Gulf states refine approach

The region is spurring its hydrocarbons sector to develop a downstream industry by hugely expanding refining capacity. This growth will help countries to move away from basic oil and gas sales and into the value-added market.

Saudi Arabia, the world’s biggest oil exporter, has been leading the way in building new refineries, which cater both to exports and local demand. Above, a refinery in Jubail in Saudi Arabia. Courtesy: Total
Powered by automated translation

Arabian Gulf states are expanding their refineries to export more value-added products, to develop a downstream industry and diversify income away from oil and gas, and to meet rising local demand for fuels such as petrol.

The total capacity of Gulf refineries is forecast to increase to approximately 7.4 million barrels per day (bpd) by about 2022, a 70.5 per cent increase over the current 4.3m bpd capacity, according to the consultants Frost & Sullivan.

Saudi Arabia will remain dominant with a 45 per cent share and Kuwait will still hold second place with a 19.2 per cent share.

“In line with the GCC governments’ vision to gradually delink their GDP’s reliance on oil and gas prices, the investments in [the] downstream value-added sector have been witnessing a surge,” says Virein Kumar Yadlapalli at Frost & Sullivan.

“Refining and further downstream [oil and gas] industries such as petrochemicals, speciality chemicals and plastics, among others, have benefited.”

Saudi Arabia, the world’s biggest oil exporter, has been leading the way in building new refineries, which cater both to exports and local demand.

It partnered the French oil firm Total to build a 400,000 bpd refinery in the Gulf industrial city of Jubail last year, and China’s state-owned oil firm Sinopec to construct another 400,000 bpd refinery in the Red Sea industrial city of Yanbu. That facility began operations this year. Saudi Aramco is building another 400,000 bpd refinery in the Red Sea port city of Jizan that is due for completion by 2017.

The UAE has just finished doubling the refining capacity at Ruwais from 417,000 bpd, while Qatar is building a second 146,000 bpd condensate refinery in the industrial city of Ras Laffan.

Condensate is a light oil that is easy to convert into oil-based products.

Most of these new refineries are designed to make Gulf states self-sufficient, halting the imports of products such as petrol, and exporting excess production.

“The current projects within the GCC are based on a strategy from national oil companies to create the export refinery concept,” says Raheel Shafi, a senior consultant for the Middle East at Nexant, a consultancy firm.

“GCC refiners have taken a step further into the value chain of fuel supply to wider markets, effectively using the hydrocarbon reserves to provide very competitive cost structures to markets such as Europe where producers face issues when it comes to size and complexity of existing refining assets.”

The increase in refining capacity in the Gulf region is part of a model designed to focus on downstream industries to derive more value at a time when oil prices are less than US$60 a barrel. Brent has fallen by about 50 per cent since reaching $115 a barrel in June last year as Opec pumps crude at a time when US oil supply is still rising on the shale oil boom. Weaker demand in Europe and Asia, and a strong dollar have also contributed to the slide in oil prices.

“It is a business model that a number of people like to adopt, to have control of the whole supply chain from upstream all the way to downstream, to petrochemicals as well,” says Steve Sawyer, a downstream consultant at energy consultancy FGE.

“If there is a reduction in profit in one sector you can hopefully make it up in another sector and that is what is happening at the moment.

“Having that integrated supply chain network across all parts of the business helps you to smooth out any ups and downs in your cash flow.”

Saudi Arabia is one example of a country focusing on petrochemicals to develop a downstream industry and create much needed jobs.

Sadara Chemical, a $20 billion petrochemical joint venture between Aramco and the US multinational Dow Chemical, will use both gas and naphtha, derived from refined crude, to produce petrochemicals this year. All other Gulf petrochemical projects use gas as feedstock.

Sadara will produce certain complex chemicals for the first time in Saudi Arabia and will help create thousands of jobs, both directly and indirectly.

“After 2025 we expect more refineries to be built in the Middle East and the reason is that Middle East countries need the jobs, so it’s better to export finished products or value-added products rather than crude oil because that creates a lot of jobs locally,” says Mike Sarna, a downstream analyst at consultancy IHS. “You have direct jobs in a refinery of about 1,000 to 1,500 [jobs], but also it creates a lot of secondary jobs because a refinery requires a lot of supplies and material and contractors, and part of it could be local contractors.”

Besides the local agenda, refineries in the Gulf will have a direct impact on the international refining industry. All Gulf refineries are built to very high specifications such as the ability to process fuels with very low sulphur content that enables them to sell products anywhere in the world. Refineries that cannot compete with the size and complexity of the new Gulf refineries are likely to suffer.

“Directionally it [Gulf refinery expansion] will weaken refining margins. It depends by region,” says Alan Gelder, the head of Europe, Middle East, Africa, Russia and Caspian refining & chemicals research for Wood Mackenzie.

“The place least impacted by Middle East refining capacity is North America largely because of the distance and advantage they got on discounted feedstocks.”

Gulf exports of diesel could compete with Russian exports to Europe, while the Middle East could send more naphtha to Asia, analysts say. Africa will be also another key market for Middle Eastern refining products, such as diesel, analysts say.

“Asian refineries are generally smaller scale than the [typical]Middle East export refinery and have configurations that are more geared towards local specifications,” says Mr Shafi. “The Middle East refineries are export refineries retaining the flexibility of producing fuels of a wide variety of specifications.”

But the low oil price could mean that refineries yet to be built, such as Duqm refinery in Oman and Fujairah refinery in the UAE, face delays.

“All projects that are not currently under construction and that are in the planning or engineering stages are at risk of being delayed,” says Mr Sarna. “Those already in construction don’t have any problems.”

In addition, Gulf refineries will need to set up or beef up their trading arms to market and sell their new exports, which will be competing in a global market. Aramco Trading, for example, a wholly-owned unit of Saudi Aramco, is handling refined products marketing and will need to sell the new products globally.

“In the ramp up, they [trading arms] may well be selling products at a bit of a discount just to get rid of them, but once they are up and running it’s really making sure that they can run that refinery at a good utilisation level and find markets for the products,” says Mr Sawyer.

“The stronger the trading arm the better value they will have for those products, the more money will come in.”

Follow The National's Business section on Twitter