“Start Me Up” – Refinery Construction Outlook Part 1: Middle East and Africa

By Robert Auers

Today we begin a series discussing various major refinery projects covered in our recently released World Refining Construction Outlook (WRCO).  We will start with the Middle East and Africa where we will see if major projects can “start up” to meet growing products demand.

Middle East – “Spread out the oil, the gasoline”

In addition to strong regional demand growth, many Middle Eastern countries are trying to move further up the value chain by becoming net product exporters as well as crude exporters.  As a result, besides Asia, the Middle East has seen the strongest growth in refining capacity of any region since 2010.  This growth has primarily been the result of three ~400 MBPD projects completed in the region since 2013 – SATORP (Saudi Aramco / Total) in Jubail, YASREF (Saudi Aramco / Sinopec) in Yanbu, and Takreer (Abu Dhabi NOC) in Ruwais.  Last year Iran also saw the completion of the first of three trains of its 360 MBPD Persian Gulf Star condensate processing, while train two is to be starting up this month, and train three is forecast to start up early next year.  The chart below shows the growth of Middle East Refining Capacity since 2006.

This growth in the region shows no signs of slowing down over the next several years.  While Saudi Arabia only has only one more large project in the works (the 400 MBPD Jazan refinery), Kuwait, Iran and Iraq also all have major capacity additions planned over the next five years.  The most notable of the projects is Kuwait’s massive 615 MBPD Al-Zour development, officially forecast completion this year.  Still, we think this timeline may be a bit aggressive and a 2019 startup seems more likely.  Aside from its size, this project is also notable for its emphasis on low sulfur fuel oil, which is slated to make up slightly more than one third of its product slate.  This will be accomplished through the installation of atmospheric bottoms hydrotreating.  Kuwait National Petroleum Corp (KNPC) expects that the majority of this fuel will be used in local power plants, but we suspect that it could make valuable bunker fuel as well once the new IMO regulations take effect in 2020.  Furthermore, KNPC is already exploring options for the addition of resid cracking at some point in the future.   Another notable project in Kuwait is the modernization and combination of the country’s Mina al-Abdulla and Mina al-Ahmadi refineries.  While this project will only increase total crude processing capacity by 60 MBPD, it will result in much more significant increases in high value projects due to the installation of a new large coker.

Meanwhile, Iran and Iraq have introduced major initiatives to expand and modernize their refineries and this has led to a number of project announcements in each of those countries.  Of the two, Iran has made more progress towards its goals, not only with the aforementioned Persian Gulf Star facility, but also with another large condensate facility in Qeshm (to be completed this year) and large refineries planned for both Abadan and Isfahan (each not expected until at least 2020).  Iraq, meanwhile, has announced a number of projects.  We suspect that most of these will likely not get built, but there are several in the country that we view as probable as well.

Africa – “Kick on the starter, give it all you got”

The maintenance and continued operation of existing refineries, much less construction of new ones, has been hard to come by in much of sub-Saharan Africa.  It’s a region where projects are often announced by national governments who rarely have the resources or ability to follow through.  As a result, total African refining capacity is only 3.5 MMBPD, and excluding South Africa, Egypt, and Algeria, capacity is only 1.5 MBPD.  In addition, African utilization rates typically remain well below 70% of nameplate capacity at existing plants due to a continued lack of investment.  Meanwhile, regional demand is nearly 4 MMBPD and growing.  As a result, total African net product imports are on the order of 1.5 MMBPD (likely higher), while the continent is a significant crude oil exporter.  Moreover, unlike Latin America, much of this crude is of the light sweet variety and relatively easy to process. However, there does look to be some hope, as we’ve seen a few notable large projects, which take a markedly different approach from most, emerge from the stream of unlikely-to-be-completed government announcements.

Certainly the largest and farthest along of these projects is the proposed 650 MBPD Dangote refinery, proposed for the Lekki Free Trade Zone just outside of Lagos, Nigeria.  The project is being led by Aliko Dangote, the richest man in Africa, who owns a conglomerate that operates in businesses including cement manufacturing, food processing, and freight.  This refinery will mark Dangote’s entrance into refining and to oil and gas in general.  Though it will process domestically produced light sweet crude, it is projected to be a relatively complex facility, with resid fluid catalytic cracking, mild hydrocracking, reforming, and alkylation. At first, given the track record of previous project announcements in Africa, the refinery’s eventual completion seemed unlikely.  But, as time has progressed, its eventual completion has become more and more probable, and it now seems fairly certain that a project of at least some scale (likely not the full 650 MBPD) will be completed.  We believe the reason for this project’s success so far are twofold.  First, as previously mentioned, the Dangote group is large profitable conglomerate with access to capital.  Secondly, the Nigerian government has expressed strong support for the project (largely due to supply shortages and its own inability to operate government owned plants) and has worked with Dangote to ensure a reasonable regulatory and economic environment for the plant’s construction and operation.   Furthermore, construction progress looks to be significant, as shown in the photo below, taken in September 2017.

Petrolex is another privately held Nigerian firm exploring the construction of a new refinery outside of Lagos in the Ogun state.  Their announced project is much smaller (250 MBPD) and much earlier in the planning stages.  Moreover, Petrolex is a much smaller firm with its only significant asset being a new large tank farm at the same site where the proposed refinery is to be located.  These circumstances make the eventual completion of the Petrolex refinery much less likely than that of the Dangote plant.  Still, if the Dangote project is successful, it may aid Petrolex in obtaining financing, and may represent another potential “black swan” megaproject in Nigeria.

TM&C recently completed and published its 2018 World Refinery and Construction Outlook (WRCO).  The WRCO includes a much more detailed list including all announced global projects with total crude capacity and individual unit capacities for each project.  Furthermore, each project we track is listed by region and ranked based on its probability of success.  In addition, a detailed discussion of the regional factors and trends that are affecting refinery construction projects is provided.  If you would like more information on this or our other products, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.