SAUDI ARABIA - Part 4 - The Overseas Oil Refining & Market Share Investments.

Saudi Aramco has partnerships in overseas refining and retail ventures with a total capacity of almost 2.2m b/d, up from 1.678m b/d in 2003. Of these, refining capacities of 923,000 b/d are in the US and Greece. The other 1.27m b/d are in South Korea, the Philippines, China and Japan, up from 755,000 b/d in October 2003 - and the Asian capacity will rise steadily in the coming years.

Private Saudi businessmen have built up an overseas presence from the upstream end to refining and distribution. They have links to key members of the royal family, and are widening their operations. Corral Petroleum of the Amoudi family owns Preem Petroleum of Sweden which has moved to Morocco and other markets. Nimir Petroleum of the Bin Mahfouz family has ventures in Yemen and in distant countries such as Sakhalin in Russia's Far East and Venezuela. Delta International, a smaller but agile company, is involved in Azerbaijan and elsewhere (see Gas Market Trends).

SABIC in 2002 bought the Dutch firm DSM Petrochemicals. This raised its ethylene output by 1.2m tons to 6.9m t/y and gave it a key to the EU. Now this venture is called SABIC Euro Petrochemicals. SABIC is negotiating to acquire other such assets oversees. At home it is raising its petrochemicals capacity from 43m t/y to 64m t/y by 2008 (see DT 15 - see Saudi refining capacity in DT 14).

Hamad al-Sayari, governor of the Saudi Arabian Monetary Agency (SAMA), on Oct. 11 told Reuters high oil prices were probably impacting global economic growth and consumer countries should do more to encourage investment in the industry. He said: "The real concern is the impact on developing countries". WTI on Aug. 31 hit a record of $70.85/b and has since traded over $60/b for several weeks, with forecasts that higher energy costs will cut growth across the world. Four months ago, Sayari said, oil prices had not made a visible impact on the global economy. US Treasury Secretary John Snow, who was to attend a meeting of G-20 finance ministers and central bankers including Sayari in Beijing last week, on Oct. 11 said prices were "way too high".

Saudi Arabia, the world's biggest oil exporter, has offered to pump extra crude to calm the oil markets. But it has had no response from customers as most production above the current output of just over 10m b/d is heavy/sour crude.

Sayari repeated Saudi Arabia's case that a shortage of refining capacity, not crude production, was driving prices up and blamed what he said was unfair taxation of the oil industry by many industrialised nations, adding: "The negative attitude of some of the countries towards oil creates uncertainty and discourages investment, which leads to the shortage in the infrastructure... The policies have a lot to do with discouraging investment and that should be addressed - to encourage investment in the whole process". He added: "Whenever the price goes up then the blame is put on the oil companies and countries. And when the price goes down they jack up their taxes".

Singling out Britain, whose Chancellor of the Exchequer Gordon Brown has repeatedly urged OPEC to raise output to bring prices down, Sayari said even at $60/b crude oil only accounted for 20% of the cost of a litre of British gasoline. "The rest is taxes and refining", he said. He said it was not in Saudi Arabia's interest for oil prices to be too high. "It would have a negative impact on demand. And of course it would have a positive impact on alternatives which would affect

the market", he said.

November WTI on Oct. 12 rose $0.77 to $64.30/b, after gaining $1.73 on Oct. 11. November Brent rose $0.42 to $60.50/b. Sentiment remained positive on prices after the IEA on Oct. 11 reduced its forecast for growth of world oil demand this year by a lower-than-expected 90,000 b/d to 1.26m b/d. This was backed up by news that, according to government data, crude oil imports into China rose 4.8% year-on-year in September, after falling in August, despite the high cost of oil. The upward trend went against the idea of demand destruction caused by the high oil prices, as China's economy continued to grow. Demand destruction gained currency this month as oil prices plunged by more than 11%. For those who were bearish on demand as the northern hemisphere winter approached, the IEA report gave them more confidence about demand. The IEA said world oil demand in 2006 will grow by 1.75m b/d owing to a rebound from "the largely temporary impact of Katrina and Rita and a recovery in Chinese demand".

Oil Minister Ali al-Naimi on April 6 said American investors had refused a Saudi offer to have two refineries built in the US, each with a 500,000 b/d capacity, at a meeting in Dallas, Texas, a year earlier. He said US investors had rejected the proposal because they would have to pay $100m for paperwork and other expenses to get a permit for the plants. No refinery has been built in the US since 1976.

Saudi Aramco's International Division, created in 1991, is in charge of the company's overseas investments. It handles all matters from crude oil sales to transport and storage, monitoring market developments and new investment opportunities, pursuing negotiations with potential partners and acquiring logistics in key locations. In August 2001, Saudi Aramco launched a contracting service on its internet website.

An electronic bulletin board lists contracts for which solicitation of interest and prequalification is open to companies registered as contractors with Saudi Aramco. Companies can download and submit its prequalification questionnaires. The division has been monitoring consolidation among the majors in the petroleum industry, which began in 1996 with a European downstream merger of BP and Mobil. Then came the US downstream merger agreement in 1997 between Shell and Texaco for one venture called Equilon Enterprises and between Shell and Star Enterprise (50-50 Texaco and Saudi Aramco) for another venture called Motiva Enterprises. The trend accelerated in 1998 when BP took over Amoco and then Arco. Later Exxon acquired Mobil. For Chevron to take over Texaco in October 2001, it was required by the Federal Trade Commission (FTC) to shed some of Texaco's assets in the US. Saudi Aramco bought the latter's 17.2 stake in Motiva, thus raising its equity in this to 50%. Shell bought Texaco's remaining equity in Motiva and raised its stake in it from 32.8% to 50%. The acquisitions were completed in February 2002.