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The Middle East’s downstream scene

Published by , Senior Editor
Hydrocarbon Engineering,


The Middle East is a major hydrocarbon-producing region. Home to six OPEC member nations, it contributes significant volumes to world oil and gas supply. It is perhaps less well known as a major refining and petrochemical hub.

There are currently 53 operating refineries in the Middle East, with a total capacity of just over 10 million bpd. Iraq has the highest number of sites, at 14, however Saudi Arabia holds the most capacity, at 3.3 million bpd. Bahrain and Jordan only have one refining site each. National oil companies dominate the ownership matrix, with a few sites incorporating International Oil Co. joint venture (JV) partners. A handful of sites are owned and operated by trading organisations, but those are the minority.

The first oil refinery was built in the Middle East in 1912. Abadan refinery in Iran began life as a 2500 bpd coastal asset, and was expanded during the First World War to provide fuel for warships. Fast forward to present day, and the Abadan refinery has a capacity of almost 400 000 bpd. This expansion trend holds true for the wider region; the Middle East has added 3 million bpd of refining capacity over the past decade, with another 2 million bpd planned over the coming decade. The region’s asset base is rapidly evolving.


Figure 1. Global integrated NCMs by region, Refinery Evaluation Model (REM), 2021, US$/bbl (source: Wood Mackenzie)

Evolution of the asset base

Historically, Middle Eastern refineries have been hindered by lower-than-average complexity, and high yields of low-value oil products. This reflects the challenges of exporting to Asia, where there was little uniformity of product quality specifications. However, this has changed over recent years, with multiple brownfield upgrades and a handful of highly-complex greenfield assets coming online.

The following countries are pushing ahead with upgrade projects and greenfield constructions:

Saudi Arabia

Saudi Arabia has invested in three 400 000 bpd, multi-billion dollar greenfield refineries over the last 10 years; Jazan refinery, wholly owned by Saudi Aramco, is ramping up operations and follows on from Jubail (SATORP), a JV with France’s TotalEnergies, and Yanbu (YASREF), a JV with Sinopec.

Brownfield investment also continues at pace in the Kingdom, with clean fuels projects underway at Ras Tanura and Riyadh refineries. Both projects aim to focus on improving fuel quality, as the country moves towards Euro-V specifications.

Discussions are still underway on plans for a COTC facility at Yanbu on the Red Sea. The project would be part of a wider industrial complex, and would utilise an economically-viable, innovative configuration to convert crude oil to chemicals. Specific details, including timeline, are yet to be confirmed.

Kuwait

During 2020, KNPC also completed its long-awaited clean fuels project at the Mina Abdullah and Mina Al-Ahmadi refineries. The multi-billion dollar project further integrates both sites, and enhances the quality of refined products produced across both sites.

Kuwait recently completed a greenfield project too. The Al-Zour refinery, with a capacity of 615 000 bpd, produces a large volume of low-sulfur fuel oil to be consumed by the adjacent Al-Zour South power plant to help satisfy domestic power demand. The site is currently ramping up operations and will eventually be upgraded to better align domestic power demand fuel oil needs, and the recently-completed LNG import terminal volumes.

Oman

Oman is completing a greenfield refinery. Duqm, a JV between Oman Oil Co. and Kuwait Petroleum International, will have a capacity of 230 000 bpd and process a mix of Omani and Kuwaiti barrels. The project, OQ8, will be located on the Indian Ocean, approximately 600 km south of Muscat, and is expected to ramp up during 1H23.

Iran

Iran’s most notable downstream project in recent years has been the Persian Gulf Star condensate refinery. The refinery processes domestic South Pars condensate, and is configured to produce a high yield of gasoline. Initially, a significant volume was purposed for exports, however sanctions hindered the export of any material volumes. Most of the gasoline, meeting Euro-IV specifications, stays in-country to meet domestic demand.

The other main project underway in Iran is Abadan’s construction of a new refinery train. The overall capacity of the site is not expected to change, however the crude unit and vacuum column are to be replaced alongside the construction of several new hydrotreating units. Estimated completion is 1H23.

Iraq

Iraq has a brace of greenfield refineries under construction. Karbala, expected onstream 2023, is being led by South Korea’s Hyundai Engineering and Construction company. The second project, Dhi Qar, with a capacity of 100 000 bpd, is expected onstream during 2029, and will replace the Nassiriyah greenfield refinery project.

Other projects

Other notable projects in the region include BAPCO’s modernisation and expansion project, and ADNOC’s Crude Flexibility Project (CFP) in Ruwais, Abu Dhabi, UAE. BAPCO’s endeavour will see Sitra refinery expanded to 360 000 bpd, and include a number of hydrotreating and upgrading units. ADNOC’s CFP project will allow Ruwais to process increasing volumes of medium, sour crude. Murban volumes are expected to be freed up for export, and replaced with Upper Zakum barrels.

Recent large-scale greenfield projects have been developed as a catalyst for wider economic development in industrial clusters; YASREF and Jazan in Saudi Arabia are good examples of this. This trend has evolved over the past decade as NOCs have tried to minimise value leak to third-party organisations. The preference now is to handle all parts of the value chain in-house; upstream production, piped to domestic refineries, through to export options, via distribution and trading, are now all handled under one organisation.


Figure 2. Middle East integrated NCMs, margin evolution 2021 – 2050, REM, excluding future investment (source: Wood Mackenzie)

Recent margin strength – how long does it last?

The refining industry suffered its worst year ever during 2020 as COVID-19 lockdowns eroded refined product demand and refinery utilisation rates subsequently fell. Almost 3 million bpd of refinery capacity was rationalised because of the pandemic. 2021 saw net cash margins improve as lockdowns eased and demand recovered. The Middle East weighted average 2020 Net Cash Margin (NCM) settled at -US$3.40/bbl and improved by US$1.50/bbl to settle at -US$1.90/bbl during 2021. Gasoline and middle distillate cracks provided most of the support. Petrochemicals spreads, particularly the polyolefins value chains, supported those sites with petrochemical integration during 2021.

Whilst this is an improvement year-on-year, the majority of Middle East assets struggle to make positive NCMs to due high yields of low-value products such as fuel oil. On a global basis, the majority of Middle East refineries sit firmly in the third and fourth quartile. The best performing sites are in North America and China, with the Middle East and, to a lesser extent, the FSU being home to the worst performers.

2022 margins have improved again primarily due to further increases in demand, lower China exports, the loss of refined product supply from Russia, and the threat of further loss during 1Q22.

However, 2023 will see margins remain at similar levels longer-term, as new capacity comes online. As the energy transition takes hold, margins will fall back to historical levels, and the downward trend will continue through 2030 and 2040 as global oil demand falls.

By 2050, 80% of assets in the Middle East will have negative NCMs. The sustainability of these sites will undoubtedly be called into question; Middle East NOCs will have to strike a balance between satisfying domestic refined product demand vs the cost of subsidising the refining operations of these cash negative sites. ‘Doing nothing’ could become a costly drain on government resources.


Figure 3. Europe NCM uplift vs chemicals wt%, REM, 2021 (source: Wood Mackenzie)

Do assets adapt to, or lag behind, the energy transition?

The global pandemic gave refiners a glimpse of the upcoming energy transition, as COVID-19 hit transport fuel demand hard. Even in mid-2022, in post pandemic recovery, it has erased three years of global demand growth. Russia’s invasion of Ukraine, along with tight distillate markets, have provided a near-term boost to refining margins. However, the longer-term outlook for refining is that margins are expected to fall, and overcapacity is expected to return to the asset-base on a structural basis, as oil demand falls as a result of the energy transition.

Refining assets around the world will have to adapt to the transition. Margin competitiveness is only part of the puzzle. The question is: what else can be done to improve robustness and to become a ‘refinery of the future’? Shell’s Rhineland refinery in Germany is already well-progressed on this journey, as an example.

Refining sites need to be both commercially and environmentally-competitive in order to adapt to the energy transition. Rhineland has a lower-than-average emissions intensity, but only achieves a negative NCM on a refinery-only basis. Petrochemical integration is key to Rhineland achieving a positive NCM.

The same trend can be observed across the European asset base: as petrochemical yield increases, NCM uplift, integrated margin (minus standalone refinery margin), also increases.

Beyond petrochemical integration, Rhineland is also investing in a handful of other ways to adapt; the refinery is rationalising capacity, investing in green hydrogen, and will start producing bio-sustainable aviation fuel (SAF).

These projects address the key question: how do you satisfy growing petrochemical demand, whilst managing declining transport fuel demand, and also reduce overall carbon footprint? The reconfiguration will allow existing equipment and infrastructure to be repurposed for applications that support the broader robustness of the site. It is no longer sufficient to benchmark assets on a purely economic basis – asset ‘robustness’ must extend beyond EBTIDA and be more holistic around how refining, petrochemical and ‘green’ technologies interact and succeed together.

The Middle East asset base does not currently face the same legislative pressures, but they are not immune to the broader challenges of the downstream industry. Ageing, standalone refining sites will feel the most pressure, and will very quickly be left behind if they do not adapt to the upcoming energy transition in some way.


Written by Johnny Stewart, Principal Analyst, Refining and Oil Products, Wood Mackenzie, UAE.

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/17102022/the-middle-easts-downstream-scene/

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