A number of projects that will add significant oil refining capacity in the region remain on track to meet rising domestic demand, despite delays and weakness in prospective export markets.
The addition of local capacity is particularly important to consumers in the UAE now that the government has liberalised the petrol and diesel markets, removing subsidies and leaving them open to price fluctuations in the international wholesale market.
For motorists in the UAE there was an immediate increase in petrol prices of 24 per cent this month when the new price regime took effect. Diesel prices were cut by 29 per cent.
The impact on most household budgets is not expected to be onerous initially, but consumers and businesses alike have expressed concern about the potential impact down the road when world oil markets tighten up.
Suhail Al Mazrouei, the Minister of Energy, said prices in future will be set monthly based on the average daily price of “the international benchmark” in the previous month, plus a fixed amount covering transportation, operating and distribution costs, plus “a small profit margin” for distribution companies.
“The moving part will be the average of the monthly international gasoline price,” while the other part of the price formula will remain fixed, said Mr Al Mazrouei.
Therefore, the cheapest fuel available should be that refined locally, which would have the lowest transportation, operating and distribution costs.
But the country is still importing a significant amount of its needs, which have been rising at a rate of about 8 per cent a year.
“We are still importing gasoline as of now,” Mr Al Mazrouei said. “Even Adnoc Distribution [the monopoly operator of petrol stations in Abu Dhabi], last year they imported around 2.4 billion litres of gasoline,” which equates to more than 40,000 barrels per day of refinery output.
He added: “We will still import gasoline until the refinery is fully functional and fully commissioned. Therefore, I don’t think in the gasoline we will be exporting in the near future.”
Under the government’s expansion plans, the biggest addition to the country’s refining base has been the US$10 billion doubling of capacity at the government-owned plant at Ruwais, 250 kilometres west of Abu Dhabi city, bringing total process capacity to 817,000 barrels per day, or about 27 per cent of the UAE’s daily crude oil output.
The Ruwais plant began to start up its new units at the end of last year and is expected to meet demand currently being covered by imports. But it has run into a number of snags during the start-up process that have caused delays.
The latest, Reuters news agency reported on Friday, is that one of the main new units – a residue fluidised catalytic cracker with 125,000 bpd capacity – has had to be shut down for several weeks because of an unspecified technical hitch.
To meet the next phase of the country's growing demand, the government-controlled International Petroleum Investment Company (Ipic) is planning to build a $3.5bn refinery near the port of Fujairah with 200,000 bpd capacity.
The team building that plant is similar to Ruwais – with France’s Technip handling the front end engineering and design and its Shaw Stone subsidiary project managing.
Ipic was expected to announce at the end of June the award of the main engineering and construction contract from an all-Korean shortlist, which includes SK Engineering and Construction and GS Engineering and Construction, both of which had parts of the Ruwais commission.
IPIC has not yet announced that and the latest estimate by trade sources is that the Fujairah refinery, assuming it begins construction this year, would be ready to come online in 2018.
While neighbouring countries have not yet moved to cut subsidies on transport fuel, they have also been expanding to meet local fuel demand. As with the UAE, their refinery expansion is also part of a broader industrial strategy that includes producing additional cheap feedstock for parallel expansions of petrochemicals.
Saudi Arabia, for example, added two 400,000 bpd refineries in the past two years. But another plant of similar capacity at Jazan, on the Red Sea, has now been delayed because of a dispute with one of its contractors, SK of Korea, according to industry sources.
A proposed plant at Al Zour, Kuwait, which is to have a capacity of more than 600,000 bpd, is expected to be commissioned to meet growing domestic and regional demand, but budget constraints have resulted in its schedule being pushed back.
“Such delays are very characteristic of the region,” said Emma Richards, an industry analyst at BMI Research.
“The Saudi plant [at Jazan] is in a very remote location and the infrastructure was just not in place to bring in vital equipment and materials.”
Meanwhile, “the move forward at Ruwais took a lot of financial, regulatory and bureaucratic resources”, she added.
Although the oil price slump in the past year has brought budget pressures, the case for refinery expansion remains compelling.
“There is huge demand growth domestically and diversification is the cornerstone of a lot of these expansion plans,” Ms Richards said. “Also, with oil prices lower there is pressure on contractors and there might be an element of conscious delay to bring costs down.”
amcauley@thenational.ae
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