Authors: Ryan M. Couture and John R. Auers
With the unexpected passing of “The Purple One,” we thought it timely to use the title of one of his most interesting albums in our continuing series on the varying costs of refinery projects “around the world.” In our first installment of this series, we took a look at the advantages that U.S. refiners have compared to their global competitors and focused specifically on the difficulties Latin America, the largest market for U.S. products, has had in adding refining capacity. As we continue “around the world,” we move on to the Middle East, the biggest competitor with the U.S. for export product markets and an area which has both had some success and some disappointments in the refinery construction arena.
“There Ain’t No Reason 2 Stay” – Until Recently
While the Middle East has had a long history in the upstream segment of the oil industry, most of the oil produced has gone to export markets, with the refining sector remaining relatively small in most of the region until recently. To a large extent, this was because regional product demand was minimal and oil was exported to be refined in the U.S., Europe and Asia where product markets were much larger. But these dynamics have been changing; and as a result, downstream construction activity in the Middle East has accelerated. In just the last three years, the Middle East has added 1.6 million BPD of refining capacity, increasing the regional total by about 20%, and as much as 5 million BPD of additional capacity is being planned over the next five years (although we expect less than half will get built in that timeframe). To some extent, these projects were/are necessary to meet rapidly growing regional product demand, which has increased by almost 50% since 2004, as shown in Figure 1 below, the fastest growth rate of any region of the world.
“I Think I know a Better Way, Y’all”
But growing in-region demand is not the only driving force, as the oil producing countries in the Middle East have set strategic goals of moving up the “value chain” by turning their crude oil into finished transportation fuels and petrochemicals, exporting those higher valued commodities. There are certainly a variety of reasons why this thinking makes sense. The biggest is the cost of the raw material – whereas European, Asian and until recently U.S. refiners have to source most of their crude oil from other places and pay the potentially very high transportation costs, Middle East refineries can get it directly from adjacent fields. Natural gas necessary for refinery operations is also cheap (another benefit U.S. refiners have started to reap from the shale boom). Also geography isn’t bad, as in addition to growing internal demand, the Middle East is in relatively close proximity to other large demand centers (most notably Asia and Europe). And there are many other benefits the Middle East countries realize in adding downstream facilities – including lessening dependence on crude oil prices, diversifying their economies, increasing high-wage employment, etc.
“She May Not Be in the Black”
However building refiners is a complex task and projects in the Middle East have significant challenges. Climate is a major hurdle, with a good portion of the year too hot to work, and the threat of dust storms a possibility at all times. In addition to the difficult climate, a lack of developed infrastructure, both to support construction and ultimately operations presents a major impediment. This can mean requiring a build-out of utilities and roads in order to support the project, dramatically increasing costs.
In addition, the Middle East has been and remains a potential geopolitical flashpoint. With bullets flying, building complex refineries becomes an almost impossible task. Even where immediate conflict isn’t in play, other geopolitical/diplomatic/political factors can be major hurdles. A case in point is Iran, which has major plans for refining additions, but getting supplies or financing can be a challenge; as even though UN and EU nuclear sanctions have been recently removed, others remain such as the various U.S. trade sanctions.
The limits of the workforce in the Middle East poses significant challenges, as the region lacks not only sufficient professional, technical and skilled personnel, but even unskilled workers. In 2012, only 6% of the Gulf Cooperation Council states university students majored in engineering or science. The industry there for years has depended on expatriates to fill both managerial and technical roles. In addition, much of the low-skilled manual labor is filled by foreign workers, often from Africa and Southeast Asia, as local workers, particularly in the wealthier states, are unwilling to do those job. While countries in the region are working to shift this in the wake of the drop in oil price, it is a difficult task. You need to look no further than the recent strike in Kuwait. The workers, all Kuwaiti nationals, went on strike over wages and benefits and in the process, cut 1.5 million BPD of production for several days. A nationwide strike last year across many U.S. refineries had almost no impact on operations.
Finally, just as in Latin America, most refinery projects are sponsored and executed by national oil companies (NOC’s), with the accompanying issues of politically directed, confused, and conflicted planning, incorrect staffing, corruption, and in some cases simple incompetence.
“A Wonderful Trip Through Our Time”
Despite the challenges, there is no shortage of projects that many of the NOCs have initiated. In our Construction Outlook, we are tracking 35 current refinery projects across eight countries. In today’s blog, we will focus on some of the larger projects (both past and present), looking at how some of the challenges have impacted their results/progress.
Let’s begin with Saudi Arabia, which has been the most successful country in the region in actually building and starting-up plants (though not inexpensively), having completed two world scale export-oriented facilities in the last three years and making progress on a third. The first of these, known by the acronym SATORP, is a joint venture between Saudi Aramco and Total. The project consists of a 400 MBPD refinery and associated petrochemical plant located along the Persian Gulf in Jubail. The project was announced in 2008, but did not reach completion until 2013. During this time, the project’s budget doubled, from an original $6 billion estimate to $12 billion. The project only saw minor delays, which is a rarity for a project of this size and scope in the Middle East.
The Yanbu refinery (YASREF), located on the Red Sea, was ultimately a joint venture between Saudi Aramco and Sinopec. The project began as a partnership between Saudi Aramco and ConocoPhillips which was announced in 2006, before Conoco bowed out in 2010 and Sinopec joined in 2012. Just like SATORP, the refinery is designed to process 400 MBPD of Arab Heavy crude, predominantly to produce products for export markets in Europe and Asia. The facility exported its first product in 2015, four years late and at a cost of $10 billion; $4 billion over the original budget. The extended delays did help reduce cost overruns to some extent, as construction costs fell in the wake of the 2009 financial crisis and the subsequent slowdown in development.
The latest major project is being constructed in Jazan, in the southwestern corner of Saudi Arabia. Also situated on the Red Sea, this 400 MBPD project, wholly owned by Saudi Aramco, was originally slated to be started up in late 2015, but publicly has been delayed till late 2017. The $7 billion original budget has increased to at least $2 billion over budget amid contract disputes. As this project unfolds, it very well may push into 2018 or beyond and exceed $10 billion.
The UAE recently started up the Ruwais (Takreer) refinery expansion, positioning itself as a major export oriented facility. Originally announced in 2008, the project more than doubled the existing 350 MBPD refinery to over 800 MBPD. Several units were added including a new 417 MBPD atmospheric CDU and 200 MBPD vacuum CDU, in addition to several hydrotreaters and a hydrocracker. The project was originally scheduled by 2013, but hit delays and ultimately was completed in late 2015 at a cost of $10 billion, a cost similar to that of the greenfield refineries in Saudi Arabia.
Kuwait’s Al-Zour refinery is the biggest and most ambitious of all the Middle East projects, but has also encountered the most problems. Originally announced in 2006, the 615 MBPD project was cancelled and then reinitiated. The startup date has slipped by seven years so far and cost estimates have risen by $5 billion. As it stands, the publicly estimated completion date is now in the 2019-2020 timeframe, with a total project cost of $19 billion, with the very likely possibly that neither of these targets are met.
“Ask Where They’re Going, They’ll Tell You Nowhere”
We only touched on a few of the many projects that are being considered in the region. As in Latin America, almost all of the projects have a commonality, with delays, budget overruns, and dependence on outside contractors for engineering, equipment and construction. If the region continues to try to position itself as an important supplier of not only crude but also refined products, it might develop more in-region capabilities and a better workforce and increase its ability to execute projects more efficiently. However, this will only come if significant changes take place in the political and economic environment, with necessary social and economic reforms and a lessening of regional tensions. Certainly new Saudi Crown Prince Salman has announced plans to accomplish part of this, but headwinds abound and the low oil price environment and budgetary pressures faced by many of the Middle East oil producers add to the difficulties. In future blogs, we will continue our “Trip Around the World” to see how refinery projects have progressed and how they have fared compared to those in the good ole’ U. S. of A.
Turner Mason & Company looks at global refining developments and tracks the progress of projects and their implications for the industry. We use this as one of the factors we analyze when compiling our 2016 Crude and Refined Products Outlook, which was recently released. In addition to The Outlook, we offer our construction tracking and analysis as a separate product. The 2016 Comprehensive Construction Outlook is available and this is updated on an “evergreen” basis. We provide details of proposed refinery projects and expansions across the globe, handicapping the likelihood that they will be built, and estimating both the incremental volumes of the different grades of crude that will be processed and products that will be generated. Other details, including units constructed, the cost of the projects, and an estimate of start-up are also included. For more information about these products or our other publications or TM&C services, please visit our website or give us a call.