As part of its strategy to monetise its hydrocarbon reserves, and to add value to its oil and gas reserves, Saudi Arabia has embarked on a wave of expansion projects ranging from refining to petrochemicals. This has led to the growth of downstream service providers.
High oil revenues have spurred a boom in both oil and non-oil development projects. Unlike in previous investment cycles, there is heavy private sector participation in the current round of projects, with US$79 billion in private-sector energy projects under development, according to the Saudi Arabian General Investment Authority. Private investment is expected to grow even further as the economy expands and the Saudi business environment continues to improve.
The Kingdom’s reserves of crude increased to 260 billion barrels at the end of last year and its reserves of natural gas amounted to 275.2 billion cubic feet, according to Saudi Aramco. Yet, the refining sector is not well developed and does not match the huge crude reserves in size. The Kingdom is striving to increase its refining capacity to meet increasing local demand as well as upgrading product quality to meet international standards.
Currently Saudi Aramco and its affiliates control some 4.2 million bpd of refining capacity, or 5% of the world’s total capacity. Saudi Aramco affiliates in the US, South Korea, Japan and the Philippines account for about 2 million bpd of this capacity. Of the remainder, 720,000 bpd comes from two joint venture refineries in Yanbu (where ExxonMobil is the partner) and Jubail (Shell) and the rest from five refineries wholly-owned by Saudi Aramco, including Rabigh, Yanbu, Riyadh, Jeddah and Ras Tanura.
Some 20% of global refining capacity is located in the US, where domestic production meets about 85% of demand. There are no major new refinery projects coming up in the US, but planned capacity expansions should be sufficient to maintain growth of about 1.5% per annum over the next five years. The EU accounts for almost 20% of the world’s refining capacity, with the other principal centres being China, Russia, Japan, Singapore and India.
To meet the increasing demand, Saudi Arabia launched projects to upgrade existing refineries and construct new ones. Aramco is upgrading three existing refineries in Ras Tanura, Jubail and Yanbu, and in January 2010 it was entrusted by the government with the task of building and financing the $7 billion Jizan refinery. The refinery project was initially planned to become the first independent oil refinery in the Kingdom. However, as only two bids were submitted, Aramco took on the project in January 2010.
The progress of the Yanbu and Jubail projects is on track despite the withdrawal of ConocoPhillips from Yanbu last April. Despite the withdrawal, Aramco signed several contracts with local and international contractors for the detailed engineering, procurement and Construction (EPC) of the project last July, and incorporated new company to execute Yanbu project called Red Sea Refining Company.
Meanwhile, the Jubail project, which is developed in joint venture between Saudi Aramco and Total, witnessed a slight delay which allowed it to cut its EPC costs by capitalising on lower construction costs. “We actually cut our costs by more than 20% and this will have a positive impact by reducing our CAPEX and improving our internal rate of return,” said Saleem Shaheen, former president and CEO of Saudi Aramco Total Refining and Petrochemical (SATORP). “When there is a lot of tension, costs are increasing and the schedule is delayed. When the costs are down, there is more room to relax the schedule a bit,” he explained.
SATORP is now expected to achieve the mechanical completion of its integrated project during the second half of 2012, while commercial production is set for early 2013. Jubail will be able to produce 400,000 bpd of high quality petrol, while housing an integrated petrochemical complex producing olefins and aromatics.
Meanwhile, there has been a delay in awarding the front-end engineering, design (FEED) and project management services contract for the Jizan refinery, however this was finally tendered in Decembe. The work for the refinery project will be carried out both in and out of Saudi Arabia.
All these refineries will rely on crude oil coming from Saudi Aramco, which will not be supplied at a subsidised price, claims Abdulhakim Abdullah Al-Gouhi, president and managing director of Saudi Aramco Shell Refinery Co. (SASREF): “Crude is purchased from Saudi Aramco at the prevailing export price as per the time of delivery.”
Beside its upstream and refining presence, Saudi Aramco started working on plans for the development of the Kingdom’s petrochemicals industry. Aramco’s decision to enter into the petrochemicals sector came as part of a change in Saudi Arabia’s feedstock strategy for the industry.
In the past low-cost ethane gas had been available to make basic plastics, such as polyethylene, at far lower prices than almost anywhere else in the world – ethane cost $0.75 a MBTU in Saudi Arabia as opposed to as much as $7-9 a BTU elsewhere at the time – by mid 2005 supplies were beginning to tighten. Sipchem was the last petrochemicals company to receive ethane feedstock allocation in 2007.
Saudi Aramco resolved to start producing a wider range of petrochemical products using mixed liquid feedstock and naphtha. However since naphtha is sold on international markets with its value linked to the price of crude oil, Aramco’s plants would be less competitive than the earlier ethane-fed facilities.
The solution was to build massive new production complexes integrated with huge export refineries, which is the case of Ras Tanura, Yanbu, Jubail and Petro Rabigh which were inaugurated in November 2009.
This cut out costs related to transporting feedstocks and created economies of scale, with large, efficient plants producing petrochemicals at a lower overall cost than smaller, less efficient facilities. This would in turn require the direct involvement of Saudi Aramco, which controls all the kingdom’s refineries, rather than Sabic.
The petrochemicals scene in Saudi Arabia witnessed in 2010, the start up of several projects producing olefins and polyolefin including Yansab, NatPet, Saudi Kayan and Sipchem’s acetyl project.
The majority of the downstream projects are located in Jubail and Yanbu industrial cities – the industrial hubs of the Kingdom – which are superbised by Yanbu, Royal Commission for Jubail and Yanbu (RCJY). “The objective of the RCJY is to support the industrial base of the Kingdom of Saudi Arabia by planning, establishing, developing and managing the two industrial cities in Jubail and Yanbu,” says Dr. Alaa Nassif, general manager for strategic planning and investment development, directorate general at RCJY.
“The fundamental and viable role of the RCJY was reflected by its participation in realising the developmental objectives of the Kingdom and diversification of economic sources including non-oil based industries, transfer of technology, increase of economic growth, and training of qualified national manpower to take over and lead the industrial and economic development process.” he says. “I believe that the biggest opportunities for future investment in the Kingdom lie ahead in the areas of downstream petrochemical derivative clusters, value-added specialty and performance chemicals further down the product chains, plastics, and energy intensive industries such as minerals and metals,” he explains.
The booming of the downstream sector in the Kingdom has led to the creation of service companies that provide additives and catalysts, such as Gulf Stabilizers Industries (GSI). “We provide antioxidants and non dust blends (NDB) for polymer and polymer processing industry for local and regional petrochemical producers,” says Baker Khan, general manager of GSI. “We are the only producer of these products in the Middle East,” he adds.
The antioxidants are added to various polymerisation processing units along with other desired additives, while the NDB is a blend of antioxidants and other desired additives. With all this progress in the downstream sector, Saudi Arabia now needs to use these petrochemical products as feedstock for other industries instead of relying on exports alone, as it will help the government achieve its twin goals of creating jobs and diversifiying its economy.
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