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Responding to market needs

Saudi Aramco is revising its downstream ambitions. It claims it may be involved in a quarter of additions to global refining capacity in the next five years. James Gavin writes

SENIOR Saudi Arabian oil officials have spent recent years defending the country against accusations that it has been partly responsible for oil-price inflation by not releasing enough crude onto the market. That accusation is now rarely aired. But the Saudi analysis of the problem – that a shortage of global refining capacity has been largely responsible for market tightness – has led to a significant change in the country's downstream strategy.

Domestic refining capacity is set to grow by 1.3m barrels a day (b/d) over the next five years to reach 3.4m b/d by 2012. A report released last month by the Saudi Arabian General Investment Authority (Sagia) predicts most of the 60% increase in capacity will come at the end of the period, when two 400,000 b/d refineries, at Jubail and Yanbu, come on stream. According to Sagia, the new capacity will represent 17% of the global increase in refining capacity between 2007 and 2012, and will cost more than $20bn.

Saudi Aramco says it is responding to market needs by investing downstream and, at the same time, enabling the economy to grow. It is studying the possibility, with several partners, of expanding capacity from the planned 3.4m to 5.4m b/d. Most of the extra capacity will be for processing heavy, sour crude.

Aramco said in its recently issued 2006 annual review that it is "considering" building close to 2m b/d of additional refining capacity in Saudi Arabia and abroad. "We may be engaged in about one-quarter of the announced plans for refinery capacity increase worldwide," it said.

Growing confidence downstream

The company's growing confidence in the downstream business stems, in part, from the resurgence of the refining industry generally: margins are robust and investment in new capacity is attractive. Saudi Arabia's large oil reserves and proximity to big markets are other significant advantages.

However, some officials are concerned that the new capacity could come on stream during an industry down-cycle, leaving the country saddled with excess capacity. Wood Mackenzie, a consultancy, expects margins to stay strong until 2010, at which point it says capacity additions may result in a downward adjustment in margins.

The possibility of a capacity surplus winding down margins cannot be discounted – long-term forecasts for refining margins are notoriously unreliable. However, Bassam Fattouh, an analyst at the Oxford Institute of Energy Studies, says Riyadh believes the prospect of lower margins will force other refineries to scale back expansion plans or reduce refining capacity, leaving more market share for Saudi Arabia. This will eventually result in a rebalancing of supply and demand, enabling margins to recover, he says. And, in the meantime, Aramco's large cash reserves and relatively low feedstock costs will allow it to weather unfavourable market conditions in the short term. "They're not worried about a refining glut."

Domestic demand is a significant driver of growth in the country's downstream. Refined products consumption is growing at an estimated 5-7% a year. In 2005, demand was estimated at 0.85m b/d. Saudi Arabia is locating new refineries at home and nearer the markets to which they will be selling – "a sensible strategy for diversifying risk", says Paul Stevens of the Centre for Energy, Petroleum and Mineral Policy.

Building in China

As well as domestic refineries, Aramco is building capacity in China. Capacity at Fujian is to triple to 240,000 b/d by 2009, with new capacity able to process underutilised Saudi heavy and sour grades. At Qingdao, around 200,000 b/d is being added. Aramco's partners in Fujian are Sinopec and ExxonMobil, and, at Qingdao, Sinopec. Aramco has a 25% stake in both ventures.

The two planned Saudi-based export refineries, at Yanbu and Jubail, will each be expandable to 0.8m b/d. The Yanbu plant is being built in a joint venture with ConocoPhillips; Total is the partner at Jubail. Both plants will produce a range of products, including gasoline for export to the US, diesel for Europe and naphtha and fuel oil for Asia. The refineries will be fed by recently developed fields, including Manifa – Aramco expects this offshore field to add 0.9m b/d of heavy oil capacity by 2011.

There is also a prospect of a privately owned refinery being built at the port-city of Jizan – a sign that the authorities are considering allowing private capital to fund part of the downstream expansion.

Aramco, meanwhile, will extend its reach down the value chain. Integrating petrochemicals operations with its domestic and international refineries is an important part of its downstream strategy.

Saudi officials estimate existing petrochemicals expansion projects will nearly double the country's share of global supply, to 13% by 2010. And last month, oil minister Ali al-Naimi predicted the country's petrochemicals output will reach 100m tonnes a year (t/y) by 2015 – equivalent to about 20% of the world market by then. Most of the additions are expected to come from Saudi Basic Industries (Sabic), which recently announced plans to increase production capacity to 130m t/y by 2020, from 50m t/y. A substantial contribution will also come from the private sector.

But Aramco, which has no operational petrochemicals capacity, will not be left out. Its Petro-Rabigh joint venture with Japan's Sumitomo will produce 2.4m t/y of bulk and specialty products. Start-up is planned for late 2008 and Petro-Rabigh is already considering an expansion. As well as Petro-Rabigh, Aramco is involved in two other embryonic petrochemicals ventures: the development of a 1.2m t/y ethane/naphtha steam cracker at the 0.55m b/d Ras Tanura refinery, which it is modernising in partnership with Dow Chemical; and a 0.8m t/y plant at the Fujian complex.

The search for gas

SAUDI Aramco is increasingly focusing its attention on gas developments amid rapidly rising demand from the power and petrochemicals sectors, and from industry. The company discovered three new gasfields in 2006, including Karan, from which it aims to produce 28m cm/d of gas from 2011.

It also found the Kassab field in the Eastern Province, 50 km south of the onshore Ghawar field. Flows from the Kassab-1 well are reported at 283,000 cubic metres a day (cm/d). The Nujayman-1 wildcat identified another gasfield south of Ghawar, in Eastern Province.

Such is the need for gas that Aramco is venturing into little-explored areas, carrying out seismic surveys on the Red Sea, for example, and opening up the Nafud basin in the north.

However, available volumes may not be large enough to meet domestic needs, even when Karan is on stream. "Karan will figure prominently," says Colin Lothian, Middle East analyst at Wood Mackenzie. "But it won't bail them out. Although sizeable, it won't produce the levels of gas that they require."

Additionally, the company must also find the right sort of gas. Non-associated gasfields such as Karan have a low ethane content, making them unsuited to providing feedstock for petrochemicals schemes.n


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