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Why is downstream investment gaining importance in the Middle East?

THE GCC countries of Bahrain, Saudi Arabia, UAE, Kuwait, Qatar and Oman are synonymous collectively with the vast hydrocarbon reserves that the countries possess.  Historically the region has been a major exporter of crude oil and more recently of natural gas.  Although the large majority of the crude oil which is produced is exported from the GCC countries, some of it is used within country.  Crude oil has been refined in the Middle East since the 1930s and yet the refining landscape within the region has changed more than once in its lifetime.

The GCC refining industry has seen three major phases of capacity additions, where each time the size of the phase of investment has increased:

  • The first phase was in the 1970s and the combined investment phase took the GCC refining capacity to over 1 MMBPSD.
  • The second wave in the 1980s added another approximately 1.5 MMBPSD taking the total capacity to around 2.8 MMBPSD.
  • The third phase which could also be termed the current phase has been the most drawn out but is also the largest, starting in around 2008. This phase has and will see the GCC build its largest and most complex refineries and profit from amongst the best refining margins globally.  The Phase is ongoing and will continue until at least 2020.  From 2012 to 2020 the refining capacity of the GCC is expected to almost double, going from approximately 4 MMBPSD to 7 MMBPSD.

The changes are impressive.  The drivers for growth are however more complex leaving the refiner and central ministries with very difficult decisions to make.  Pressures on the use of crude oil are observed from many directions within these economies.

The GCC economies are very dependent on crude oil and gas sales for national revenue.  Diversification of the local economies therefore is seen as an effective way of addressing this national and regional concern. However the tools for diversification of the economy are limited to the hydrocarbon reserves.  This therefore means that diversification means continued investment in downstream businesses.

Energy requirements in the GCC are significantly higher per capita than in other regions of the world, largely due to significantly higher ambient temperatures in the summer months but also due to the lack of demand side management low cost electricity.  This results in a very high energy burden placed on the state owned oil and gas companies.  Producing fuel for internal use, whether for power generation or for on road fuel, impacts profitability of any refining asset.

Although reduced profitability may have to be accepted for the production of fuel oil, it certainly isn’t accepted by foreign investors.  Ensuring increasing foreign investment within the GCC states is also seen as a means of diversifying the local economy.  Foreign investments by international partners require acceptable financial to satisfy board members and shareholders, producing a dilemma for decision making with the previous discussion.  Quite simply, focusing on domestic energy demand is unlikely to attract foreign investment.

The demographics of the GCC are very specific.  The rate of development of these countries has been on an accelerated path since the discovery of oil in Bahrain in 1932.  These rapidly growing economies with strong GDP growth rates have resulted in a fast growing young population in a relatively short space of time.   The median age within the GCC is very low with unemployment on the rise amongst young males and females.  All of the countries face very similar, sometimes limited options to create jobs.  Building oil refineries is one of the major solutions.  

Source of the article

Nexant Special Report – Competitiveness of Middle East Refining and Its Global Impact

This report analyses increases in refining capacity in the Middle East and their impact on both existing local refining assets and global refining centres.  A competitive analysis of archetypal refineries provides valuable insight into future profitabilities and margins both within the region and in competitor refining centres.  The interesting conundrum of meeting domestic demand and national initiatives while remaining competitive is also examined.

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