Ras Tanura Refinery Likely to Be Shelved by Saudi Aramco

Off the Job

The 400,000-b/d refinery project in Ras Tanura, on the coast of Saudi Arabia's prolific Eastern Province, looks likely to be shelved for up to five years—or even indefinitely—according to industry sources speaking to Reuters. The project, valued at at least US$8 billion, was put on hold in early 2009 in line with other Saudi Aramco projects at the front-end engineering and design (FEED) or pre-tendering stage, in order for the company to capture falling construction costs. However, unlike the kingdom's other ongoing upstream and downstream projects that experienced such deferrals, it has not been restarted (see Saudi Arabia: 14 April 2009: Ras Tanura Refinery Expansion Put On Hold by Saudi Aramco and Saudi Arabia: 3 February 2009: Retender Principle Proven at Saudi Karan Gas Field; Floodgates Open for More?). Instead, staff working on the FEED study at contractor WorleyParsons have been taken off the project and further work has been halted. "Our contract remains intact, however the client has deferred the project," a spokesperson from WorleyParsons told Reuters, with industry sources close to the project telling the news agency that "work on the Ras Tanura refinery expansion stopped about two weeks ago. Aramco never says a project is cancelled, it's postponed for months to years. This one they are talking about five years or more postponement."

Refining Drive Unravelling?

The Ras Tanura refinery project is part of what was originally a 1.45 million–1.6 million-b/d refinery capacity expansion programme. Three 400,000-b/d refineries were to be constructed, in Yanbu, Jubail, and Ras Tanura, as well as one 250,000–400,000-b/d export refinery in the south-western Saudi Arabian Red Sea port of Jizan. The Yanbu and Jubail projects were from the outset earmarked to be joint venture (JV) projects with private investors and have since been secured by ConocoPhillips and Total respectively. Jizan was intended to be a 100% private venture, while Ras Tanura was to be developed and operated solely by Saudi Aramco. Being more of an expansion than a grassroots project, the Ras Tanura scheme would add refining capacity to what already is a crude processing and refining hub.

Much of Saudi Arabia's refining push has been driven by a wish to raise the amount of refined product exports from the kingdom, to increase its value added and to create more employment opportunities for the kingdom's young and growing population on the back of the oil industry. Only the Ras Tanura project did not have export as its main focus; it would instead mainly produce feedstock for a planned US$20-billion Dow Chemical petrochemical JV with Saudi Aramco, as well as feed the domestic demand for some of its other products (see Saudi Arabia: 2 September 2010: Dow Chemical, Saudi Aramco Outline Scope of Planned Ras Tanura Petchem JV and Saudi Arabia: 9 February 2009: Dow Chemical, Saudi Aramco Delay Tendering at US$25-bil. Petrochemical Project). Recently there have been growing signs that the Dow Chemical-Saudi Aramco JV—which was also postponed to capture falling construction costs in late 2008 and early 2009—is considering a relocation, with Jubail heavily rumoured to be the preferred location. This would indicate that not only is the logic behind the Ras Tanura refinery expansion changing drastically, but also the export-focused role of the Jubail refinery, which now looks increasingly likely to become focused on domestic supply instead and to a large extent produce feedstock for the Dow Chemical-Saudi Aramco petrochemical project.

While the ConocoPhillips- and Total-led JVs in Yanbu and Jubail are indeed moving forward, the Jizan refinery project has since the outset been regarded as the problem child of the Saudi refining expansion drive. Located very far from any feedstock, its operational costs will be high, effectively cancelling out much of the advantage of a Saudi placing in the first instance. Being seen mainly as a politically motivated industrialisation effort targeting one of the kingdom's least developed regions (on the border with restive Yemeni areas), the project has been unable to find a private investor. Saudi Aramco officially said late last year that it will move ahead with the project on a 250,000-b/d scale, although there has been no real work to demonstrate the company's commitment since (see Saudi Arabia: 20 January 2010: Saudi Aramco to Take Charge of Jizan Refinery Project in Absence of Willing Private Investors).

Outlook and Implications

Saudi Arabia's domestic demand for refined products continues to grow strongly on the back of a rapidly growing population and high subsidies that have created one of the world's most wasteful consumption patterns. Hence it is not a lack of domestic demand at the root of the Ras Tanura project's shelving, but rather an increasingly gloomy outlook on the global refining markets by Saudi Aramco and its partners. There is a global shift towards Asia, where more and more refining capacity is being built and continues to be added, while refining capacity in the Organisation for Economic Co-operation and Development—especially in North America and Europe—is seen as too high even in the long term. With the risk for potential overcapacity developing even in Asia over the mid-to-long term, Saudi Aramco's initial plan to bring two 400,000-b/d export-focused refineries onstream by 2013–14 (not counting the troubled Jizan project) indeed looks less and less appetising by the day.

Still, given the market risks in the segment, it makes sense for Saudi Aramco to continue developing those projects for which it has managed to secure private investment and just persuade one or both of its IOC partners to sell more of their JV's output into the domestic market—which, if decent prices can be secured, in any case looks to be a safer bet than having to compete in an overcrowded global market. Nevertheless, having access to very competitively priced Saudi feedstock still remains a lure for private refiner investors and is likely to ensure that their projects stay at the higher end of the profitability spectrum within the refining industry over the coming decade.

The Saudi Aramco decision does, however, signal an increasingly gloomy outlook on the global refining market over the long term too. It will be interesting to see what its Gulf peers decide regarding their refining capacity expansion projects which, like the Saudi one, also come on the back of completed or planned upstream capacity increases. Abu Dhabi has never officially given up on a 300,000–500,000 export refinery project in Fujairah, but has made little effort to actually commit to it, and Kuwait has for political reasons been unable to launch its long-planned 615,000-b/d al-Zour refinery, which was partly meant to offset its ageing Shuaiba refinery that is due to be closed down. Qatar too has at least one refinery project in the planning and design stages, while Iran—out of political and domestic-market necessity—is continuing its effort to become self sufficient and even an exporter of refined products, albeit of the more low-value kind not fine enough to be sold into developed markets with high environmental standards.

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