Abu Dhabi — Against a total of 2.2 million barrels of refining capacity at the end of 2013, the world’s largest oil producer, Saudi Arabia, will add another 1.2 million barrels per day of oil to be refined in the next six years.
The new capacity includes the Satorp refinery, which is already up and running, and the Yasref refinery, which will start up in coming days, says a research note by Jadwa Investment, a Riyadh-based investment firm.
This major investment in downstream sector by the kingdom coincides with a huge growth in modern refineries in countries such as India and China, which will mean that these new export-orientated Saudi refineries will compete in a very tight international market.
The global refining industry has changed in the last decade with a shift in demand growth away from OECD countries to non-OECD ones. The supply of highly complex and modern refineries, as a way of decreasing dependency on imports, has also increased. India and China have seen a huge growth of refining capacity which has contributed to creating a global surplus, all of which has led to decreasing refining margins and utilisation rates. Older and less-competitive refineries have therefore been forced to close, with Western Europe being one of the worst affected regions.
With the help of shale oil, the US has transformed itself from being the world’s largest importer of gasoline to a major exporter of diesel, further adding to the supply of high-quality refined products available in the global market.
Regardless of the apparent over supply of global refining capacity, a plethora of refining projects will add around seven mbpd of highly complex capacity between now and 2020. This also includes new refineries from Saudi Arabia, which will make it a net exporter of middle distillates including diesel by the end of the decade, joined by Russia, China, the US and India.
Investment in the refining sector in Saudi Arabia has been a long-term policy goal for the government as it was, and still is, seen as sure way of achieving diversified economic growth and employment for the Saudi population. At the end of 2013 Saudi refining capacity totalled 2.5 mbpd, the largest capacity in the GCC region, with Kuwait a distant second at 940,000 bpd.
Since the majority of the Saudi refinery capacity was built before 1990, such assets are older and less advanced and therefore produce a large proportion of lower-value heavy distillates comparative to other regions.
The main factors behind demand growth have been a rapidly rising population, economic growth and improving living standards. The combination of these factors, in turn, have contributed to larger consumption via increasing electricity consumption, higher usage of energy in industry and increased car ownership.
Saudi Arabia has one of the lowest-priced transportation fuel in the world, with diesel at 6.7¢ per liter and gasoline at 16¢ per liter. Furthermore, refined products are also supplied at similar discounted rates to the Saudi Electric Company.
Due to the combination of rapid expansion in demand and Saudi refineries higher proportion of heavy distillate output, a deficit in light and middle distillate products has developed. In particular, the rise in the consumption of diesel and gasoline has translated to a steadily rising level of imports of both these products in the last few years.
The three new and highly-complex refineries totalling 1.2 mbpd will change Saudi Arabia’s refined product balance by 2020, but the degree of this change is dependent on the growth in domestic product demand.
One area where Saudi refineries will have some competitive advantage is in crude feedstock. The new refineries will be configured to process heavy sour crudes in order to produce middle and light distillates. The supply of these crudes is set to come from the last of the “large” oil fields in Saudi Arabia, the Manifa field. As the field reaches a plateau of 0.9 mbpd by the end of 2014, it will feed all three refinery projects in Jubail, Yanbu and Jazan.
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