 2004, Aramco signed a memorandum of understanding (MoU) with Japan’s Sumitomo Chemical to develop what was to become a model for integrated refinery and petrochemicals schemes. An existing 400,000 barrel a day (b/d) Aramco refinery at Rabigh on the kingdom’s Red Sea coast would be integrated with a new petrochemicals complex, on which the firms would work together.
In 2006, Aramco signed MoUs for the development of two new 400,000 b/d refineries at the kingdom’s two industrial cities: one at Yanbu, also on the Red Sea coast with the US’ ConocoPhillips and the other at Jubail on the Gulf coast with France’s Total. Both facilities were to be integrated into petrochemicals complexes at a later date, with the Total joint venture named the Saudi Aramco Total Refining & Petrochemicals Company (Satorp).
In early 2007, Aramco signed another MoU , this time with the US’ Dow Chemical to develop a $17bn petrochemicals complex at Ras Tanura, again on the Gulf coast, to be integrated into a 400,000 b/d expansion of an existing 500,000 b/d refinery at the site, which Aramco was to develop itself.
But ConocoPhillips’ decision to quit the $10bn Yanbu project in late April 2010 sent shockwaves around the oil and gas industry and set the tone for the problems Aramco now faces.
Although the US firm was rumoured to be trying to reduce the level of its participation in the scheme, analysts believed the development was at too advanced a stage for it to walk away from the project entirely.
The Engineering, procurement and construction (EPC) contracts were tendered in February, with contractors selected and asked to hand in final confirmations of their prices for individual packages on the scheme. On 21 April, the day both partners announced the decision, senior executives at banks working on funding for the project told MEED that the financing schemes were progressing quickly.
“It is a little bit late in the process for ConocoPhillips to be rediscovering itself and changing its strategy like this,” says John Sfakianakis, chief economist at the local/French Banque Saudi Fransi. “Many would find it surprising that a company of this size decides at the eleventh hour to pull out of the project. It was to do with Conoco’s strategy, not the economics of the project.”
ConocoPhillips says that the decision was in line with its strategy to move out of refining and concentrate on upstream hydrocarbons projects. The margins on offer in refining are no longer enough for the company, whose roots lie in the upstream sector.
ConocoPhillips’ strategy changed after the financial crisis, which saw oil prices in the US fall from highs above $147 a barrel in July 2008 to under $40 a barrel in February 2009. Consumer gasoline prices also fell from more than $4 a gallon to less than $1.60 a gallon during the same period.
The Yanbu project withdrawal is the biggest casualty of the company’s new direction. The real surprise comes from the fact ConocoPhillips was prepared to sacrifice its relationship with Aramco, the biggest national oil company in the world, in the process. The decision to quit the project has effectively ended ConocoPhillips’ prospects of working in the kingdom in the future, industry sources say.
“I find it hard to believe Conoco will be able to make any kind of comeback in Saudi Arabia after this,” says Sfakianakis.
The problem highlights the degree to which the interests of international oil companies and their state-owned counterparts have diverged since the financial crisis, says Paul Hodges, chairman of UK-based downstream and petrochemicals consultancy International Echem.
“There is too much refining capacity,” he says. “Gasoline demand is now starting to go down rather than up in many places [worldwide]. It has been going down in Europe for a long time now, it is going down in the US. Why would you build new plants?”
In 2006, the UK’s BP was making $8.50 for every barrel of oil it refined. In 2007, profits hit $9.90 a barrel. But the economic crisis slashed margins to $4 a barrel.
For companies like ConocoPhillips, refining is simply not profitable enough. Aramco, meanwhile, is more concerned with meeting domestic demand, creating jobs and adding value to its output.
The Yanbu project was not the only Aramco scheme to be affected by the financial crisis. Sources close to the Dow joint venture tell MEED that a combination of costs, profitability, and demand for petrochemicals products have led the partners to make a series of changes to the scheme, which will in turn impact $30bn-worth of projects.
In late March, MEED reported the partners were planning a site change for the project and in April news emerged that the scheme would be moved to Jubail, where it will sit alongside the Satorp refinery.
The project will now be largely fed by ethane gas provided by Aramco and to a lesser extent liquid feedstocks provided by the Jubail refinery. The location change will cut the cost of building the complex by up to 40 per cent, one adviser on the scheme says, while the use of ethane will significantly improve margins.
“Dow was quite concerned by the cost of the plant, and the returns it would get,” the adviser says. “In a lot of ways, this is a bit of a U-turn for Aramco, but it means that the project goes ahead, and after a lot of delays, they need it to move ahead.”
The site change has caused Aramco to cut back its own plans for new refining capacity. The Ras Tanura expansion has been cancelled, as it is now surplus to requirements in terms of both feedstocks for the petrochemicals scheme and supply for international fuel markets.
Domestic demand will be met by both the Jubail and Yanbu projects, along with another $7bn refinery scheme at Jizan in the south of the country, which Aramco took over in February, after what was meant to be the country’s first independently financed and developed refining project attracted insufficient interest.
The project will now be developed in two phases, with Aramco first building a hydroskimming refinery to produce basic fuels, before adding cracking units to produce more valuable gasoline products at a later date.
“Probably they are rethinking their strategy now,” says Sfakianakis, although he expects Aramco to push ahead with downstream plans regardless. “These are strategic projects and there is no way Aramco won’t go ahead with them in the long term.”
The difference, says Hodges, is the appetite for international involvement has been diminished by the financing issues of the past two years. “We are seeing the effect of reality on even the better-qualified projects,” he says. “When the projects were planned, the idea was demand was going to grow. Europe isn’t growing, and even China’s exports, rather than imports, are increasing because they are building refineries and petrochemicals plants.”
Aramco plans to invest $60bn in new capacity to 2016, chief executive Khalid al-Falih said in January. After the issues with ConocoPhillips and Dow, they are likely to do so alone.