Saudi Arabia is pushing ahead with plans to nearly double its refining capacity despite a sharp increase in investment requirements for such projects due to a surge in construction costs and a shortage in manpower.
After a long delay, the Gulf Kingdom, the world's dominant oil exporter, approved two mega refining ventures with foreign partners this month despite an increase by at least 60 per cent in their costs, according to analysts.
The two refineries would be constructed in the country's hydrocarbon industrial hub on the Eastern coast as joint ventures with France's Total and the US ConocoPhillips with a combined production capacity of 800,000 bpd. The government-owned Saudi Aramco is spearheading the Kingdom's upstream and downstream expansion drive that will add more than one million bpd to its crude output capacity, double its refining production and boost its petrochemical production to about 13 per cent of the world's total output.
"Saudi Aramco is moving forward with its refining capacity expansion plans. Two new refining plants that Saudi Aramco is planning to build with Total (in Jubail) and ConocoPhillips (in Yanbu) are currently underway, with a combined capacity of 800,000 barrels per day,"the Saudi National Commercial Bank said.
"These projects are only a part of Aramco's plans to boost domestic refining capacity by as much as 1.6 million bpd from 2.1 million bpd. The amount of capital investment required for the two plants, initially estimated at around $6billion (Dh20bn) each, is now expected to have increased by at least 60 per cent on rising cost structures,"NCB said in a study sent to Emirates Business on Saturday. It said the increase was a result of rising material costs, skilled labour shortages, the weakening of the US dollar, which has pushed import costs much higher, as well as structural difficulties on site.
A Final Investment Decision (FID) has already been established on Aramco's project with Total,"the study said. "But while Aramco and ConocoPhillips have recently confirmed that they are in the second stage of planning, no FID has been undertaken yet, and the project's target date was delayed by two years. This certainly highlights some of the challenges facing Aramco ahead."
Saudi Arabia's domestic refining capacity is estimated at around 2.1 million bpd but the Kingdom also controls more than one million bpd in joint refining ventures abroad. It has set a target of doubling its total refining capacity to six million bpd, more than 70 per cent of the total Arab refining production. Saudi Aramco, the world's largest oil producer, has not specified the total capital needed for its refining ventures but its President and CEO Abdullah Jumah said recently the company would pump nearly $90 billion into upstream and downstream expansion projects in both oil and gas.
"Despite the wide range of uncertainties, including confusion and uncertainty over energy policies; continuing worldwide shortages of manpower, materials and services; as well as rising costs; we have stayed the course with our investment plans for oil production capacity expansion and a variety of related initiatives that will help increase the world's energy supply capacity,"he said.
"Over the next five years, we plan to invest some $90bn in our upstream and downstream projects in Saudi Arabia and around the world. At the same time, on the downstream side, as our global refining investments materialise, our worldwide refining capacity will almost double from three million bpd presently to about six million barrels per day, which should help alleviate the tightness in global refining capacity."
Industry sources said soaring construction costs would not be an obstacle for Saudi Arabia to press ahead with expansion projects given the sharp rise in its crude export earnings because of the surge in oil prices.
From only around $33 billion in 1998, the Kingdom's oil revenues jumped to nearly $143bn in 2005 and $165 billion in 2006 before swelling to a record $170bn in 2007, when average oil prices peaked at about $70 a barrel. The income is expected to exceed $200 billion this year.
Saudi Arabia's domestic refining capacity is estimated at around 2.1 million bpd