Ageing Arab refineries 'need huge investments'

Arab countries need to make massive investments in a comprehensive overhaul operation of their ageing refining industry, that can no longer meet the steady rise in local consumption, their main oil group has said.

Although new projects will add more than five million barrels per day (bpd) to existing Arab refining output capacity within the next five years, many regional hydrocarbon exporters could become net importers of petrol and other petroleum products because of inefficient refineries, the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec) said.

What complicates the problem is that most refineries in the region are owned by the government and this is discouraging initiatives and keeping profitability low. Another major obstacle is that the bulk of those refineries are relatively small units that were built nearly half a century ago and their operational costs are now nearly double that of refineries in industrial countries, Oapec said.

High cost of operation

"Most Arab refineries are suffering from major problems, that have largely depressed their profitability and made them incapable of meeting domestic demand and strict environmental standards… The problem is that a bulk of them are owned by government institutions, which heavily subsidise their products… This naturally weakens any interest in improving profitability or competitiveness," the Kuwait-based Oapec said in a 100-page study on challenges that Arab refineries face.

"Other problems and challenges the Arab refining sector faces, is in the high cost of operations and maintenance compared to refineries in other countries, mainly industrial nations; its inability to comply with environmental standards on petroleum products; low production of most refineries against a rapid increase in domestic consumption; and a widening gap between local production and consumption structures in some products."

According to Oapec, which controls more than 60 per cent of the world's recoverable crude resources, new projects will boost total Arab refining output capacity by more than five million bpd from around 7.4 million bpd to 12.42 million bpd in 2015.

But it noted that such projects, which involve new refineries and expansion of existing units, are also beset with challenges in the form of, what it described as, persistent volatility in demand, fluctuating construction costs and other factors.

It said many Arab nations have approved expansion plans to meet local and foreign demand and at the same time, to cope with changes in the structure of demand for petroleum products.

The hurdles ahead

The study said such changes include cutting the use of high-sulphur heavy fuel for environmental reasons, the availability of natural gas in some Arab countries, and the application of energy-saving measures in industry.

"Several Arab countries are now building new units to convert fuel oil and heavy products into light derivatives, as well as new high-tech refining facilities… However, projects for building new refineries and developing existing refineries in many Arab countries are facing hurdles that may impede, delay or even jeopardise their implementation," Oapec said.

"These hurdles include the uncertainty surrounding future demand trends for oil products on world markets, which makes it difficult to predict the economic risks of investing in new projects… They also include fluctuations in the cost of building materials, especially in the pre-crisis, mid-2008 period, which created wide disparities in project cost estimates."

Oapec's figures showed the average costs of operation and maintenance of Arab refineries have peaked at $2.5 (Dh9.18) to $5 a barrel compared to $1.5 to $2 a barrel in industrial nations.

Consumption of fuel and loss of crude oil in Arab refineries are estimated at around six per cent to nine pr cent while it is around four per cent to five per cent in refineries in the developing world, the report said.

"The main reason for this high cost and consumption in Arab refineries is that most of them are old units that were constructed during the 1950s and 1960s… A bulk of these are small refining units, which have been excessively expanded over time to face a steady growth in demand," it said.

"Such projects have entailed the installation of several new small distillation units at each refinery with a capacity not exceeding 10,000 bpd to 20,000 bpd… This has led to a weakening in the integration of various production units and has consequently boosted consumption and costs of maintenance and operation," the report said.

Relatively small units

The report showed that more than 50 per cent of the Arab World's 60 existing refineries are relatively small units, with an average production capacity of around 41,000 bpd. Nearly 26 per cent of them are medium refineries with a capacity of 132,000 bpd while 24 per cent of the units pump an average of 328,000 bpd.

"Besides being small units, Arab refineries also suffer from a wide gap in the structure of demand and consumption… This requires massive investments to modify and update the refineries in order to boost the output of certain products which are in strong demand in the local market," Oapec said.

"For example, production of fuel oil in the Arab world accounts for around 29.1 per cent of the total refined output while domestic demand accounts for 21.9 per cent of the total demand… This means there is a surplus in local output… In contrast, production of gas oil constitutes nearly 28.9 per cent of the total refined output while it accounts for 35.1 per cent of the local demand… This means there is a deficit in local production."

Oapec warned that in the absence of sufficient investments, which should cover new projects and the updating of existing units, Arab markets could face shortages in some refined products.

"This means that some Arab countries which are exporters of petroleum, including those in the Gulf Co-operation Council (GCC) states, could become importers of this product within the coming few years."

A breakdown showed demand for petroleum in the Arab region is projected to nearly double to more than two million bpd in 2015, while consumption of gas oil and diesel could surge from about two million bpd to more than three million bpd in the same period. LPG (liquefied petroleum gas) is also forecast to jump from less than 500,000 bpd to nearly 1.8 million bpd.

"Despite differing views in the Arab world on the construction of new major refineries, there is consensus among refinery operators and owners on the need to shut down old units with relatively small output capacity, which some studies have proven to be unfeasible," Oapec said.

Banking on technology

"There is a need now to concentrate efforts on the expansion of medium and large refineries in the region… As for new refineries, there are supporters and opponents of such projects… Those who oppose such big projects argue that refining is a high-risk and low-profit industry… They also argue that such projects are harmful to the environment, noting that most industrial nations, including the US and Europe, have not built a new refinery in the past 30 years."

Oapec urged its members, which include the six GCC nations, to co-operate with local and foreign research institutes to develop the technology needed for upgraded refining operations, particularly conversion and hydro-treating processes, so that Arab refineries can produce oil products that meet local and international environmental requirements.

"We hope that current refinery development projects will continue to be implemented so that the capacity of conversion processes, hydro-treating and naphtha reforming can be raised to world standards… Such measures will boost the profitability of this vital industry," it said.

"We also hope that pipelines for transporting products will continue to be laid so that Arab countries can exchange products and that terminals for exporting surplus derivatives to overseas markets will continue to be built."

Refining capacity to rise in UAE

Oapec's figures showed Arab nations currently have 64 refineries that pumped nearly 7.39 million bpd at the end of 2008 compared with 7.2 million bpd at the end of 2006.

The increase in 2008 was mainly a result of expansion in refineries in some member states, including the UAE, where refining capacity grew to 798,000 bpd from 778,000 bpd in 2006.

The increase allowed the UAE to maintain its position as one of the largest refining producers, with its output accounting for more than 10 per cent of the total Arab refining capacity of 7.3 million bpd. Its capacity is set to rise further in the next years as new units come onstream and expansion of existing refineries is completed.

Saudi Arabia's refining output remained unchanged at around $2.095 mbpd but it accounted for nearly 27 per cent of the total Arab refining production. The kingdom's capacity is also projected to rise sharply in the next few years as it pushes ahead with major refining projects.

Kuwait had the second largest refining capacity in the region, standing at 889,000 bpd. Other key GCC producers in this sector include Bahrain and Oman, with around 249,000 bpd and 222,000 bpd respectively. Iraq's refining capacity has remained unchanged at 597,000 bpd since 2003.

Outside the GCC, Egypt had the highest refining capacity in the region, with around 726,000 bpd. It was followed by Algeria and Libya, with refining production standing at 463,000 and 378,000 bpd respectively.

A breakdown showed Saudi Arabia would account for the largest share of the capacity increase in the region, with an addition of 1.2 million bpd.

Around 615,000 bpd would be added to Kuwait's capacity while the UAE is expanding output by 500,000 bpd. Qatar is adding around 250,000 bpd and Oman and Iraq are adding 150,000 bpd and 160,000 bpd respectively. Oapec did not provide figures on the cost of the Arab refining projects but according to its affiliate, the Arab Petroleum Investment Corp (Apicorp), these are estimated at $115bn.

Increase in regional reserves

In a recent research, Apicorp said the cancellation or postponement of energy projects in the region has sharply cut estimated investment in the coming years. It said the global credit squeeze had already slashed the energy investment requirements in the Middle East and North Africa (Mena) by nearly $200bn during 2009-2013.

"The impact on energy investments in Mena is evident in our five-year period review for 2009-2013 and the tentative preview for 2010-2014… In the context of lower demand, our preview points to lower potential capital requirements resulting mainly from lower costs… Both the review and the preview point to the upside likely to be capped by further shelving or suspension of key projects."

Despite their massive oil production in the past years, the crude resources of the UAE and other regional hydrocarbon producers have remained intact while some of them have recorded an increase, according to British Petroleum.

The UAE's proven resources slipped by only around 300 million bpd while Saudi Arabia's crude reserves, which account for more than a fifth of the world's total proven oil wealth, swelled from around 255 billion barrels to 264 billion barrels.

Kuwait's oil reserves rose from 94.5 billion to 101.5 billion barrels while Qatar's oil deposits jumped by nearly six times, from around 4.5 billion to 27.3 billion barrels in the same period.

Between 1988 and 2008, the UAE pumped in excess of 14 billion barrels while cumulative production by Kuwait and Saudi Arabia surpassed 15 billion and 50 billion barrels respectively. Qatar also pumped above four billion barrels.

Industry experts said the increase in regional oil reserves was a result of large new discoveries and the introduction of advanced technology, including horizontal drilling and enhanced recovery.

Recommendations

- Arabs should pursue develop ment of the refining sector and bridge the gap in the production- demand structure

- Efforts should be intensified to curb consumption of liquefied petroleum gas and to invest more in the development of gas fields and gas processing

- Arabs should expand the pipeline network and export terminals for the transport of petroleum products to ensure  access to all and to expand inter- Arab exchange of products

- Arab refining companies should boost co-operation and exchange of expertise to develop refining technology

- The Arab private sector should be encouraged to contribute to the region's refining and petro- chemicals sector with the aim of upgrading this vital industry

- Efforts should be undertaken to reduce the expected shortage in local petroleum production

- Arabs should work to boost co-ordination between local refineries and refining sectors in every country

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