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Saudi Arabia – extending the value chain

Saudi Arabia – extending the value chain

Oct 23, 2016
8 min read
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Saudi Arabia is OPEC’s undisputed premium oil producer, with gargantuan reserves and enormous production levels.

In Q3 of 2016, Saudi Arabia averaged production levels of 10.7 million barrels per day (bpd), making it the world’s biggest producer of crude oil. When natural gas liquids (NGL’s) and condensates are also taken into account, Saudi Arabia’s total liquid production exceeds 12 million bpd.

Saudi Arabia posted near record oil production levels in June, July and August, according to OPEC’s monthly report, further illustrating its commitment to defend its market share despite floundering oil prices.

There has been much furore surrounding the possibility of a wide reaching production freeze agreement in the coming weeks. In principal, Saudi Arabia is in favour of the freeze, but with Saudi Arabia, Iraq and much of the OPEC cartel already producing at near record levels, analysts are sceptical about the actual effect of a production freeze and whether it will do enough to address the crippling market supply and demand imbalance.

But keeping itself in pole position in the global upstream oil market is just one of the Kingdom’s key focal points this year. Through state oil company Saudi Aramco, the Kingdom has a number of plans in force to keep it front and centre across the whole of the hydrocarbon value chain.

 

Creating a downstream dynasty

Saudi Aramco has been very vocal in its desire to become a world leader in the refining and petrochemical sectors. Particularly in the new era of sub-$50 per barrel oil, squeezing every last drop of value out of each barrel becomes a huge priority.

“By 2020, we intend to be the world-leading integrated energy and chemicals company, focused on maximising value creation across the hydrocarbon chain, facilitating the sustainable expansion of the kingdom’s economy and enabling a vibrant Saudi energy sector," Aramco’s CEO, Amin Nasser, told a press briefing in Dhahran earlier this year.

Increasing its refining and petrochemical output would allow Saudi Arabia to add considerable value to its hydrocarbon exports before they leave the country. While petrochemical and refined white product prices have taken a hit in recent years, they have not fallen as far as unrefined crude, meaning that healthy margins are still to be had for operators willing to invest in their downstream sector.

Aramco’s chief executive has confirmed that the country will look to double its refining capacity to well over 10 million barrels per day by the year 2020.

As well as a range of jet fuels, ultra-low sulphur diesels and Euro grade V and VI fuels, Aramco’s increased refining capacity will produce naphtha – a key feedstock used for the production of petrochemicals. Saudi Arabia is keen to boost the production of higher value, specialty chemicals in its petrochemical facilities, rather than continuing to rely on the larger scale commodity petrochemicals (ethylene, propylene and polypropylene) that it currently produces.

To do this, the country will have to make far greater use of mixed feed or liquid feed crackers, as opposed to the ethane based gas crackers that have historically been the mainstay of the regions petrochemical industry.

Liquid crackers, which use naphtha as a feedstock, produce higher yields of the aromatics and other valuable products.

Last month, Aramco’s epic joint venture with The Dow Chemical Company, Sadara, started up the first of its mixed feed crackers – the first in the region. The US$20 billion plant is the biggest petrochemical facility to be built in a single phase. Sadara’s mixed feed cracker will process 50,000 barrels per day of naphtha.

“The introduction of the specialty petrochemicals and chemicals will help support the drive to broaden the secondary and tertiary petrochemical manufacturing landscape in Saudi Arabia, thus making the Kingdom a leading cornerstone to meet the growing demand for specialty products locally and regionally,” said Sadara’s chief executive officer, Ziad al-Labban.

Of the 21 separate production units at Sadara, 14 will be manufacturing chemicals that have never before been produced in the GCC. The complex also comprises a manufacturing park, which will house manufacturing facilities for the products’ end users. In doing so, Sadara hopes to bring the manufacturing sector in-Kingdom, rather than exporting its raw materials abroad, thus adding another link in the Saudi hydrocarbon value chain. 

This practice has been used elsewhere in the kingdom, with the country’s Petro Rabigh complex also including an industrial park. It is a model that is being heralded as a real success and is being replicated elsewhere in the gulf – most notably at Oman’s LIWA Plastics Industries Complex, administered by ORPIC.

 

 

Growing the international brand 

While Saudi Aramco is the undisputed oil and gas heavyweight of the Middle East, the company also has a huge portfolio of international assets.

In the US, Aramco will assume full control of the Motiva refinery’s assets in April 2017, following the break-up of its joint venture with Shell. Aramco will control three key refineries under the Motiva brand, with a combined capacity of 1.1 million barrels per day.

Aramco has also emerged as the leading candidate to purchase the LyondellBasell Industries Houston refinery. The refinery has a processing capacity of 263,776 bpd and would add significant clout to Aramco’s US operations in the downstream sector.

Aramco also has significant assets in Asia and is looking to expand these in the coming years.

"The cabinet has approved to delegate a number of ministers to discuss with the Chinese side the following projects: a memorandum of understanding (MOU) to cooperate in the energy sector; an initial cooperation memorandum in the field of crude storage," a Saudi government press release said.

Asia will be a key battle ground as Saudi Arabia looks to defend its enormous market share of crude oil production against returning production from regional rival Iran.

Asia represents a huge opportunity for Saudi Arabia, not only as a market for its upstream oil and gas products, but also as a location that is ripe for downstream expansion.

Saudi Aramco is currently in talks with China National Petroleum Corporation (CNPC) over the rights to build a new refinery in China, according to the company’s chairman, Khalid al-Falih.

The 260,000 barrel per day Yunnan refinery project has been delayed a number of times, but Aramco senior staff hope that the deal will be concluded soon. The refinery is designed to process high-sulphur oil and it is believed that Aramco would supply the refinery with its Arab Medium or Heavy grade crude.

Indonesia is also a key market for Saudi Arabia to target. With the one-time heavyweight producer of South East Asia now re-entering the OPEC cartel, plenty of opportunities abound for closer collaboration between the two countries.

Saudi Aramco is expected to be involved in a refinery upgrade project in central Java. The Cilacap refinery project will boost refining capacity at Indonesia’s biggest refinery to 370,000 bpd (from the current 348,000 bpd).  The project is expected to cost in excess of $5.5 billion and will be completed in 2022.

Aramco was originally expected to take a 45 per cent stake in the project, with the remaining 55 per cent being held by Indonesia’s state oil company Pertamina. However, Aramco is believed to be in the process of downgrading its stake to 30 per cent, with Pertamina absorbing the excess.

 

Looking to the future

Saudi Arabia remains the region’s undisputed upstream oil and gas heavyweight, with production levels that dwarf even the combined output of its regional neighbours. While maintaining its dominance in the upstream oil and gas market, Saudi Aramco is also planning for the country’s future by increasing its international portfolio of assets and widening its reach across the full spectrum of the oil and gas value chain.  

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