“With or Without You” – Which Refinery Projects Could Hold Key to Global Product Supply and Demand Part 3 – Middle East

By:  John Auers

Last week, in the second of what will be a four-part series, we discussed the potential fate and impact of a variety of proposed large refinery capacity expansions in the fastest growing region of the world, Asia.  This week, we move on to another region where demand is expanding, the Middle East, examining the refinery project landscape in that key area.  While U.S. refiners are only recently seeing the benefits of having advantaged access to crude oil, Middle East refiners have long enjoyed these feedstock cost advantages.   As is the case in most other major crude producing countries, the refining industries in the Middle East are dominated by state-owned companies, who in most cases, have ambitious plans to either expand capacity or upgrade existing plants.  In this way, they are aiming to become bigger players in product export markets.   As we saw in our previous blogs, while some success has been seen in recent years, there have also been overruns, postponements and cancellations.  The collapse in oil prices since 2014 has also wreaked havoc on their expansion and upgrading plans, drying up available capital in many cases.

In today’s blog, we will examine what can be expected in the coming years with regards to refinery construction activity in this key region.  Certainly market developments will play key roles in the success of various projects, but geopolitics could have a particularly important role, considering the turmoil that the region has and will continue to experience.  As in the first two parts of this blog series, we will focus on a few key, large projects whose success or failure might be particularly impactful on regional and world product supply and demand balances. As such, once again we will ask the question, “With or Without You (Them),” in examining how various projects will impact global product supply and demand.  USGC refiners, who have become more and more dependent on foreign product markets, will be especially interested in the answer to this question, considering that many countries in the Middle East (Saudi Arabia, Kuwait, UAE, etc.) are among the largest product exporters in the world.

“And You Give Yourself Away” – How will Aramco’s Privatization Plans Impact Downstream Plans?

The announcement by the Saudi’s in early 2016 that they were interested in pursuing partial privatization of state-owned Aramco has been a major topic of conversation in the industry over the past year.   With values for a transaction of this magnitude measured in the trillions of dollars, they certainly won’t be “giving themselves away.”   Much of the discussion has revolved around how this will impact the upstream segment of the industry, but the potential implications on Aramco’s downstream strategy, and therefore potential refining capacity expansion, is also significant.

While Aramco’s downstream involvement is dwarfed by its upstream, it is still the largest and most active refiner in the Middle East.  With current refinery capacity of 2.9 million BPD, it makes up over 30% of total regional capacity and exceeds No. 2 Iran by almost 1 million BPD.  It has also added 800,000 BPD over the last four years, making up two-thirds of the total increase in the Middle East over that time.  These capacity expansions came about due to two world scale Joint Venture (JV) plants, SATORP (Aramco and Total) in Jubail and YASREF (Aramco and Sinopec) in Yanbu, which started up in 2014 and 2015, respectively.

Aramco certainly isn’t done, with ongoing construction at full tilt at their wholly owned 400 MBPD Jazan refinery.  They have publicly stated that this grassroots, full conversion refinery, is their highest priority project, system wide.  It is meant to be the cornerstone of the new Jazan Economic City on the Red Sea, and the most recent publicly stated schedule calls for initial “oil in” late this year and full start up in 2018.  The project is far enough along that we feel it will very likely be completed, but whether it meets this schedule is certainly up in the air, especially considering the overruns and schedule slippage at SATORP and YASREF.

But what comes next for Aramco?  For the first time in years, after Jazan, there are really no major grassroots projects on the schedule for Saudi Arabia over the next few years, although both SATORP and YASREF are considering relatively small expansions at their facilities.   With domestic demand continuing to grow, this would mean that refinery production will have to be diverted to meet this demand, reducing the amount available for export.  Will privatization change Aramco’s strategic vision and pour more (or possibly less) resources into the downstream?  Since the timing and even the fact of privatization is uncertain, the answer to this question is really just a big question mark at this point.

“And I’m Waiting For You” – Big Plans with Big Uncertainties in the Rest of the Middle East

The biggest project currently planned for the Middle East and the largest one we have on our Probable list globally is the 615 MBPD Al-Zour refinery being developed in Kuwait by their state owned oil company, KNPC.   But whether this project actually makes it to start-up and when that start-up occurs is still very much up in the air, and perhaps one of the biggest unknowns on the refining capacity landscape.

The Al-Zour project certainly has tread a difficult and ever-changing path.  It was first announced in 2006, only to be cancelled less than three years later as a result of falling crude prices and political disagreements with the Kuwaiti government.   But with changes in both political sentiment and more money available with a bounce back in oil prices, the project was resurrected in 2011, with completion planned for 2017.   However progress has come in fits and starts, with project costs soaring and the schedule continuing to slip.  The 2011 budget of $14.5 billion has climbed to over $19 billion and the most recent official start-up is now slated for 2019.  While we at TM&C do think this plant is likely (though not certainly) to be started up eventually, the date we have in our WRCO is 2020/21

Significant uncertainty prevails in regards to refining projects throughout the rest of the Middle East as well.  Iraq and Iran, the second and third largest producers in OPEC, have very ambitious plans to add capacity, both through upgrades at existing refineries and construction of grassroots plants.  In total, our comprehensive list of projects shows a total of about 1.1 million BPD of capacity expansion in Iran and about 900,000 BPD in Iraq.  But of these, we only have 200,000 BPD in Iran on our Probable list, and even this project, an expansion at Iran’s largest refinery at Abadan, is pretty iffy.  Considering the political and security situation in these two countries, it is hard to be more optimistic, but if we are wrong, the impacts on product markets could be significant.

Other countries in the Middle East are not standing idly by either, with over 700 MBPD of capacity expansion projects being planned, mostly in the Gulf States of UAE and Oman.  Of these plans, we only have one on our Probable list, the IPIC (the investment arm of Abu Dhabi’s government) sponsored 200 MBPD refinery in the key port of Fujairah.   We believe this plant is likely to start up next year, although a delay would not be a surprise.   This follows the startup of the 400 MBPD Ruwais refinery expansion sponsored by another Abu Dhabi state owned company, TAKREER.  While that project was “successfully” completed in 2015, it experienced significant overruns and schedule slippage.

In the final blog of this series, we will look at refinery capacity developments in some areas which are experiencing challenges to their downstream segments, Europe and the Former Soviet Union (FSU).  In the case of the former, rather than expanding capacity, we can look forward to more shutdowns, although the amount of rationalization is certainly a major uncertainty.  In the FSU, a major product exporting region, some projects are moving ahead, but the drop in oil prices is undoubtedly putting a crimp in those plans.

TM&C has recently completed and published its 2nd edition of the WRCO.  Some of the key findings in this study were summarized in our February 7th blog.  In the WRCO, 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.