Tackling excess refining capacity

After Kuwait announced the cancellation and suspension of all works related to its 615,000 barrels a day Al Zour Refinery late in March, Qatar recently announced that it was delaying several projects, including its 250,000 barrels a day Al Shaheen Refinery in Messaieed industrial city.

The refinery would have been fed from Shaheen offshore oil field, which is scheduled to increase capacity to 400,000 barrels a day and beyond. Crude oil pipelines to the refinery and tank farms would have served for onshore storage of the export crude, which is currently exported from floating facilities.

In the light of the worldwide economic recession and the precipitous decline of oil prices, such decisions are understandable, but one would hope that they are not a prelude to total cancellation at a later date.

The Al Shaheen project was conceived as early as 2005 and was originally scheduled to be completed in 2010, but it got delayed many times for a completion date of beginning of 2012.

Obviously, these delays afforded Qatar Petroleum the possibility of putting the project on hold in an attempt to benefit from declining costs of major engineering projects.

In the last few years, engineering projects cost, especially in the oil and gas sector, have gone up in leaps and bounds as to make decision making very difficult, to say the least. This is even more so for refining projects where the profit margin is usually small and refineries sometimes operated at a loss.

Abdullah Bin Hamad Al Attiyah, the Qatari Oil Minister, in a recent statement said that he "expects costs to drop by 30 per cent or more", enough reason to delay any project, especially when it was expected to cost $5 billion.

It is estimated that some $60 million have been spent on studies and front end engineering design. The refinery would have sophisticated processes to ensure international marketable product qualities and conversion units to reduce fuel oil production and increase the yield of the much wanted light products such as gasoline, diesel and jet fuel.

The engineering, procurement and construction packages were already under way early 2009 before the delay was announced. Therefore, all the preliminary works are in place, and this will help Qatar Petroleum to evaluate its position carefully and go back to the implementation of the project as soon as conditions improve.

There is another reason why Qatar can delay this project because it is not in need of it to supply its modest domestic market. The refining industry in Qatar started in 1958 with a small topping plant of less than 1,000 barrel a day, only to grow to a capacity of 1,37,000 barrels a day now of crude oil and condensate with a conversion unit to reduce fuel oil production and produce export quality products.

The local consumption is close to 60000 barrels a day, which makes the refinery dependent on export of its internationally acceptable surplus products and thereby generating higher refinery utilisation rates to help the overall economy of the industry.

The world refinery shortage of a few years ago is now possibly under way of resolving as the world refining capacity increased by three million barrels a day between 2005 and 2008 with many more projects under construction or design.

Coupled with the recent decline in world oil demand, we may be heading to some level of excess capacity for some time to come, and until the world emerges from economic recession.

Let's hope that Qatar will reactivate its project at a time when costs are down and before a major overcapacity develops in the market for exportable products.

- The author is a former head of Energy Studies Department in Opec Secretariat, Vienna