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Jadwa Investment releases outlook for Saudi crude oil refining sector.

Saudi Arabia will see 1.2 million barrels per day (mbpd) of new refining capacity come online by 2020, according to the latest report released by Jadwa Investment.

"This includes the Satorp refinery, which is already up and running, and the Yasref refinery, which will start up in Q4 2014. This major investment in downstream sector by the Kingdom coincides with a huge growth in modern refineries in countries such as India and China, which will mean that these new export-orientated Saudi refineries will compete in a very tight international market.

"The global refining industry has changed in the last decade with a shift in demand growth away from OECD countries to non-OECD ones. The supply of highly complex and modern refineries, as a way of decreasing dependency on imports, has also increased. India and China have seen a huge growth of refining capacity which has contributed to creating a global surplus, all of which has led to decreasing refining margins and utilization rates. Older and less competitive refineries have therefore been forced to close, with Western Europe being one of the worst affected regions. With the help of shale oil, the US has transformed itself from being the world's largest importer of gasoline to a major exporter of diesel, further adding to the supply of high quality refined products available in the global market.

"Regardless of the apparent over supply of global refining capacity, a plethora of refining projects will add around 7 mbpd of highly complex capacity between now and 2020. This also includes new refineries from Saudi Arabia, which will make it a net exporter of middle distillates (incl. diesel) by the end of the decade, joined by Russia, China, US and India.

"Investment in the refining sector in Saudi Arabia has been a long term policy goal for the government as it was, and still is, seen as sure way of achieving diversified economic growth and employment for the Saudi population. At the end of 2013 Saudi refining capacity totaled 2.5 mbpd, the largest capacity in the GCC region, with Kuwait a distance second at 0.94 mbpd. Since the majority of the Saudi refinery capacity was built before 1990, such assets are older and less advanced and therefore produce a large proportion of lower value heavy distillates (such as fuel oil) comparative to other regions.

"Saudi refined product consumption in 2002 averaged 1.2 mbpd, but by 2013 this had almost doubled to an average of 2.2 mbpd. The main factors behind demand growth have been a rapidly rising population, economic growth and improving living standards. The combination of these factors, in turn, have contributed to larger consumption via increasing electricity consumption, higher usage of energy in industry and increased car ownership. Another important factor contributing to rising consumption is the existence of subsidies in the supply of transportation fuel and for electricity generation.

"Saudi Arabia has one of the lowest priced transportation fuel in the world, with diesel at 6.7 US cents per liter and gasoline at 16 US cents per liter. Furthermore, refined products are also supplied at similar discounted rates to the Saudi Electric Company (SEC), which uses around 200 thousand barrel per day (tbpd) of diesel and 40 tbpd of fuel oil for electricity generation.

"Due to the combination of rapid expansion in demand and Saudi refineries higher proportion of heavy distillate output, a deficit in light and middle distillate products has developed. In particular, the rise in the consumption of diesel and gasoline has translated to a steadily rising level of imports of both these products in the last few years.

"The three new and highly complex refineries totaling 1.2 mbpd will change Saudi Arabia's refined product balance by 2020 , but the degree of this change is dependent on the growth in domestic product demand. As Saudi Arabia's economy maintains its expansionary phase between now and 2020, on the path to developing into a more diversified advanced economy, we anticipate that growth in refined product demand is likely to grow at an even faster rate than the previous decade.

"As a result, at the end of 2020, Saudi Arabia will remain a net importer of light distillates. The three new refineries will add a total of 260 tbpd of light distillate capacity from 2014-2020, but demand will grow by a total of 330 tbpd during the same period. With no imminent reform in subsides on transport fuel, it is no surprise that gasoline will be the driver of growth in light distillates consumption. Although some surplus of light distillates will develop during the period in question, demand will end up exceeding supply by 2020, with the effect of additional refinery capacity only reducing the level of imports rather than achieving self-sufficiency.

"The slower pace of demand growth in middle distillates, compared to light distillates, and a large proportion of refining capacity being configured towards this segment will result in a surplus of middle distillates equal to 470 tbpd by 2020. Around 90 percent of this surplus will be made up of high quality diesel, meeting the Euro 5 criteria for ULSD.

"Thus Saudi Arabia will be an exporter of middle distillates by 2020, but the lack of a viable medium term alternative in the generation of electricity ,due to limited natural gas reserves and accompanying infrastructure, will ensure the continued use of diesel in meeting domestic electricity demand, thereby eating into potential exports.

"Given the high levels of complexity of all three refineries, the growth in heavy distillates output will be minimal. But, as with diesel, the continued use of fuel oil in the power sector will result in Saudi Arabia importing small amounts of heavy distillates by 2020, reversing its position as an exporter of this segment in 2014.

"Saudi Arabia's refineries face competition with a number of different global competitors, all of which will be attempting to secure market for their diesel too. Historically, Saudi Arabia has exported all types of products, including diesel, to the Asia Pacific region, but the ability to carry on doing this by 2020 will be limited. High quality refinery additions, led by China, will result in the region being long on diesel. North America, another traditional energy trading partner, will have no need for diesel imports, whilst refinery upgrades and additions around the Middle East will limit the extent to which Saudi refineries can sell locally. Western Europe, South America and Africa are the only regions which are forecast to have diesel deficits come 2020. Europe's tighter emission standards and stricter specifications around usage of diesel make it a suitable market for the expected ULSD output from Saudi refineries.

"Saudi refineries will not be alone in vying for a Western European market share, as all the major export refining hubs with a diesel bias also have plans to ship to the region. The proximity of Russia's refiners to European markets means a large majority of its projected ULSD exports will be sent there. Added to this will be exports from US refiners, who will continue to benefit from ample supply of crude feedstock as a result of shale oil, with diesel exports totaling around 1 mbpd, most of which will end up in Western Europe.

"One area where Saudi refineries will have some competitive advantage is in crude feedstock. The new refineries will be configured to process heavy sour crudes in order to produce middle and light distillates. The supply of these crudes is set to come from the last of the 'large' oil fields in Saudi Arabia, the Manifa field. As the field reaches a plateau of 0.9 mbpd by the end of 2014, it will feed all three refinery projects in Jubail, Yanbu and Jazan.

"Nevertheless, the changes currently taking place in global refining market, with large scale highly complex capacity coming online will mean that, in the longer term, Saudi refiners will have to look beyond traditional markets such are Europe and Asia Pacific and actively orientate themselves to seeking out 'new frontiers' for its refined products, with the obvious destinations being Africa and to lesser extent, due to the distance, South America."

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Publication:CPI Financial
Geographic Code:9CHIN
Date:Nov 18, 2014
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