Global Insight Perspective | |
Significance | The Jizan project will be tendered by the end of the current quarter according to Aramco officials, together with final commitments to the Jubail and Yanbu' joint ventures (JVs) with Total and ConocoPhillips; cost escalations at the refinery projects are now reported close to 60% and start-ups delayed from 2011 to 2012/13. |
Implications | With cost overruns and delays reaching painful levels, Saudi Aramco might be forced to reconsider its refinery construction drive, which was hoped to add almost 1.8 million b/d of capacity to the Kingdom. Rumours of a wholly owned contingency refinery should one JV falter have, however, been denied. |
Outlook | The politically motivated Jizan project was always going to be the hardest to place, and no JV partner has yet come forward. Should one of the other 400,000-b/d projects be scrapped too, the impact would be global, given the tight market and the probability of other regional projects following suit. |
A report in today's Middle East Economic Survey (MEES) newsletter has highlighted the mounting delays in the tendering process for Saudi Aramco's three joint-venture (JV) refineries, two of which are being developed with France's Total and ConocoPhillips, respectively. The report has also managed to receive an official answer denying persistent rumours claiming that the Jizan refinery project—to which a JV partner has not yet been secured—is dead. What seems more and more certain, however, is that the global cost escalations are hitting the Saudi projects with full force, causing many to question the economy behind the projects at this time and adding further uncertainties for subcontractors and suppliers. It also seems that the delays affecting the more advanced Jubail and Yanbu' projects are now surpassing one year.
Saudi Arabia has, unlike many of its neighbours, made sure to maintain refined products export capacity over the years, with its current refining capacity standing at around 2.1 million b/d and domestic consumption averaging 1.3 million b/d. To add value to its exports, create new domestic employment opportunities, and industrialise its economy further by building on its hydrocarbons and petrochemical experience and know-how, however, the Saudi government—through NOC Saudi Aramco—launched a refinery expansion programme in 2004-2005 aimed at adding almost 1.8 million b/d of refining capacity. While extraordinary refinery margins in the refining industry were one source of optimism surrounding such a huge combined programme, it is the access to large volumes of supplies and the tight global refined products supply picture for the coming years, coupled with Saudi Aramco's economic muscle, that have made the ambitious programme look feasible. To spread the risks, disburse profits to the population, and attract the latest technology, three out of the four planned refineries were launched as JV projects, giving 35% of the stake to Saudi Aramco, 35% to a private partner, and 30% to the Saudi population through initial public offerings (IPOs). The fourth project—and currently the most advanced—is the domestic-market-focused 400,000-b/d Ras Tanura heavy oil refinery, solely financed, owned, and operated by Aramco.
Saudi Refinery Capacity Expansion Programme | |
Project | Notes |
Aramco/ ConocoPhillips | Plans for this 400,000-b/d export project in Yanbu' were announced in 2005. An MoU was signed with ConocoPhillips in 2006, after tender. The project was expected to cost over US$6 billion. A 30% stake is planned to be offered to the public, leaving ConocoPhillips and Aramco with 35% apiece. The refinery, which will process heavy, high-sulphur Saudi crude into high-end products, was originally expected onstream by 2011, but this date has been pushed back to 2012-13. Bechtel is contracted for the FEED phase. |
Aramco/Total | The refinery in Jubail will produce some 400,000 b/d for the export market. It is expected onstream by 2012-13 (the original date was 2011). Total signed a MoU for the project in 2006, with costs then being estimated at US$6.4 billion. An IPO of 30% is expected in future. Technip is conducting FEED. |
Aramco | Aramco will run this 400,000-b/d refinery in Ras Tanura, which will focus on providing for the domestic market. A part of its output is expected to be earmarked for a large petrochemical plant being built in its proximity. Completion is expected in 2012, at a cost of US$7-8 billion. WorleyParsons was awarded the FEED contract. |
Jizan Export Project | The refinery in Jizan is planned as part of an industrialisation and job-creation project in the Jizan Economic City in Jizan province and will have capacity of 250,000-400,000 b/d. Chevron was involved in talks but withdrew, citing Jizan's geographical location as far from both supplies and markets. Petronas has voiced some early interest in partnering Aramco in this project during mid-2007. |
Jubail and Yanbu' Woes
According to MEES, both Total and ConocoPhillips are getting somewhat cold feet about the continuous cost escalations at their JV projects with Aramco. Front-end engineering and design (FEED) for Total's Jubail JV refinery and ConocoPhillip's Yanbu' refinery—both with a 400,000-b/d capacity—by France's Technip and United States' Bechtel, respectively, are reported by the newsletter to have surpassed US$10 billion at both projects. This is in stark contrast to original budgets of US$6-6.4 billion, set during mid- to late 2006. With the widespread world market shortages underpinning these escalations set to continue, the final construction costs for the projects seem virtually impossible to predict. The consortia are still officially committed to the projects, although local rumours suggest that the level at which the refineries will no longer be economically viable as investments is drawing dangerously near.
In addition to the construction-cost aspect, the delays suffered by the projects—no doubt caused mainly by the shortages of know-how and material—have passed the one-year threshold. With FEED plans, according to MEES's sources, due late in the first quarter of 2008, the tendering of construction contracts cannot be expected to be awarded before late this year, as Total and ConocoPhillips will have to agree with Saudi Aramco over the final configuration of the projects, as well as agree on feedstock supplies and prices in the interim. This would appear to push the refineries' completion date to late 2012 in a best-case scenario, or more likely the first half of 2013.
Getting Jizan Unstuck
The most uncertain part of Saudi Aramco's refinery capacity expansion plan was always going to be the 250,000-400,000-b/d Jizan export refinery on the Red Sea coast. This too was planned as a JV project. Following Chevron's withdrawal from early negotiations, citing serious doubts about the commerciality of the refinery—especially given its location—the project has been constantly surrounded by rumours of its shelving or outright scrapping. Being a part of a politically motivated plan to build an industrial and economic city in the kingdom's impoverished south-eastern region in order to create jobs in an area with high levels of unemployment and Islamic militancy, the export-oriented refinery is about as far from its feedstock as it could possibly be without leaving the country. The surrounding mountainous terrain would also make a pipeline costly, leaving shipment by boat from Yanbu'—or the Persian Gulf—the more probable solutions.
Initial talks with Malaysia's Petronas about project participation were reported in mid-2007, although no further progress has been reported. With its original viability under question, escalating costs are a real threat to this project, making rumours of its demise quite believable. MEES, however, succeeded in receiving an official denial from the Saudi Oil Ministry, calling the rumours "completely false", with another source close to the JV saying that "the project is alive and well". The latter has claimed that delays have been due to the greenfield characteristics of the whole industrial/economic city, with the configuration of the refinery being dependent in turn on the configuration of the zone's port and surrounding infrastructure. The source expected a request for partnership to be tendered before the end of the first quarter and the project to be awarded by late 2008.
Outlook and Implications
With the Saudi refinery-capacity expansion programme seen as one of the safest parts of the future global refined-products supply planning due to Saudi Aramco's financial muscle, the news that delays are mounting and uncertainties are surrounding its implementation are escalating, have the potential to upset plans significantly. Notwithstanding Saudi denials, the spectre of cost escalations reaching 60% and rising should be seen as a great threat to the programme, especially the Jizan project, which is Saudi Aramco's weakest link. That rumours of Aramco working on a completely different 400,000-b/d project to replace Jizan—and/or another one of the facilities—were strenuously denied to MEES might be more a result of positive thinking than the opposite. The risk that Saudi Aramco should shelve one or two of the projects until cost levels stabilise, should one JV partner withdraw, is perhaps not yet looming, but is large enough to be factored into mid-to long term planning.
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