Analysis: Saudi Arabia set to compete fiercely with major Asian gasoil exporters with Jazan startup

Singapore — Saudi Arabia looks poised to become a major middle distillates supplier once its refinery and petrochemical project in Jazan starts commercial operations in coming months -- a move that could create fierce competition with major Asian gasoil exporters such as South Korea and India.

The kingdom's latest 400,000 b/d domestic refinery and petrochemical project in Jazan, located on the Red Sea, is expected to start commercial operations some time in mid-2020, S&P Global Platts reported earlier.

At full capacity, Jazan will produce 209,900 b/d of ultra-low sulfur diesel, 71,400 b/d of 91 RON and 95 RON gasoline, 48,500 b/d of high sulfur fuel oil and 6,700 b/d of LPG, according to an Aramco corporate presentation at an industry conference in June.

The Jazan refinery is expected to lift the kingdom's total domestic refining capacity to around 3.3 million b/d.

Reflecting the boost in refining capacity, Saudi Arabia's total gasoil exports are expected to climb to as much as 38 million mt by the end of 2021, from 30.09 million mt at the end of 2019, based on Platts Analytics estimates of Joint Organizations Data Initiative or JODI data.

The full-year gasoil export estimate for 2021 takes into account gasoil imports into the kingdom, as well as an increase in domestic diesel demand over the next 22 months.

EXPORT COMPETITION

A rise in gasoil exports from Saudi Arabia could impact the volumes of other leading exporting countries such as South Korea and India.

"Middle Eastern national oil companies are pursuing a strategy of expanding their refining and petrochemical assets, but this will increasingly bring them into competition with Asian players," said Alex Yap, senior Asia analyst at S&P Global Platts Analytics.

For one, Saudi Arabia is located closer to key diesel import destinations in Europe and Africa, making its outflows more economical than exports from South and East Asia.

Saudi Arabia's domestic refineries also have access to more competitively priced crude feedstocks than other regional exporting countries, which gives its refineries an edge over other exporting countries that rely heavily on imported crude from the Middle East.

"The growing refining capacity in the Middle East is a threat to [oil product] exporters in the Far East ... Saudi Arabia is indeed a new competitor in the export market," a Korea Petroleum Association official in Seoul said.

In 2019, top diesel exporter India exported 227.55 million barrels, while South Korea exported 195.39 million barrels, official data from the two countries showed.

While diesel demand is synonymous with economic growth in a country, the global growth rate for diesel demand is likely to dip over the next two years.

In its latest report in January, the International Monetary Fund estimated global economic growth in 2020 and 2021 to come in at 3.3% and 3.4% respectively, a downward revision of 0.1 percentage point for 2020 and 0.2 for 2021.

Therefore, it is likely that the incremental gasoil barrels from Saudi Arabia could potentially squeeze export volumes emanating from other regions.

South Korea exported 48.82 million barrels of gasoil in the fourth quarter last year, down 4.3% from Q3 and down 9.3% year on year, latest data from state-run Korea National Oil Corp. showed.

The country's gasoil exports could drop to around 45 million barrels in Q1 this year, according to traders at major South Korean refiners SK Innovation, S-Oil, GS Caltex and Hyundai Oilbank surveyed by Platts Monday.

SAUDI IMPORT/EXPORT TRENDS

Saudi Arabia is increasing its gasoil production as it strives to rely more on domestic output to meet its requirements and lower its import bill -- but the impending increase in production from Jazan will exceed its ballooning requirements.

The kingdom's domestic diesel demand rose 9% on year to 26 million mt in 2019, JODI data showed.

In an effort to meet this increase, its gasoil exports fell 26% on the year to 30.094 million mt in 2019, while its gasoil imports slumped 90%, or by 8.661 million mt, over the same period to 995,000 mt, JODI data showed. That put net gasoil exports down 11% from 2018 at 29 million mt.

This came after the kingdom exported a record high 40.78 million mt of gasoil in 2018, up 37% on year, the JODI data showed. Its gasoil imports more than doubled to 8.969 million mt in that year from 4.404 million mt in 2017, the same data showed.

Despite the looming increase in Saudi Arabia's gasoil exports and its impact on competing suppliers, Yap noted: "Middle distillates will remain the most profitable part of the oil barrel so long as light-end molecules are plentiful due to North American shale production. "