The 400,000-b/d refinery project in Ras Tanura, on the coast of Saudi Arabia’s prolific Eastern Province, looks likely to be shelved for up to five years—or even indefinitely—according to industry sources speaking to Reuters.
Samuel Ciszuk IHS Global Insight Middle East energy analyst reveals the significance behind the move.
The project, valued at at least US$8 billion, was put on hold in early 2009 in line with other Saudi Aramco projects at the front-end engineering and design (FEED) or pre-tendering stage, in order for the company to capture falling construction costs. However, unlike the kingdom’s other ongoing upstream and downstream projects that experienced such deferrals, it has not been restarted.
Instead, staff working on the FEED study at contractor WorleyParsons have been taken off the project and further work has been halted. “Our contract remains intact, however the client has deferred the project,” a spokesperson from WorleyParsons told Reuters, with industry sources close to the project telling the news agency that “work on the Ras Tanura refinery expansion stopped about two weeks ago.
Aramco never says a project is cancelled, it’s postponed for months to years. This one they are talking about five years or more postponement.”
Saudi Arabia’s domestic demand for refined products continues to grow strongly on the back of a rapidly growing population and high subsidies that have created one of the world’s most wasteful consumption patterns. Hence it is not a lack of domestic demand at the root of the Ras Tanura project’s shelving, but rather an increasingly gloomy outlook on the global refining markets by Saudi Aramco and its partners.
There is a global shift towards Asia, where more and more refining capacity is being built and continues to be added, while refining capacity in the Organisation for Economic Co-operation and Development—especially in North America and Europe—is seen as too high even in the long term.
With the risk for potential overcapacity developing even in Asia over the mid-to-long term, Saudi Aramco’s initial plan to bring two 400,000-b/d export-focused refineries onstream by 2013–14 (not counting the troubled Jizan project) indeed looks less and less appetising by the day.
Still, given the market risks in the segment, it makes sense for Saudi Aramco to continue developing those projects for which it has managed to secure private investment and just persuade one or both of its IOC partners to sell more of their JV’s output into the domestic market—which, if decent prices can be secured, in any case looks to be a safer bet than having to compete in an overcrowded global market. Nevertheless, having access to very competitively priced Saudi feedstock still remains a lure for private refiner investors and is likely to ensure that their projects stay at the higher end of the profitability spectrum within the refining industry over the coming decade.
The Saudi Aramco decision does, however, signal an increasingly gloomy outlook on the global refining market over the long term too. It will be interesting to see what its Gulf peers decide regarding their refining capacity expansion projects which, like the Saudi one, also come on the back of completed or planned upstream capacity increases. Abu Dhabi has never officially given up on a 300,000–500,000 export refinery project in Fujairah, but has made little effort to actually commit to it, and Kuwait has for political reasons been unable to launch its long-planned 615,000-b/d al-Zour refinery, which was partly meant to offset its ageing Shuaiba refinery that is due to be closed down.
Qatar too has at least one refinery project in the planning and design stages, while Iran—out of political and domestic-market necessity—is continuing its effort to become self sufficient and even an exporter of refined products, albeit of the more low-value kind not fine enough to be sold into developed markets with high environmental standards.
Samuel Ciszuk is the Middle East energy analyst at IHS Global Insight.
