The two major refining deals that Saudi Aramco has signed with foreign oil companies in the last week are highly significant both for the boost they will give to the Kingdom in the value-added downstream international markets and also for the fresh investment opportunities that will locally open. The deals to build refineries at Yanbu (with ConocoPhillips) and Jubail (with French company Total) involve some $6 billion of investment. Both refineries are set to begin in 2012. Raw material will be the Kingdom’s sour heavy crude, generally significantly discounted because of extra processing costs. Aramco is hoping to supply each new refinery with 400,000 barrels of heavy crude daily.
The present chronic world shortage in refining capacity has added to the recent oil price volatility, compounding the effects of high demand, uncertainty over crude supplies and the pernicious effects of speculators in the forward markets. Though the six-year lead time for these two new refineries may not have an immediate impact on the current jittery oil markets, the knowledge that two substantial facilities as these are in the process of constructing will probably have a psychological effect on oil traders. This will be enhanced by the fact that the raw material will be “difficult” heavy crude with a high sulfuric content.
Twenty years ago, major oil companies majors looked suspiciously at efforts by producing countries to claw back some of the value of their output by refining it themselves. They were happy enough with small refineries that supplied local demand but generally deplored competition with their international network of refineries. How the world has changed. Not only have most of the major companies spent the last decade shedding out-of-date, “rusting” refining capacity to third parties but they have failed to build sufficient replacement capacity, perhaps this is due the market not anticipating the degree to which demand would soar from first China and now India.
The fact that two oil giants like ConocoPhillips and Total have formed joint ventures to refine heavily in Saudi is not only an indication of the changing circumstances of the downstream market but is also a testament to the role the Kingdom has long played in injecting extra production whenever it was necessary to try and stabilize the market.
It must be expected that the decision of two international oil giants to commit several billions to the economic growth of the Kingdom will boost the confidence of a wide range of international investors especially as Saudi Arabia embarks upon its breath-taking new industrialization, education and welfare plans.
If, as expected, Saudi investors are able to take up minority stakes in the two joint ventures, it must be certain that the shares will become blue chip stocks on the Saudi bourse. These two new refineries are the latest evidence of the Kingdom’s integration into the world economy. However they are assessed, they are extremely exciting.
