WEEKEND EDITION

Saudi Arabia plans royal treatment for heavy crude

Kingdom to raise refining output, but plans may do little to ease high prices

By Moming Zhou, MarketWatch

Last update: 6:38 p.m. EDT June 6, 2008

SAN FRANCISCO (MarketWatch) — Dense, dirty and less profitable, a type of crude oil long marginalized by the global petroleum industry is attracting a wave of new refining investment as the world’s supplies of premium crude look set to decline.

Saudi Arabia, through its state-owned oil company Saudi Aramco, is planning to expand its refinery capacity by nearly 80% in five years, in part by signing deals with foreign oil majors including ConocoPhillips (COP:Last: 91.840.000.00%
1:01pm 07/03/
Delayed quote data

Much of that new capacity will be aimed at turning the kingdom’s reserves of heavy crude oil, which is less desirable and is sold at discount to premium light crude, into gasoline and other petroleum products for shipment to Europe and Asia.

“Indeed we are building more refineries that will refine Saudi crude; much of this will be heavy sour crude,” said a public relations specialist at Saudi Aramco, the world’s largest oil producer. “We can say that we will continue to satisfy both domestic and world demand.”

The kingdom’s plans to increase its refining capacity won’t necessarily alleviate high oil and gasoline prices. It will take years before new refineries start operating. World oil demand growth, including rising consumption in Saudi Arabia itself, could easily outstrip additional capacity, analysts say.

“The refineries [in Saudi Arabia] won’t be ready in five years, and we are expecting delays on all fronts,” said A.F. Alhajji, an energy economist at Ohio Northern University and a long-time observer of Saudi Arabia. Demand is too lofty to be accommodated by the planned increase in capacity, he said.

Saudi Arabia’s move to expand its refining output of heavy crude comes as major oil-producing countries prepare for a future that may yield less of the more-profitable, light crude oil.

Some of the world’s biggest oil fields, including Saudi Arabia’s Ghawar, Europe’s North Sea, and Mexico’s Cantarell, are producing less of the premium oil.

To be sure, the world still has plenty of light crude to meet global demand for at least a few decades. But the long-term outlook for light crude, combined with oil prices over $135 a barrel, has encouraged some countries to bump up their investment in producing heavy grades of crude.

Saudi Arabia expects to increase its oil production to 12 million barrels a day in 2009 from today’s 10.5 million. Some of the growth, including the 900,000 barrels a day in the Manifa field, the fifth-largest in the world, will be in heavy grades.

“This is just the sequence of investment. You go for more profitable oil first, and then if you have money, you invest in the less profitable,” Alhajji said.

Canada, where 95% of reserves are in the form of oil sands, has seen a rush of investment into producing and processing the super-dense output from these sands.

About 40% of the world oil resources are heavy or extra-heavy crude, according to Schlumberger Ltd. (SLB:, the world’s largest oilfield services company, and another 30% are made up of oil sands and bitumen, which are even more difficult to refine.

In Saudi Arabia, about one third of its 260 billion barrel reserves, the world’s largest, are heavy crude, according to U.S. Energy Information Administration.

Refinery shortage

As the world is trying to churn out more heavy crude, the existing refinery system is proving to be a bottleneck.

Saudi Arabia has promised billions of dollars in the next five years to expand its refining capacity to 6.5 million barrels a day from 3.7 million today, making the country one of the largest refiners in the world.

Among its plans, Saudi Aramco said in May that it will proceed to build two refineries with ConocoPhillips and France’s Total. Each has a daily capacity of 400,000 barrels and is designed to refine heavy crude into products for the United States and European markets.

In comparison, ExxonMobil’s Baytown, Texas, refinery, the largest in the United States, has a capacity of 562,500 barrels a day.

Outside Saudi Arabia, Saudi Aramco signed a contract with Sinopec and ExxonMobil early last year to upgrade a refinery in China’s coastal Fujian province to 240,000 barrels a day.

In the United States, in a joint venture project with Royal Dutch Shell (RDS.A:

“Instead of selling heavy crude at a heavy discount, it makes more economic sense to sell petroleum products,” Alhajji said.

Tags: peak oil energy investments

This entry was posted on Friday, June 20th, 2008 at 6:02 am and is filed under Saudi Arabia, oil supply. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.