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Saudi Arabia is investing in refineries to take advantage of growing demand and higher margins
 
Higher global demand of oil and oil products has provided a business opportunity for Saudi Arabia to develop higher refining capacity in the next few years. The new refinery projects will contribute to the kingdom's goal of increasing its domestic and international refining capacity by 50% over the next five years to over 6 mln bpd.

Saudi Aramco, the state owned oil company has commenced on both upstream and downstream projects. The first project - expansion of the 300,000 bpd Haradh is complete and has commenced production in mid-February. Work is already underway on most of the new oilfield projects, which will add 2.5 mln bpd (barrels per day) of capacity by 2009 - of Arab Light or Arab Extra Light grades, preferred by Asian, European and US refiners. Saudi Aramco has also embarked on the contracting process for two major new refinery projects, and is at an advanced stage of negotiations with prospective strategic partners that will be involved in operating these facilities and marketing their products.

All these new refineries are to be built at Yanbu, on the Red Sea and at the Gulf industrial city of Jubail, offering the most substantial opportunities for international oil companies to invest in the Saudi oil and gas industry .

At present Saudi Aramco and its affiliates control some 4.2 mln bpd of refining capacity, or 5% of the world's total capacity. Saudi Aramco affiliates in the US, South Korea, Japan and the Philippines account for about 2 mln bpd of this capacity. Of the remainder, 720,000 bpd comes from two joint venture refineries in Yanbu (where ExxonMobil is the partner) and Jubail (Shell) and the rest from 5 refineries wholly or majority owned by Saudi Aramco.

The first of the new clutch of domestic downstream projects to get underway is an estimated US$8 bln joint venture with Japan's Sumitomo Corporation involving the addition of 80,000 bpd of capacity to the Rabigh refinery and the construction of a naphtha-based petrochemical unit, with al capacity of 1.3 mln tpa of olefins. Saudi Aramco is considering similar integrated projects in Fujian, China, where it has forged a partnership with ExxonMobil and Sinopec and at the existing Ras Tanura refinery.

Saudi Aramco's evident interest in these projects has implications for the global outlook of the refinery industry, which has enjoyed healthy margins for the past three years as a result of surging demand, in particular for light products such as gasoline, diesel and jet fuel. Some 20% of global refining capacity is located in the US, where domestic production meets about 85% of demand. There are no major new refinery projects coming up in the US, but planned capacity expansions should be sufficient to maintain growth of about 1.5% pa over the next five years. The EU accounts for almost 20% of the world's refining capacity, with the other principal centers being China, Russia, Japan, Singapore and India.

Saudi Arabia's share is a modest 2.4%, most of which is towards the domestic market. The new projects in Saudi Arabia and across the Middle East and North Africa (notably in Kuwait, Egypt and Algeria) are aimed for the export market, primarily Asia, but also with a view to selling specialized high-quality products in the EU and the US.

If all these projects materialize, the world could be faced with significant refining over capacity from about 2010 onwards, and a return to the thin margins on the late 1990s and mid-1980s. With advanced technology in its newer units and the advantage of integration with petrochemicals in many of its refineries, Saudi Arabia will be better equipped than most to deal with such a change in the petroleum cycle.

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