Soaring costs set to stall Aramco refinery

18 April 2008
Budget for Jubail complex increases to more than $10bn while Yanbu costs double to $12-13bn.

Saudi Aramco is likely to delay the development of one of two new refineries planned for Yanbu and Jubail, in the latest response to rising costs.

Costs on the Jubail complex have soared beyond $10bn, while the cost of Yanbu is understood to have doubled to $12-13bn.

Rather than develop both schemes in tandem, as was previously expected, senior industry sources expect Aramco to prioritise one of the facilities.

French energy contractor Technip, which is completing the front-end engineering and design on the Jubail plant, has confirmed that costs on the 400,000-barrel-a-day (b/d) refinery will now surpass $10bn, from an initial budget of $6bn.

"It is double-digit currently," says Thierry Pilenko, president of Technip. "We have made a cost estimate and we are now fine-tuning it."

Pilenko says because of the increase in costs, Aramco is likely to prioritise the development of one of the refineries rather than develop them at the same time.

"I think they will both go ahead but doubt they will [be developed] in parallel because of the capacity constraints in the industry," he says. "It is going to be Saudi Aramco and the partners' decision to see which refinery goes first, [but] the more you wait on these projects, the more expensive they are going to be."

A joint investment decision on Jubail will be made this year by Total and Aramco.

One senior executive from Total, who is involved in making an investment decision with Aramco, says he has received an early indication from Aramco that Jubail will be prioritised ahead of Yanbu.

"As we get closer to the investment decision, there is a recognition within Saudi Aramco that trying to carry out two mega-projects of this size at pretty much the same time could cause more trouble than it is worth," he says. "Jubail is currently seen as more advanced."

According to the existing deadlines, the Jubail refinery, which is expected to process Arabian Heavy crude and a new grade of crude from the offshore Manifa field, is due to begin production in 2012. Yanbu is expected to begin production the same year.

The 400,000-b/d export refinery at Yanbu is being developed with the US' ConocoPhillips, which could not be reached for comment on possible delays.

The cost of developing Yanbu is thought to have at least doubled from the initial estimate of $6bn, when the memorandum of understanding was first signed by Conoco and Aramco in 2006.

Under the cost schedule, Conoco and Aramco's rate of return is understood to be about half the 12-15 per cent band expected for a project of this size.

The kingdom's refining capacity of 2.1 million b/d could be boosted by up to 1.6 million b/d under Saudi Aramco's expansion plans.

Aramco could not be reached for comment.

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