The downstream industry in the Arabian Gulf is undergoing a tremendous transformation. By the end of the decade, it will have hundreds of thousands of barrels of new refining capacity feeding tens of newly-built, modern, fully-integrated petrochemical plants.
Foreign and domestic markets will be inundated with tonnes of high value products made in the GCC, bringing billions of dollars in revenues to the region, creating much needed employment opportunities for the youth and supporting the local economies.
At the same time, the industry is entering an era of weak global demand, low petroleum prices and stiff competition from rival producers, making it all the more imperative to adapt to these changes or risk losing ground to other, more agile players.
“The downstream industry has been very tough recently because of the market changes. And this has been the driver behind our decision to move more towards integration as opposed to having standalone projects,” Mohammad Al-Mutairi, CEO of Kuwait National Petroleum Company (KNPC), tells RPME, as he confirms the news of a new downstream complex in Kuwait.
The complex will be built next to and integrated with the massive Al Zour refinery in the southeast of the country.
The area will also house a 3bn cubic feet per day import terminal for liquefied natural gas (LNG) to be used mainly for power generation. The project is in tendering phase and is expected to be completed in 2020.
All three facilities will be managed by a separate, soon to be established company called Kuwait Refining and Petrochemicals Company (KRPC), reveals Mutairi.
“Because of location and integration and for best practice, the idea is to have one entity in Al Zour. Financially and economically, it makes sense to have our petrochemical operations integrated with a refinery,” he adds. Meanwhile, KNPC will continue to operate its two refineries — Mina Abdullah and Mina Al Ahmadi, including work on a massive expansion project better known as the Clean Fuels Project.
“The Clean Fuel Project is aimed at upgrading and expanding KNPC’s existing refineries into an integrated merchant refining complex with total capacity of 800,000 bpd meeting the future diversified market requirements,” Mutairi explains.
After the upgrade, both refineries will be able to produce low sulphur content fuels compliant with the highly stringent Euro-V equivalent specification and suitable for export to Europen and US markets, in addition to Africa and Asia. The project is 39% complete, according to Mutairi, and is due for commissioning in mid-2018.
After Saudi Arabia, Kuwait has the second largest refining industry in the Middle East. And when completed, some of its mega projects will propel the country’s total refining capacity to 1.4mn bpd, securing its long-fought-for position as global and regional leader in the refining and petrochemical sectors.
“We are talking about over $35bn of capital spending over the next five years,” says Mutairi.
Arguably, the most significant of these projects is the $11.5bn Al Zour complex. Billed as one of the world’s largest new grass root refinery projects, the Al Zour refinery will be able to process 535,000 bpd of heavy and sour Kuwaiti crude, and produce a combined 565,000 bpd of low sulphur fuel oil and high quality refined petroleum products. Calling it “the largest project in Kuwait’s history” and its contract awards “a breakthrough”, Mutairi said the refinery is of great significance not only for the company but for Kuwait as a whole.
Without doubt, the increase in production and access to new markets will give KNPC a much needed boost. Despite 2015 being an overall good year for refiners, it was also full of challenges.
“We witnessed a sharp drop in the oil price and, since there is a direct relationship between the two, we saw a sharp drop in the pricing of petroleum products,” admits Mutairi.
“The refining margins in 2015 put a lot of pressure on refineries, and some were close to having negative results but luckily the year ended with a slight positive.
“We witnessed a small improvement in the last two months which is normal in the winter season because there’s a demand for petroleum products especially for diesel. The demand came mostly from Asian countries.”
Similarly to its upstream counterparts, the company had to introduce strict measures on spending, resulting in operational savings of almost $230mn.
This, combined with a $150mn profit from refining and gas liquefaction enabled it to maintain positive results in the 2014-2015 financial year.
“As for the first two quarters of FY 2015 /2016 starting 1st April to end of September 2015, we are seeing some improvement in Singapore cracking margin of 5.41 $/bbl against last year of 4.85 $/bbl and the company’s actual financial performance to end of September 2015 is showing similar improvement pattern,” Mutairi said.
KNPC exports about 66% of its products abroad, mainly to countries in Asia, its biggest market to date, with the remaining balance (34%) consumed domestically.
Supply and demand are two extremely important factors to watch when running a refinery business, but lately have been increasingly hard to predict.
“In previous years supply and demand patterns were clear, with demand mainly waning in the summer and picking up in the winter. This time around, the market is not responding to traditional cycles and is not witnessing a significant increase in demand.
“Personally, I will be closely monitoring changes in the supply/demand trade patterns for products, in lieu with the refining expansions that is taking place in the region,” says Mutairi.
He continues: “The global refining capacity is set to rise by 6.4mn bpd by 2020 to 102.2mn bpd. Most of the capacity growth takes place east of Suez, followed by the Middle East.
“In practice, excess refining capacity will continue in the medium term especially that there are other fuels bypassing the refining system such as natural gas liquids and gas-to-liquid (GTL).
“Both the overcapacity and the slow global economic growth and recovery are putting pressure on refining margins. This is what we have been experiencing during the last few years and we expect refining margins to remain weak and continue to be under pressure in the medium term,” Mutairi said.
Adding to the company’s woes will be the closure of the 200,000 bpd Shuaiba refinery, which is planned for April 2017 and ahead of the Clean Fuels Project, resulting in over a year of significant decrease in production.
“The decision was made based on economic reasons. Shuaiba is an old refinery; the technology cannot be upgraded for many reasons. One of them is that the land is very congested, there is no space to expand or upgrade the refinery so we decided to close it down and utilise the tank farm in the terminal for the Clean Fuels Project; this part will be handled by Mina Abdullah refinery,” explained Mutairi.
“There will be a drop in production for one and a half years from 930,000 bpd to 800,000 bpd but it will be a temporary drop,” he insisted.
“We are adjusting our production and marketing plan accordingly.
“The one thing that we are monitoring closely is the marketing of our products because we don’t want to lose any customers during this period.”
Mutairi is well aware of the challenges ahead but maintains that with the right leadership and strategy, the difficulties can be overcome.
“There is global crude over supply and over refining capacity. This, coupled with the slow global economic growth, continued to put pressure on refining margins during the last few years, with [margins] expected to remain weak until 2017.
“However, we still believe that demand for petroleum products will continue in the short to mid-term. Although there was a slowdown in China and India, petroleum products are still an economic option.
“There is also the possibility of strong global economic recovery, which would follow usual market logic — the deeper and faster the price decline, the stronger and faster the recovery.”
“With the expectation that crude oil prices will increase, by how much I cannot say because nobody can predict, and the rise in demand for naphtha, especially from the petrochemical side, we believe that [refining margins] will improve and we expect them to be in the range of $2 to $6 in 2016.”
KNPC couldn’t be in better hands. With over 26 years of industry experience in both technical and managing roles, Mutairi built his career from the ground up.
He joined the operations department of Mina Abdullah as a chemical engineer in 1987, and after alternating between jobs in Kuwait’s three largest refineries, was promoted to the role of deputy CEO of Mina Al-Ahmadi. Fast-forward to May 2013 and he was already running Kuwait National Petroleum Company (KNPC) which was recently established as Kuwait’s main refining entity as parts of the government’s plans to restructure its oil and gas sector.
“When you work in a big refinery managing a lot of people, the most important thing that you learn is leadership. You are leading people from the production to various, more senior levels and you see your decisions affecting not only the refinery and its output, but also your people,” Mutairi said.
“As one of the largest refining companies in the world, we believe that we are well placed to reap the benefits of economic recovery in years to come, especially with the implementation of the mega projects and through our strive to achieve excellence in what we do. In addition, the market trend is moving towards stringent product qualities and we are prepared to meet these challenges by upgrading our facilities,” he concluded.
