Downstream projects suffer as Gulf spending tightened
Several new developments are about to come on stream. New proposed ones will be delayed by the weak oil price
The Gulf is a region where the timelines of proposed oil and gas projects are often flexible or ill-defined, making it difficult to judge the impact of the oil price fall on investment plans. Burgeoning financial reserves mean no one is panicking yet, either. Nonetheless, a spate of project delays suggests that a more cautious approach to spending is being adopted, especially for the downstream.
“Three critical issues continue to confront investors and project sponsors,” Ali Aissaoui, senior consultant at the Arab Petroleum Investment Corporation, said in a January commentary. “Rising project costs, scarcity of supply of natural gas and ethane, as well as funding restrictions. Of the three, the latter remains the most critical.”
The axe man cometh
Recent activity indicates that Gulf Cooperation Council (GCC) countries faced with the choice of whether to prune back spending on new petrochemicals and refining projects or upstream projects are wielding the axe downstream and leaving production relatively unscathed.
“It can be argued that the economics of many gas-based petrochemicals projects in the Gulf haven’t really changed, as they aren’t necessarily dependent on the oil price. But a falling oil price does make naphtha-based competitors in Asia more competitive. Inevitably, there will be efforts to control spending and that makes them vulnerable,” said Robin Mills, head of consulting at Manaar Energy in Dubai.
Saudi Arabia has had a major rethink of its project pipeline, as it seeks to offset the impact of the low oil price. Apicorp estimates the kingdom needs around $100 a barrel to keep its budget in the black, much higher than that for Qatar and Kuwait, where the figure is roughly $50-75/b. In February, oil prices were struggling to stay above $50/b.
The first major casualty of 2015 was Saudi Aramco’s planned $3 billion clean fuels plant at its Ras Tanura refinery complex, construction of which was shelved for at least another year in early January. The plant, incorporating a naphtha hydrotreater, was to be part of phase two of an upgrade programme for Aramco’s refineries, and had been scheduled to come on stream in 2016. The project had already been re-tendered after initial bids exceeded Saudi Aramco’s budget.
Other Saudi projects put back include the construction of a $600 million bulk storage facility at Shoaiba, now delayed until at least 2018, as well as a $3bn development on the Khurais oil field, where Italy’s Saipem is lead contractor on new processing facilities. This was to have been ready by 2018, but is now expected to be completed a year later.
Last October, Shell and Saudi Basic Industries Corporation (Sabic) called off the expansion of the Saudi Arabia Petrochemical Company (Sadaf) joint venture, reporting discouraging preliminary studies.
"The economics of many gas-based projects haven't really changed, as they aren't necessarily dependent on the oil price"
Beyond Saudi Arabia, the $6 billion-plus Al Karaana petrochemicals joint venture between Qatar Petroleum and Shell at Ras Laffan in Qatar was shelved in mid-January. The two firms said it was “commercially unfeasible” in the prevailing economic climate.
Meanwhile, in Kuwait, the bid deadline for the engineering, procurement and construction (EPC) contract for the fifth gas fractionation train at Kuwait National Petroleum Company’s Mina al-Ahmadi refinery has been repeatedly delayed in recent months and is now set for early March. The new train will add around 800m cubic feet a day to the country’s gas production capacity and also increase condensate output.
Part of the problem is that considerable new capacity already under construction in the region is due to come on stream in the near term. In Abu Dhabi, a $4.5bn expansion of the Borouge petrochemicals project is pushing ahead despite the difficult conditions. The joint venture between Abu Dhabi National Oil Company (Adnoc) and Austria’s Borealis will boost production capacity to 4.5m tonnes a year (t/y) during 2016 from 2m t/y now. A Borouge official said in January that the company had cut its prices by at least 20% in response to the oil price slide.
The $20bn Sadara petrochemicals project being built by Aramco and Dow Chemical in Saudi Arabia, whose construction was already well under way before the oil-price collapse, is approaching completion and likely to start production later this year. When it reaches full capacity next year, the plant, which is the first in the region to use naphtha and other refinery liquids as feedstock, will produce 3m t/y of products.
Another well-advanced project, a plant expansion at Saudi Refining and Petrochemical (PetroRabigh II), should start operations in December. The $8.5bn joint venture between Aramco and Japan’s Sumitomo Chemical is expected to reach full capacity in early 2016. It will be able to produce 1.34m t/y of paraxylene and 424,000 t/y of benzene, among other products.
Also due to come on stream this year in Saudi Arabia are the $3.4bn Al Jubail Petrochemical Company (Kemya), a joint venture between Sabic and ExxonMobil, producing 400,000 t/y of synthetic rubber products, and Saudi Arabian Fertilizer Company’s $500 million-plus Safco V expansion project, producing 1.1m t/y of Urea.
Investments by GCC-based companies in foreign petrochemicals projects are also continuing. Motiva, the joint venture between Shell and Saudi Aramco, is planning to boost diesel fuel output at its refinery in Texas – the largest in the US. If it gains government approval, the expansion will raise capacity to 105,000 b/d from 82,000 b/d. GCC producers also remain involved in developing petrochemicals capacity in Asia, in an effort to cement export markets. Last September, state-controlled Thai energy firm PTT said it had submitted a plan to the Vietnamese government to build a $22bn plant in Vietnam in a venture with Saudi Aramco.
The announcement of some major investments in upstream projects reflects the determination within the region to maintain or increase production capacity, despite the lower oil price. In Saudi Arabia, efforts to explore for oil and gas in the Red Sea may have been scaled down, but the kingdom is keen to boost shale gas exploration, as it seeks to meet growing domestic power demand. In January Aramco said it would spend another $7bn on this search, bringing its total commitment to $10bn.
In the UAE, the multi-billion dollar Shah sour gas project was commissioned in January and is expected to reach full capacity later this year, using around 1bn cf/d of high-sulphur gas to produce 500m cf/d of usable gas, according to Adnoc.
Last year, Abu Dhabi agreed fresh terms with ExxonMobil and its partner Inpex for the continued development of Upper Zakum, the world’s second largest offshore field. The state oil company is also pushing ahead with the revamp of its onshore concession structure, having recently agreed to give Total a 10% stake, with other majors expected to join the French company in coming weeks.
Bahrain’s refinery faces strong regional competition
Plans to expand the Bahrain Petroleum Company’s (Bapco) oil refinery at Sitra could at last move off the drawing board next year, when the state-owned company makes a final investment decision (FID) on the project. But the prospect of diminishing margins on refined products and potential over-supply in the region could yet give the kingdom pause for thought.
The expansion project, now at the front-end engineering and design stage, would increase capacity of the ageing Sitra refinery, built in the 1930s, by 100,000 barrels a day (b/d) from the existing 267,000 b/d. In January, Bapco’s chief executive Peter Bartlett confirmed that FID would be taken in 2016, when the company would put its proposal before the Bahraini authorities. However, he also stressed that the refinery faced a rocky year in 2015.
While the company has already sold much of its 2015 production at what Bartlett told Reuters were “pretty good margins”, he expressed concerns that lower oil prices would reduce prices for refined products. Analysts say reduced margins on products could make Bahrain question the economics of the refinery expansion.
Those margins will not be helped by competition from increased refining capacity elsewhere in the region. The 400,000 b/d expansion of Takreer’s Ruwais refinery, in the United Arab Emirates, to more than 800,000 b/d is at the commissioning stage. In Saudi Arabia, the 400,000 b/d Satorp refinery opened in 2014, while the 400,000 b/d Yasref refinery was due to be producing at full capacity by mid-February.
Sitra exports most of its output to global markets, selling less than 10% domestically. As part of the Bahraini expansion plan, the Sitra refinery, which is largely supplied by oil from Saudi Arabia and from fields jointly owned by the two countries, is to be fed by extra pipeline capacity. In January, Bapco said the first construction contracts for the new pipeline would be awarded during the first half of 2015. The new 115 km link – 42 km of it running subsea – connecting Saudi Aramco’s Abqaiq plant to Bahrain will raise supply to 350,000 b/d from 230,000 b/d. Aramco has estimated the pipeline will cost $350m to build.
Analysts said that the pipeline project would likely be dependent on the refinery expansion being given the green light. Sitra is already in the middle of a modernisation programme to update its technology and improve its ability to compete with regional rivals. In January, Bapco said it had chosen WorleyParsons UK to provide process technology for a new sulphur plant. The combined cost of the modernisation programme and the refinery expansion is estimated at around $9bn.
The refinery already has the capacity to produce ultra-low sulphur diesel, which is increasingly popular with buyers as countries tighten their sulphur regulations, especially in key markets for the refinery in Europe and also East Africa. In February, traders quoted by local media said Bapco had signed what may have been its first term contract on ultra-low sulphur fuel – a deal covering all of 2015 with Emirates National Oil Company. Bapco does not routinely comment on fuel sales, but such a move would reflect a growing trend towards ultra-low sulphur fuel production among competing refineries in the Gulf region.