The petroleum refining industry is under pressure again with lower margins and over capacity. A few years ago, the opposite was true, which encouraged investors to go quickly into expanding capacity vertically and horizontally.

The financial crisis which started from mid-2008 with its subsequent decline in demand for petroleum products pushed refining margins down and sometimes even in the negative territory.

At the same time engineering project costs rose very sharply and reconsideration for projects sometimes led to deferment or cancellation of some refining projects. Costs have gone down but still much higher than what they used to be five years ago.

In spite of this gloomy picture some projects went ahead because investors believe that the downturn in demand is temporary and as soon as the economy turns around, demand for petroleum products will improve, utilisation rates of refineries will go up and margins will recover.

Some investors are also considering a higher degree of integration with the petrochemical industry in order to add value to the refinery products and to rid themselves of unwanted surpluses and thereby improve overall margins.

One such project is Saudi Arabia's 400 thousand barrels a day refinery in Jubail. The project is well advanced and under construction after a lengthy process of studies and front-end engineering design in addition to the negotiation that led to the joint venture between Saudi Aramco and Total. The two companies are equal partners and they will eventually offer 25 per cent of the shares to the public, a new feature which is now emerging in our region. With the power of Saudi Aramco and the ability of Total in the refining industry, the private sector will feel confident to take up the offering as soon as it is made.

In a recent conference, Salem Shaheen, President and CEO of Saudi Aramco Total stated that the aims of the project are to meet long term demand for oil products in Saudi Arabia, achieve development and employment goals, transfer technology, attract local and foreign investment and provide a platform for growth in secondary and tertiary petrochemicals.

For these aims to be met, the refinery is large to capture the economy of scale, it is highly complex to produce petroleum products of stringent specification for export and local market and it will maximise petrochemical products especially aromatics and propylene. But most importantly in my view, is that the refinery will be fed by Arab Heavy crude oil to improve the utilisation of fields that produce this crude and to allow the better grades to be exported. Thus the differential between Arab Heavy and the lighter crude will be captured by the refinery though the investment will be higher.

Proven processes

The processes that are used in the project are proven and commercialised for a long time which will add to the reliability of the refinery when completed. However, the refinery will be burdened with the production of 2.2 million tonnes a year of coke which is of a quality that could only be used as replacement for coal in power generation. Therefore it is difficult to see the wisdom of selecting this product in a region that is still one of the main markets for fuel oil. The value of coke is about 10 per cent of that of fuel oil and there are processes that could have increased gasoline and diesel products without the production of such a high portion of coke. The facilities to produce and handle coke for export are also very expensive. Saudi Arabia is in need of gas especially in summer for power generation and gasification processes for the heavy fuel oil could have been selected in stead of coking. These have been successfully applied on a wide scale in Italy and elsewhere.

Nevertheless, this should not take the glow from this project which will create employment opportunity for 1,250 people directly and 2,500 people indirectly. There are of course other projects of similar size and complexity underway in the Kingdom such as the 400 thousand barrels a day refinery in Yanbu and the additional expansion and developments in Ras Tanura and Rabigh and further down the line a large refinery in Aseer in the south west of the Kingdom.

By the time all these projects are completed Saudi Arabia will become one of the largest and complex refiners in the world.

 

The writer is the former head of Energy Studies Department in OPEC Secretariat at Vienna.