Refining Saudi Arabia's future
Saudi Arabia is taking the opportunity of collective oil-production cuts to focus on downstream ventures
Sometimes it's the brief, unscripted remark that can shed light on society more than a formal announcement. "We need to develop a savings culture," the head of the Saudi Arabian Monetary Agency (Sama), Ahmed Alkholifey, told an interviewer on stage at the Euromoney conference in Riyadh in May. He was discussing how Saudis would need to adapt to more frugal lifestyles, consuming less fuel, water and electricity, to achieve its Vision 2030.
"The savings rate in the kingdom is very low," the head of the Saudi central bank continued. "We are working with the ministries of education and energy to encourage a culture of savings."
The question of whether to save has also become the subject of some soul searching over the country's energy strategy. Should the kingdom keep its oil reserves in the ground, awaiting the day when global prices rise significantly? Or should the country pump and export as much oil as it can now while global demand is still there and before the US shale industry bags an even bigger share of the global market? After all, Vision 2030 is predicated on the principle of the kingdom ending its total dependence on hydrocarbons, so why not open the taps now?
For now, at least, the Saudi leadership appears to believe that it should continue with the arrangement reached at the end of last year with fellow Opec and non-Opec producers to restrict output to help to lift prices.
7.44m b/d - Saudi Arabia's crude exports in April
But this isn't the only view you hear in Saudi Arabia. Fahd bin Jumaa, a columnist in the influential daily Al-Riyadh, declared in March that "oil as a commodity has lost its youthful lustre and its economic life is approaching early old age after suffering from chronic excess supply and abundant global reserves over recent years". He advised oil producers "to take advantage of the value of oil, rather than leave it under the ground"—adding that $1 today was preferable to $10 in 20 years' time.
While such comments might suggest that there's a lively debate taking place in the kingdom, senior figures in the energy sector say they are meant merely to serve as a warning to Opec and non-Opec producers: Saudi Arabia wants the price of oil to be higher, but is only prepared to adhere to the collective deal if others stick rigorously to their commitments. If the current agreement collapses, then the kingdom will sell all it can, no matter what the price may be.
At present, there is no need to carry out that threat and the kingdom remains willing to play its part in seeking to influence the global market—Saudi crude exports in April averaged 7.444m barrels a day, down from the March figure of 7.541m b/d, even though production was up slightly at 10.262m b/d.
With the emphasis on constraint in oil production and exports, the Saudi energy authorities are focusing more attention on other parts of the industry. Saudi Aramco's chief executive Amin Nasser has said, for example, that natural gas production "will be doubled to about 23bn cubic feet a day over the coming decade, raising the share of clean gas in our utilities to about 70%—that will be the highest in the G-20".
Aramco's focus is also on expanding the downstream, with the aim of raising the company's global refining and marketing capacity to between 8m b/d and 10m b/d. Abdul Aziz Judaimi, head of downstream at Aramco, said in May that concentrating on refining and petrochemicals "is traditionally considered to be a smart move in an era of low-priced oil. It allows integrated companies to capture more value from oil".
Jazan's key role
Saudi Arabia's National Transformation Programme, part of Vision 2030, envisages domestic refining capacity rising from 2.9m b/d to 3.3m b/d by 2020. The Jazan refining venture has a key role to play in this expansion plan. The project, expected to be operational by 2020, will have capacity to manufacture around 75,000 b/d of gasoline, 100,000-160,000 b/d of ultra-low-sulphur diesel, and 160,000-220,000 b/d of fuel oil, depending on the crude mix processed. It will also produce 1m tonnes a year of benzene and paraxylene petrochemical products.
Judaimi said the Jazan refinery would "play the main role in providing the western and southern regions with their requirements for refined products, and the excess volumes will be exported". The project will "form the backbone of the Jazan Economic City" and will ultimately be integrated with a power and water desalination facility. At the same time, the marine terminal will have the capacity to receive very large crude carriers for the supply of crude oil to the refinery, as well as berths to support product exports.
The coming years are likely, too, to see greater collaboration between Aramco and Saudi Basic Industries Corporation (Sabic), which have historically kept their distance from each other. Increasingly, they are finding scope for cooperation. In June 2016, the two companies agreed to explore together the possibility of establishing an oil-to-chemicals project—a process to manufacture petrochemicals directly from crude oil. According to Judaimi, Aramco and Sabic have independently pursued initiatives of this kind "with the same intent: to leverage Saudi Arabia's immense hydrocarbon resources to produce high-value petrochemicals. Together, we have identified opportunities to collaborate on innovative technologies".
Both Aramco and Sabic also hope to expand their international footprints. Sabic's chief executive Yousef al-Benyan told the conference that "as a Saudi Arabian company with global operations—stretching from the Middle East to North America to China and East Asia—Sabic is uniquely positioned to leverage our global resources and experience to the advantage of Vision 2030".
Benyan, announcing a near-doubling of first-quarter profits this year compared to the same period in 2016, said the company's China operations had a big part to play in this success: "The Chinese market was very positive in the first quarter with growth reaching over 6.5%." The Saudi petrochemicals firm has a 50% stake in the Sinopec Sabic Tianjin Petrochemical Company in China.
The ties between Saudi Arabia's two energy firms on the one side and China and East Asia on the other are likely to be strengthened in the coming years. During King Salman's three-week visit to the region, more than 30 agreements were signed with Chinese firms worth some $65bn, mostly in energy cooperation. Aramco already holds a 25% stake in Sinopec's refinery (240,000 b/d capacity) in Fujian province in China and is seeking a stake in China National Petroleum Corporation's plant (260,000 b/d) in Yunnan.
Both Aramco and Sabic are keen to work closely with China as they explore oil-to-chemicals options. As Aramco's Nasser said, "given China's pioneering work on coal-to-chemicals, the case for collaboration in this area is perhaps strongest of all".
So, as Saudi Arabia considers whether it should apply the same culture of saving to its oil reserves as it must to other areas of life, Aramco and Sabic are not short of downstream ventures at home and abroad to be getting on with.
This article is part of a report series on Saudi Arabia. Next article is Fast-track to Saudi Arabia's throne?