Aramco directing its energies outside Saudi Arabia.

EARLIER this year, Saudi Arabia sent its first tanker of crude oil to a refinery in China's southern province of Fujian.

Though not particularly auspicious in terms of the global ebb and flow of crude, the cargo was hailed as a symbol of the increasingly important relationship between the two countries. Press releases were issued. Hands were shaken; photographs taken. "I would like to assure you that a stream of Saudi Arabian crude is now making its steady flow to Fujian province and that it will continue for many generations," declared Ibrahim al Buainain, director of Asia joint ventures for state-owned oil giant Saudi Aramco. Saudi Arabia overtook Angola to become the biggest oil supplier to China in 2008, accounting for a fifth of its supplies. China is now the third-largest buyer of Saudi crude after the US and Japan, says a report in The Gulf. Yet the Sino-Saudi relationship has become more than a pact between supplier and consumer. Bound from Ras Tanura, the largest offshore oil facility in Saudi Arabia, the 900,000 barrels of crude oil were transported in February to the Fujian Refining and Petrochemical Company, a $5 billion joint venture between Aramco, ExxonMobil and Sinopec. Over the next five years, Sinopec hopes to double Fujian's capacity to 480,000 barrels a day (bpd). Part of its motivation is to recoup losses. Like many refiners in the developing world, the state-owned group has been trammelled by successive years of high oil prices, its margins gnawed at one end by the soaring cost of crude and at the other by Chinese state subsidies. The Fujian plant is also essential to Saudi Arabia's refining plans, which will see it gradually diversifying its options over the next decade, taking stakes in foreign facilities and spreading its options closer to home. Of the new capacity planned in the Middle East, more than a third is due to be built in the kingdom. The jewels of the Saudi programme are two export refineries planned for the industrial cities of Jubail and Yanbu. With a combined capacity of 800,000 bpd, the projects will give Aramco a comfortable margin of new supply as demand recovers after the global recession. Located on the Gulf and Red Sea coasts respectively, they also give Saudi Arabia greater flexibility as an exporter. At face value, now does not appear to be an ideal time to be investing in refineries. As an industry with high investment costs and narrow profit margins, refining has always tended to be a case of feast and famine. Bouts of investment tend to be followed by fallow periods. Five years ago, for example, global refining capacity was so tight that the merest outage of refineries in the Gulf of Mexico was enough to send crude prices soaring. By 2004, with world economic growth pushing four per cent a year, refiners were enjoying all the benefits of a monopoly with a captive market. Margins for refining US crude rose to $11.50 a barrel, more than three times the levels seen at the beginning of the decade. Inevitably, this spurred energy companies to attempt to get a piece of the action. Oil companies drew up plans for some 250 projects worldwide, of which 72 were grassroots refineries and the remaining 178 were capacity expansions. In total, some 30 million bpd of additional refining capacity was planned by 2015. Inevitably, too, work on this glut of new capacity got under way just as the global economy slipped into recession. Cue a collective double-take. The last eight months have seen refining projects the world over skid to a halt, tenders cancelled and contracts revoked, as energy companies wait to see what the outcome of slower growth will be on their industry. One consequence of this inaction, according to the International Energy Agency, will be that refiners will "face particular difficulty meeting projected middle distillate demand." Where does this leave Saudi Arabia with its refinery plans? At first, it seemed Aramco was following the general trend, as a slew of projects appeared to come to a halt. Both Yanbu and Jubail projects were put on hold in November, while bidding on the Ras Tanura and Jizan refinery schemes was also pushed back. In retrospect, however, this move is revealed as a case of Aramco's canny commercialism rather than any attempt to scale down its refining programme. The months of delays and renegotiations has bought Aramco and its foreign partners savings of as much as 20 per cent on certain schemes. Cost estimates for the Yanbu refinery, being built with US oil firm ConocoPhillips, and the Jubail plant, being built with France's Total, each doubled to more than $12 billion as oil prices spiked last July. Aramco predicts that costs can be reduced to less than $10 billion on each scheme. The Jubail refinery is now expected to come on stream in 2013. The Yanbu refinery, however, will not begin operations until the following year, after ConocoPhilips and Aramco decided to retender the project. Aramco plans to invite contractors to bid in July for seven packages on the 400,000-bpd refinery. On June 30 Aramco and ConocoPhillips announced they are set to resume the bidding process, halted last year, for contracts to build the export-oriented refinery. "Market improvements have provided a good opportunity to reactivate the bidding process for the Yanbu export refinery project," Khalid al Buainain, senior vice president for refining and marketing at Saudi Aramco, said in a joint statement. Indeed, Yanbu has considerable strategic importance for Aramco, intended as it is to fill a hole left by the US and European refining industries. The refinery will most likely supply the US east coast market with high-quality gasoline while low-sulphur diesel will be exported to Europe and naphtha to East Asia. Increasingly stringent environmental laws, which have hampered the US and European refining industry in recent years, have provided a perfect commercial opportunity for Aramco. Besides Yanbu and Jubail, they are also the primary motivation behind a $1.3 billion upgrade at Ras Tanura. Geographical diversity is also a priority. Aramco's energies have been increasingly directed outside the kingdom in recent years, with more a third of its refining capacity now based in other countries. The company is already involved in four refining and marketing ventures outside the kingdom: Star Enterprise in the US; SangYong Oil Refining Company in South Korea; Petron Corporation in the Philippines; and Motor Oil (Hellas) in Greece. Aramco's primary target is Asia. The IEA forecasts that the Asia-Pacific region will be consuming some 2 million bpd of fuel oil in 2013, compared with 820,000 bpd last year. "At least $1 trillion needs to be spent on refinery upgrades by 2030," the energy watchdog predicts. China is the lynchpin of Aramco's strategy, and it has put considerable effort into building the strategic relationship. For the best part of a decade, the company has operated an exchange programme for students through its Beijing affiliate Saudi Petroleum. King Abdullah's first foreign trip, following his accession in 2005, was to China. And the commercial ties have grown along with the diplomatic bonds. Nearly a half of all China's oil and fuel now comes from abroad, and Saudi Arabia is determined to fill that gap to the best of its ability. So while a certain amount of bombast may have accompanied the oil tanker on its journey to Dalian port this February, the sentiments were entirely genuine.

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