Gulf states to refine their oil exports

Gulf states to refine their oil exports
4 min read
04 February, 2015
Analysis: As global oil prices fall, more GCC countries are attempting to boost revenues by refining their own oil.
Saudi Aramco and Royal Dutch Shell are partners in three US refineries [Getty]
As the Bahraini capital Manama hosts a conference on oil refining and petrochemicals this week, Gulf Cooperation Council (GCC) states are focusing on strengthening their oil refining capacity.

GCC countries are looking to expand their refining and petrochemical operations - at a time of budgetary constraints and falling oil prices - to increase revenues by adding value to its oil exports instead of selling oil in its crude form.

Despite the Gulf states' high levels of oil production, they still heavily rely on imported fuel due to a lack of local refining capacities.

The large multinational oil companies enhance their profit margins by refining crude oil when crude prices are low, so the GCC countries have an opportunity to expand in the refining and fuel market - especially given the GCC's location near emerging markets in Africa, India and Pakistan. 

One barrel of crude oil produces approximately 42 gallons of various grades of fuel - including 19 gallons of gasoline, 12 gallons of diesel, and four gallons of light aircraft fuel - after it is processed, according to the US Energy Information Administration (EIA).

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If we assume the price of crude as $50 per barrel and the current price of fuel in America as $2.20 per gallon, then the refineries that bought the barrel of crude for $50 will sell it as processed fuels for more than $90. However, other production costs need to be taken into account.

It is noticeable that, among the largest 22 energy companies listed on the Dow Jones index, those that avoided losses were those that have refining terminals in the United States and in the main centres of oil consumption around the world.

When crude prices fall, the constant profits of refineries and fuel distribution centres become more important, which lessen the losses of selling crude.

Saudi Arabia and the rest of the GCC are increasing refining capacity in accordance with a plan they put in place years ago.

While crude oil prices fluctuate in response to uncontrollable global factors, GCC countries cannot continue to depend on crude as their main source of revenue.

However, GCC countries have suffered from the fall in crude prices four times. The first was when oil prices plummeted to less than $10 a barrel between 1985 and 1986 - which lasted for four years until prices improved in 1990.

The second crisis was after the dot com bubble burst in 1999, and the third was after the international financial crisis in 2007. The GCC countries are currently facing their fourth oil crisis.

Saudi Arabia and the rest of the GCC are increasing their refining capacity in accordance with a plan they put in place years ago. However, those plans were not implemented very quickly.

Western analysts say the refining industry in the GCC is now being expanded at a faster pace, and that GCC countries can achieve significant profits if they regulate local fuel consumption, removing some of the large subsidies they pay to subsidise domestic fuel consumption.

Dave Witte, the senior vice-president at HIS, an energy information consultancy, said that investments in refining and related industries in GCC countries would exceed $80 billion by 2020.

This means that Saudi Arabia and the rest of the GCC countries will start selling refined oil products during the next decade instead of crude.

Joint refineries

Saudi Aramco, the Saudi state oil company, has partnered with transnational corporations to build refineries in oil markets including the US, China, Europe and Japan, as part of a plan to increase oil revenues. The project could help ensure a stable market for Saudi oil, additionally offering stable profit margins at times of low oil prices.

Investments in refining and related industries in the GCC countries will exceed $80 billion by 2020.
- David Witte

Saudi Aramco has also partnered with Royal Dutch Shell in a joint refining venture, and formed Motiva Enterprises, which owns and operates three refineries on the US gulf coast.

The venture markets its fuel products through 7700 Shell branded service stations across the United States, which allows Riyadh to retain an important market for its oil - despite the fondness of US politicians to talk about their intentions to reduce their dependence on Arab oil.

There are also joint refinery building projects between Kuwait Petroleum Corporation, Saudi Aramco, China, Qatar Petroleum International, Rosneft, and the Venezuelan BDTSI company, which will lead to an increase in exports and a decrease in oil imports in GCC countries.

Furthermore, the Kuwait Petroleum Corporation, Petrovietnam and the Japanese oil company Idemitsu Kosan have reportedly agreed to build an oil refinery and petrochemical complex in the north of Vietnam at a cost of $9 billion, with production expected to start in 2017.

Western sources also indicate the existence of new joint refinery projects between Arab countries and India, Indonesia and China. These projects will reduce GCC countries' fuel imports and increase their exports of processed oil products.

This is an edited translation from our Arabic edition.