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Gulf invests in major oil refinery upgrade programme

Gulf refinery upgrade programme Aramco
Aramco workers at Saudi Arabia's $21 billion Jazan refinery: it is one of a number of refineries Gulf countries are investing in
  • Upgrades part of diversification plans
  • Kuwait, Saudi, Oman and UAE involved
  • High oil prices helping to pay for it

Gulf states are expanding their oil refining capacity through a series of massive upgrades, at the same time as they drive towards net zero and seek to move away from petroleum and natural gas.

The apparent contradiction is, however, only apparent. 

From Az-Zour in Kuwait to Duqm in Oman, the refinery upgrades are central to plans to produce higher value-added products in-country. They are part of long-term diversification strategies, but also act as hedges against future hydrocarbon volatility.

While the expansions are likely to boost the Gulf’s position as a major global supplier of non-renewable resources, they are being balanced out by huge investments in the green economy.

“The Gulf is building out refinery capacity to integrate this with petrochemical and plastics production,” says Gabor Petroczi, director of oil and gas for Europe, Middle East and Africa at ratings agency Fitch.

“This is relatively less exposed to the energy transition. New refinery output will be offset by renewables, carbon credits and capture, hydrogen and biofuels.” 

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Refinery expansions have long lead times and require major capital commitments.

Bahrain’s $6 billion Bapco Modernisation Programme (BMP), for example, is approaching completion only now, six years after the site was first handed over to the project developers. Upon launch the BMP should boost Bahrain’s crude refining capacity by 42 percent, to 380,000 barrels per day (bpd). 

In Kuwait, the giant Az-Zour Refinery Project will reach output of 615,000 bpd by the end of this year, after a third crude distillation unit comes online. The expansion was first approved in 2012 and construction work started in 2017, with overall investment in the plant estimated at $27 billion.

Next door in Saudi Arabia, Aramco’s $21 billion Jazan refinery started producing at the end of 2021, providing 400,000 bpd of capacity. Elsewhere in the kingdom, clean fuels projects are under way in Ras Tanura and Riyadh. 

Saudi Arabia has also built out abroad, having taken a 30 percent stake in the $10 billion Huajin Aramco Petrochemical Company (Hapco), an integrated refinery and petrochemical complex
in northern China.

Closer to home, Adnoc’s $3.5 billion Crude Flexibility Project will add 420,000 bpd of refinery capacity, capable of handling heavier and more sour crude grades from offshore Abu Dhabi and around the world.

Oman’s $7 billion Duqm Refinery and Petrochemical Complex should add 230,000 bpd of extra capacity. Under the OQ8 joint venture between OQ and Kuwait Petroleum International, 65 percent of the feedstock is due to come from Kuwait. The refinery should begin operations at the end of this year.

Oman News Agency
Oman’s Duqm refinery has a capacity of 230,000 barrels per day

These elements of the Gulf refinery upgrade programme add up to a lot of extra capacity at a time when Opec+ states are cutting output and worries are growing over the Chinese economy’s demand.

Yet, given their time lags and the capex commitments, refinery projects have to take a decades-long outlook. Short-term fluctuations in demand and pricing are lesser considerations.

Diversification

“This is part of a longstanding industrial diversification strategy,” Rory Fyfe, managing director of consultancy Mena Advisors, tells AGBI

He says all the Gulf states have been pursuing diversification strategies for many years, with integration between the crude refineries and associated petrochemical plants a part of the plans. “This is particularly important for states like Bahrain that have limited crude,” Fyfe adds. “The modernisation programme has significantly boosted revenue.”

More sophisticated petrochemical products can provide for local industrial and manufacturing development. This creates jobs and hedges against oil and gas volatility. While demand for petroleum may be in long-term decline, demand for specialised fuels that are not easily replaced
by renewables or hydrogen should continue to rise, along with demand for petrochemical products such as plastics and fertilisers. This helps to “justify the capex,” Fyfe says.

Currently those high costs can be borne easily, given “a fairly large windfall for all these operators in recent times,” says Petroczi. “There are unlikely to be any financial constraints.” 

With the Gulf investing heavily in the green economy, the emissions created by extra refinery capacity should balance out, at least locally.

The UAE’s 5 gigawatt Mohammed bin Rashid Al Maktoum solar plant, Adnoc’s 5 million tonne annual carbon capture target for 2030 and Saudi Arabia’s 1.2 million tonne green ammonia project at Neom all aim to help bring the net emissions back into balance. 

A balancing act will play out in the future between climate targets and all these refineries. For now, their expansion is set to continue.

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