Yanbu refinery financing now expected to slip into 2011

12 May 2010

ConocoPhillips exit leaves Saudi Aramco struggling to meet ambitious timetable

Saudi Aramco faces delays in financing its $10bn Yanbu refinery project that could push the finance deals into early 2011, according to sources close to the scheme.

Saudi Aramco is yet to make a decision on how to proceed with the project following the departure of the US’ ConocoPhillips as its joint venture partner.

The companies announced on 21 April that the US energy firm had decided to quit the 400,000 barrel a day (b/d) Red Sea refinery project, on which it was due to be a 50 per cent partner, as refining operations no longer fit its long-term strategy (MEED 21:4:10).

Although the state energy giant is keen to push ahead with the project, it faces having to provide a large commitment to the scheme to replace the contribution that ConocoPhillips would have made. Large portions of the project documentation will have to be rewritten and international banks, particularly those that came into the deal because of a relationship with ConocoPhillips, will have to go through their internal processes again.

Bankers in the kingdom say the deal is now unlikely to be able to reach financial close until early 2011

Delays expected

If Saudi Aramco moves ahead with the scheme, it could push back the financial close by another six to eight months, bankers say. It had originally hoped to complete the financing by mid-2010.

As a result, bankers in the kingdom say the deal is now unlikely to be able to reach financial close until early 2011. Bankers in Riyadh have previously speculated that the Yanbu deal could be completed before the financing for a second Saudi Aramco refinery project at Jubail (MEED 20:4:10)

The financing for the Jubail refinery, a joint venture with France’s Total, was originally scheduled to be completed in late 2009, but problems with the Islamic structuring for a local sukuk issue have held it up. Pressure is mounting for the partners to close these financing deals as bank commitments for the project expire in late June, sources close to the project tell MEED.

Saudi Aramco’s main motivation for continuing with the Yanbu scheme would be to capitalise on lower construction costs. International engineering firms submitted bids for the main engineering, procurement and construction (EPC)contracts on the refinery in February and Saudi Aramco chose its preferred bidders in March.

Spain’s Tecnicas Reunidas was selected to build the main coker unit at the refinery while South Korean firms were chosen to be the EPC contractors on the crude distillation unit, gasoline processing facilities, and hydrocracker at the plant.

The following South Korean companies have been selected to work on the project: SK Engineering & Construction for the crude distillation unit, South Korea’s Daelim Corporation for the gasoline unit, and GS Engineering & Construction for the hydrocracker.

Egypt’s Engineering for the Petroleum & Process Industries (Enppi) will build the main storage facilities at the refinery, while Indian/local Dayim Punj Lloyd was chosen for a deal to build the offsite pipelines at the plant.

Lower costs

Their prices were up to 40 per cent lower than had been budgeted for, running to a total of about $8-9bn, says one source with close ties to the scheme.

 “Saudi Aramco has got fabulous EPC prices from bidders, which it will not get in the future,” says a Riyadh-based source.

The contractors selected to build the refinery say that they have been given no indication as to whether the project will go ahead, but remain hopeful that Aramco will move to capture the lower costs on offer. They have been asked to extend the validity of their bid bonds by two months to 25 July and expect to have a clear idea of Saudi Aramco’s plans by the end of May.

“We know that the project team thinks these are great prices, but that there is a lot of concern at the top about what to do next,” says one executive in talks over the project.

Saudi Aramco told the selected contractors that it planned to go ahead with the project alone in a 21 April letter, despite having approached international oil companies over taking on ConocoPhillips’s stake in the scheme.

However, executives with close ties to Saudi Aramco’s management tell MEED that Chinese refining giant Sinopec remains interested in taking part in the development.

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