Indian refiners in a crude spot

West Asia today resembles a giant construction yard. Sprawling multi-billion dollar refineries and petrochemical complexes are taking shape in the Kingdom of Saudi Arabia (KSA), Qatar, United Arab Emirates (UAE) and Kuwait.

These countries, which are part of the Organisation of Petroleum Exporting Countries (OPEC) cartel, are no longer content with playing the role of the world crude exporter.

Rising population in their own countries and high per capita income has resulted in increasing domestic consumption of fuels for transportation and power generation. This move may affect other Asian countries, including India, who refine the crude to diesel or other fuels and ship them back to the West Asian countries.

REFINING CAPACITY

To understand how influential West Asia is, particularly KSA in the crude oil export industry, it helps to look at the OPEC’s oil reserves statistics. Crude oil reserves in West Asia amount to 66 per cent of the global OPEC reserves. The list of OPEC countries includes Venezuela and some countries in North Africa, as well.

Of the West Asian countries, the kingpin producer, KSA, was the world’s largest producer and exporter of total petroleum liquids in 2012, the world’s largest holder of crude oil reserves, and the world’s second largest crude oil producer behind Russia. The Kingdom produced 9.3 million bpd of crude in 2012, out of which 7.2 million bpd was exported.

However, KSA, according to the latest traders’ statistics, needs to import up to 8.9 million barrels of diesel in June, up from an estimated 6.7 to 7.5 million barrels in May; most of these imports would come from India and Singapore.

The need to import diesel is on account of the gaping hole in the Kingdom’s refining capacity. The current refining capacity stands at 2.1 million bpd and this has meant that the country, despite having some of the largest oil fields in the world, is dependent on Asian refiners for its fuel.

JOINT VENTURES

But all that is set to change in a few years. Mega refining complexes are being built today to absorb the crude, and fuel the rising energy-hungry West Asian population.

The first of these gigantic refineries will come online later this year.

A 400,000 bpd refinery that Saudi Aramco is building in collaboration with the French oil major, Total, will be one of the world’s most sophisticated refineries and will supply clean (ultra-low sulphur) diesel to KSA.

The other partner of this JV, Total, will export the diesel to Europe.

So, KSA from being an importer of about 85,000 bpd of diesel from India, will become a supplier and possibly, even a competitor in the high-premium European turf.

Three more such behemoth complexes are in the process of construction in the Gulf region. There is the Ruwais refinery in the UAE, which will come online by 2015; and the Jazan refinery and Yasref refinery, both being constructed in KSA are looking towards a 2014/15 start-up.

All of these new refining complexes are highly specialised, largely because of the joint-venture model under which these complexes operate.

With the partners to the local oil producers being international conglomerates, like Total or Dow, availability of the most recent technology in these refineries is almost a given.

CUTTING-EDGE TECH

The vast oil wealth that the local oil producer sits on obviously means that cost is not necessarily a hindrance to the implementation of the latest ‘cracking’ technology.

The automation technology that these refineries are going to employ will be the world’s most advanced, say experts in global companies like ABB and Honeywell.

One of the technology players based in Dubai once remarked, “It is a cultural thing, as much as they like to drive the most expensive car, they like to have the most advanced refinery – there is a certain pride attached to it.”

Bernadette Spinoy, the senior vice-president of Total when asked about the level of sophistication at the Satorp refinery said, “Let me put it this way, Satorp is a dream; it is everything a refiner could have imagined.”

The West Asian crude oil producers have now come to realise that oil is far too precious to be exported.

The local affluent population and the lure of the European market has effectively pushed these countries into creating value-added products like ultra-clean diesel, gasoline; the braver ones are moving down the value chain, producing paraxylene, ethylene glycol or even butanol.

These petrochemicals are the building blocks for the plastic, polyester and coatings industries. These petrochem products will again eat into the Chinese paraxylene production.

Today India is the world’s fourth largest crude oil consumer importing 3.6 million bpd, and one of West Asia’s best customers.

INDIA’S RESPONSE

But the increasing refining capacity has already begun ringing alarm bells in India, where reports suggest the state-owned refineries are moving to enter into new term contracts with national oil companies in Colombia, Venezuela and Brazil.

It will be interesting to now understand the terms of these new contracts and to find out if there are ‘any strings attached’.

But until these contracts are finalised, Indian refiners will still be looking to KSA for crude cushion in times of need. This may also change the dynamics of the relationship between India and West Asian countries. For example, India may cosy up more to Iraq now, as the country’s crude production is increasing.

Worryingly, a recent Standard Chartered Report says India’s relative lack of government funds sets it apart from China. Insufficient refinery capacity to meet demand and power shortages continues to plague the country.

Added to this dynamic are the price sensitivity of the consuming entities, scarce capital and high funding costs, and a yawning infrastructure deficit – infrastructure grew by only 6.3 per cent per annum from FY03-FY08 (year ending 31 March), while GDP averaged 8.7 per cent.

Well if we add to these woes, the shortage of crude contracts, the picture is not very rosy; and with China’s refining growing exponentially, India needs to play catch-up, sooner rather than later.

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