In the early decades of the crude oil refining industry, refineries were built in — or close to — the oil producing fields. The market for oil products was limited and not all products were in demand.
Even in our region, the old Ras Tanura and Abadan refineries followed the same trend. However, as the market developed, growth was assured and as use of all products of refining became the norm, it was evident that refineries would move closer to the consumption centres.
Logistically, it is easier to transport a large single stream of crude oil rather than smaller streams of five or six products. Geostrategic considerations also played their part in this trend as consuming countries wanted to have more control on their fuel supply and distribution.
As refineries became bigger, more sophisticated and expensive to build and as the shipping industry became more efficient in transporting larger volumes of products, economic considerations took the lead in deciding refinery locations. Only in some cases, environmental considerations — such as in the US and Europe — pushed new refineries back to the oil producing countries.
The situation today is mixed — oil producing countries are themselves consumers and exporters. The refining industry thus became part and parcel of their growth strategy. Such is the case in Saudi Arabia, Kuwait, the UAE and Bahrain, where great refineries were built — and continue to be built — to satisfy growing domestic consumption and capture export opportunities.
This process does not only add value, but enhances the industrialisation of these countries to the benefit of other industries. The major consuming countries in Asia are building refineries on their own or in joint ventures with oil producing countries. This has been going on for some time now as the region is now the largest growth region in the world for oil and its products.
Producing countries’ interests is to add value and lock in the market for their crude oil exports.
The latest deal in this regard is the joint venture between Aramco of Saudi Arabia and Petronas of Malaysia last month after hard negotiations which started in 2014.
This is the Refinery & Petrochemical Integrated Development (RAPID) project, which is 60 per cent complete on the Pengerang peninsula in the southern state of Johar, around 400 kilometres south of Kuala Lumpur and close to the strategically important shipping lane on the Malacca Strait.
The project is part of a major oil and gas industry development plan estimated to cost $27 billion (Dh99 billion). RAPID involves a 300,000 barrels a day refinery, with the highest Euro 5 standard for products, and an integrated petrochemical plant of 3.5 million tonnes of basic petrochemical products. It is estimated to cost $16 billion and Aramco and Petronas would be equal shareholders.
Malaysia is an oil producing country with modest reserves of 3.6 billion barrels and production of 693,000 barrels a day in 2015. Its domestic consumption is 831,000 barrels a day and refinery capacity is only 612,000 barrels a day. With Malaysia a net oil and product importing country, RAPID would go a long way in supplying the domestic market and exporting surplus products when it goes on stream in 2019.
NewsBase on March 8 said, “For Aramco, the venture coheres with a stated aim to nearly double global refining capacity over the next decade while deepening energy ties with the key consuming region.”
Saudi Arabia already has more than 5 million barrels a day of refining capacity in many countries including the US, China and Korea, and Indonesia and India are in line for such cooperation.
Trade between Saudi Arabia and Malaysia was $3.15 billion in 2016, helped by a 28 per cent growth. Malaysian companies are involved in many construction projects in Saudi Arabia to the tune of $4.16 billion.
While this trend of investing in the oil consuming countries is appealing to major oil producers, it is important to that such refining projects do not become competitors to the great expansion of refineries in our region, especially with respect to Saudi Arabia.
Just like RAPID, every opportunity should be viewed carefully and secured in such a way that it becomes an advantage rather than an encumbrance on the domestic industry.
The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.