Arab refiners' plan to raise output by over 5 mbpd fraught with hurdles

Arab refiners face the problem of a growing trend by Western consumers to support the production of alternative fuel. (SUPPLIED)

Arab oil producers are planning to add more than five million barrels per day (bpd) to their refining production capacity over the next four years but the projects are beset with hurdles, according to an official report.

Most of the increase is expected to come from the UAE, Saudi Arabia and Kuwait, which hold more than 40 per cent of the world's extractable crude deposits, said the report by the Kuwait-based Organisation of Arab Petroleum Exporting Countries (OAPEC), a key Arab League establishment.

The current combined Arab refining output capacity is estimated at over seven mbpd and the new projects, which will cost at least $100 billion (Dh367bn), would boost production to 12.425 mbpd by the end of 2014, the 10-nation OAPEC said.

The projects involve the construction of new refineries and expansion of existing units and are designed to meet a steady growth in domestic consumption and external demand, the OAPEC said in its 50-page study about the refining industry. "These projects will add nearly 5.03 mbpd to the Arab refining capacity, but they are beset with challenges and obstacles, which could lead to postponement or abolition of some of them, mainly those related to new refineries," it said.

"These obstacles include shortage of funding and low investment return because refining ventures are normally not highly profitable. Another challenge is the state of uncertainty in the energy market due to ambiguities surrounding the global demand for refined products as a result of lack of transparency in most consumers about forecasts on future demand."

The OAPEC said Arab refiners also face the problem of a growing trend by Western consumers to support the production of alternative fuel with the aim of reducing their import of refined products from foreign markets.

"Another key challenge is the sharp fluctuations in costs of refining projects, which have prompted regional countries to repeatedly re-evaluate their costs. The situation has been aggravated by the global financial crisis as it has caused fears among investors seeking to participate in those projects."

According to the study, Arab nations currently have 64 refineries, pumping nearly 7.39 mbpd at the end of 2008 compared with 7.2 mbpd at the end of 2006.

The increase in 2008 was mainly a result of expansion in refining units in some member nations, including the UAE, where refining capacity grew to 798,000 bpd from 778,000 bpd in 2006. 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 is pushing ahead with major refining projects.

Kuwait had the second largest refining capacity in the region, standing at 889,000 bpd. Other key Gulf 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 Gulf, Egypt had the highest refining capacity in the region, with around 726,000 bpd. It was followed by Algeria and Libya, with their refining production standing at 463,000 bpd and 378,000 bpd respectively. The study did not mention the costs of the planned refining projects in the region but the OAPEC's affiliate, APICORP, estimated them at around $115bn.

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 Mena by nearly $200bn during 2009-2013.

"The impact on energy investments in Mena is evident in our five-year period review (2009-2013) and tentative preview (2010-2014). In a 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."

The OAPEC said expansion of the Arab refining capacity is needed to diversify sources of income and face a steady rise in domestic consumption. Its figures showed the Arab energy demand swelled from around 6.8 million barrels of oil equivalent (boe) in 2003 to nearly 7.43 million boe in 2004, to 7.91 million boe in 2005 and around 8.36 million boe in 2006. It increased to 8.73 million boe in 2007 and about nine million boe in 2008.

The report showed all members recorded increase in demand over the past two years, with that in the UAE peaking at 960,000 bpd in 2008 compared with 924,000 bpd in 2007. Saudi Arabia's energy consumption, by far the highest in the Arab region, grew to 2.65 million boe from 2.53 million boe. Egypt, the most populous Arab nation, ranked second in energy consumption, which rose to 1.24 million boe from 1.21 million boe during the same period.

 

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