feb 08 update

Privately owned independent refiner Placid Refining Co. LLC said its previously announced $300 million project to upgrade and expand its Port Allen, La., refinery is on schedule for completion in first half 2010.

The project will expand the refinery's crude throughput capacity to 80,000 b/d from 55,000 b/d while cutting total air emissions in half. All existing process units are being expanded and upgraded. In addition, a fluid catalytic cracker gasoline hydrotreater, sulfur extraction capacity, tankage, and other environmental improvements are being constructed to enable the refinery to meet all applicable clean fuel standards for its products. The upgrades will allow the company flexibility to utilize a less expensive, higher sulfur crude oil mix in its production process, officials said.

Placid currently supplies 35-40% of the gasoline consumed in the Baton Rouge area. The refinery's gasoline production will increase to 1.5 million gpd from 1 million gpd when expansion is completed. Diesel production will increase to 1 million gpd from 750,000 gpd. The modifications will create 25 new permanent positions at the refinery. The 80-acre Port Allen refinery was purchased by Placid in 1975 and is the company's only manufacturing facility. Placid is one of the largest employers in West Baton Rouge Parish.

Placid Refining is already in full construction mode. More than 100 workers are on site, a figure expected to grow to 250 soon and peak at 1,600.

The first phase of the upgrade started in June with construction of an 18,000 b/d gasoline desulfurization unit, a flue-gas scrubber for the facility's FCC, and other infrastructure improvements

ExxonMobil Plans Baton Rouge Investment to Exceed $350 Million

ExxonMobil, apparently plans to add a refinery to produce lower-sulfur diesel at its Baton Rouge facility, according to Mayor-President Kip Holden’s message in his 2008 annual operating budget. Although the company is not prepared to detail the deal, the investment could exceed $350 million.

Fluor Awarded Marathon's $1.9 Billion Detroit Refinery Expansion Contract

Fluor Corporation will provide integrated engineering, procurement and construction for Marathon Oil Corporation's projected $1.9 billion expansion and upgrade of the company's Detroit, Mich., refinery. The $1.6 billion EPC contract includes services, the value of procured materials and the construction contracts under Fluor's direct management. The full EPC contract value will be booked in the fourth quarter of 2007.

"Energy security is an important topic today. When this project is completed, Fluor will have assisted Marathon in increasing the Detroit refinery's heavy oil processing capacity, including Canadian bitumen blends, by about 80,000 barrels per day (bpd) and its total crude oil refining capacity by about 15 percent, from 100,000 bpd to 115,000 bpd," said David Seaton, president of Fluor's Energy & Chemicals Group.

Construction is expected to begin within the next few months, subject to receiving the applicable regulatory permits. The project is expected to be completed in late 2010, adding more than 400,000 gallons of clean transportation fuels per day to the marketplace.

Fluor estimates that Marathon's Detroit Heavy Oil Upgrade Project will provide an average of 800 construction and craft jobs per day, peaking at 1,200 workers per day during the three-year construction period.

Sierra Club Sues Shell over Deer Park Refinery Pollution

The Sierra Club, the largest and oldest U.S. environmental organization, filed a federal lawsuit in January against Shell Oil Co and subsidiaries over pollution at a refining and chemical plant complex along the Houston Ship Channel.

Shell could face a maximum fine of $32,500 for each of an estimated 1,000 incidents between 2003 and 2007 when the Deer Park, Texas, refinery and chemical plant exceeded levels of pollution allowed under permits issued by Texas regulators.

Shell has been cited by regulators and paid fines for some of the incidents, Joshua Kratka of the National Enviromental Law Center, which represents the Sierra Club and Environment Texas in the lawsuit, told reporters.

The fines have not been enough to stop preventable pollution, Kratka said.

"Shell is paying to pollute," he said. "Shell is factoring these fines into its costs of operating these facilities."

Shell declined comment on the specifics of the lawsuit, but said the company hoped to continue discussions with the Sierra Club and Environment Texas about the issues raised in the lawsuit.

"Shell Deer Park refining and chemical share the goal of the Sierra Club and Environment Texas to improve air quality," the company said in a statement.

Pollution from the refinery and chemical plant is regularly pushed by prevailing Gulf Coast winds to neighborhoods along the ship channel, said a resident of the area.

A former U.S. Environmental Protection Agency enforcement official said to be successful the organizations will have to prove the state enforcement efforts, which include plans to prevent future malfunctions, were ineffective.

"They're going to have to address that these problems have already been addressed," said Richard Alonso, attorney with Bracewell, Giuliani.

A University of Texas study released in 2007 found a possible link between childhood leukemia and living within 2 miles of the Ship Channel's refinery row.

The Sierra Club lawsuit was filed in the U.S. District Court for Southern District of Texas under the U.S. Clean Air Act which allows citizen lawsuits to gain enforcement of the act's provisions.

The Deer Park refinery is the eighth-largest U.S. refinery and a 50-50 joint venture between Shell and Mexico's state-owned oil company, Pemex.

South Dakota Plan Passes Hurdle for $10 Billion Refinery

Union County planning officials voted in January to recommend that county commissioners approve a Texas company's request to turn 3,800 acres north of Elk Point into a planned development district for a $10 billion oil refinery.

The vote on Hyperion Resources' rezoning request followed more than four hours of public testimony at the Elk Point-Jefferson School auditorium.

"We're very pleased that the planning commission voted to recommend the development," Hyperion project executive J.L. "Corky" Frank said after the 4-1 Union County Planning and Zoning Commission vote.

Several hundred people from Union County and nearby areas packed the school gym to offer opinions on the project.

Todd Meierhenry, a Sioux Falls attorney representing Hyperion, said the rezoning proposal will now go before the Union County Commission for more meetings and another public hearing.

"So the public gets another opportunity to speak," he said.

The Hyperion Energy Center would be the first new U.S. oil refinery in more than 25 years. It would process 400,000 barrels of thick Canadian crude a day, which company executives say would help the U.S. reduce its dependence on overseas oil.

Construction is expected to begin in 2010 and last about four years, with operation in 2014.

The complex would also house its own gasification power plant, which would turn a coal-like byproduct of the refining process into hydrogen, steam and electricity to help run the plant.

Recently, Hyperion Resources told the planning and zoning commission that it needed the planned development district designation because industrial setbacks require only 25 feet, not the 1/8 mile required for the refinery complex. Also, industrial zoning wouldn't allow plant, fire and security managers to live onsite, which is required for a large refinery.

Hyperion has said the refinery will produce only low-sulfur gasoline and diesel and will set the bar in the industry for environmental stewardship.

CB&I Gets $285 Million Contract for Refinery Expansion Project

Engineering and construction company Chicago Bridge & Iron Co said it got a contract of about $285 million for expansion work at a U.S. refinery.

The location of the refinery was not disclosed.

The company will provide engineering, procurement and modular fabrication services for a sulfur recovery and hydrogen complex, it said in a statement.

Refinery Expansions in Great Lakes States need Closer Scrutiny

Refinery expansions in Great Lakes states need close scrutiny given the concerns raised at BP's Whiting Refinery last summer, a group of environmentalists said January 22.

In a special Chicago-area meeting, Members of the Alliance for the Great Lakes discussed expansions at four refineries located on the Great Lakes that are planning to process crude oil from Canadian tar sands.

The projects are in various development stages, with some companies still conducting feasibility studies and others awaiting final emission permits. Marathon Oil in Detroit, for example, is awaiting its permits for a $1.5 billion expansion, according to Alliance.

The environmental outcry over BP's wastewater discharge permit last year highlighted issues that could exist in other refinery plans, said Lyman Welch, Alliance's water quality program manager. Alliance has submitted concerns to the Michigan Department of Environmental Quality related to Marathon's proposed Detroit refinery expansion.

Marathon has been meeting with local Detroit environmentalists regarding concerns surrounding its permit, Welch said.

"From what I understand, the groups feel they've been making a good-faith effort to explain what they're doing," Welch said. "That kind of feedback from the public is critically important. "And Conoco-Phillips in Roxana, Ill., has faced concerns regarding global warming effects from its $1 billion expansion project, Welch said.

In addition, a proposed expansion of Murphy Oil in Superior, Wis., could eat up acres of vital wetlands, Welch added.

Another site in Elk Point, S.D., would be one of the first new refineries built in the country in decades, Welch said.

He said state and federal regulators need to better ensure refinery permits to protect the environment, especially given the extra resources used to refine Canadian crude.

The Canadian sands are heavier and require a dirtier, costlier process that uses a lot of water, Welch said. Welch estimated that up to four barrels of water are used to make one barrel of the Canadian sand passable through a pipeline.

Extracting the sands also requires a lot of energy, which could result in high greenhouse gas releases, he said.

Valero Interested In Buying BP Texas City Refinery

Valero Energy Corp. potentially would be interested in buying BP PLC's (BP) troubled Texas City refinery, a person familiar with the company's thinking said January 30.

BP hasn't announced any plans to sell the refinery. Rather, the company has started a "focused on the future" initiative at the plant to ensure its long- term viability.

The person familiar with Valero's plans acknowledged that the plant isn't for sale. However, Valero operates its own Texas City refinery, which could have operational synergies and cost savings if operated in tandem with BP's plant, the person said.

Valero's Texas City refinery is across the street from BP's plant. Marathon Oil Corp. (MRO) also operates a plant in the city.

The acquisition could get Federal Trade Commission approval even if Valero didn't sell other Gulf Coast refineries, the person familiar with Valero said. While the FTC might question the sale or ask the company for additional information, the overall large volume of Gulf Coast refining would ease any antitrust concerns, this person said.

BP's 437,000 barrel-a-day refinery was the site of a fatal blast in March 2005. Since then, the plant has gone through a complete shutdown and gradual restart, and hasn't operated at its full rate. BP has committed more than $1 billion to improving the plant's conditions and has performed a major overhaul of a gasoline-producing unit at the refinery.

Valero, the largest U.S. refiner, operates 16 refineries, six of which are on the Gulf Coast.

Murphy Oil Plans Work at Meraux, LA, Refinery

Murphy Oil plans to work on its 120,000 barrel per day refinery in Meraux, Louisiana, the company said during an earnings conference call with analysts.

Claiborne Deming, president and chief executive of the El Dorado, Arkansas-based company, gave no timetable, nor scope for the work.

Deming said the work would include some new tankage at the refinery, to replace the tanks damaged during Hurricane Katrina in 2005, as well as a couple of projects at its 34,500 bpd refinery in Superior, Wisconsin.

Warren Resources Charged for Four Oil Spills in Refinery

Warren Resources Inc. and several workers at its Wilmington oil refinery face criminal charges related to four oil spills last year, prosecutors said January 30.

Warren was charged with failing to report the threatened discharge of oil into marine waters and failing to prepare and implement an oil spill contingency plan, the city attorney's office said.

The refinery was charged with eight counts, including violations of the California Department of Fish and Game code regarding discharge of petroleum into the state's water, and the state Clean Water Act.

Six employees, including the refinery's general manager and an environmental consultant, were also charged. They were scheduled to be arraigned March 11.

Prosecutors alleged the refinery released more than 4,000 barrels of oil through a crack in a storage tank last March 7.

Fish and Game agents learned about the spill two days later when they noticed two vacuum trucks leaking fresh oil outside the facility. Prosecutors said the trucks' operators were seen burying puddles of oil in the dirt road surrounding the refinery, and other employees were seen trying to clean up the oil without protective equipment.

Company officials admitted that a pump operator didn't close a valve, causing the pump to overflow for more than 90 minutes, prosecutors said.

An after-hours message left at Warren was not immediately returned.

Los Angeles Fire Department engineers used dirt to block the storm drain to halt further run-off.

On July 14, investigators saw black liquid flowing from the facilty into a nearby storm drain, according to prosecutors.

Two other spills occurred Sept. 3 and Nov. 14, prosecutors said.

CANADA

Province OK's $5 Billion Placentia Bay Refinery Component Studies

The provincial department of the Environment and Conservation has accepted as satisfactory six component studies for a proposed new refinery in Placentia Bay.

The component studies covered air quality, migratory birds, marine fish and fish habitat, freshwater fish and fish habitat, historic resources and the socio-economic component study.

According to the department, all six revised component studies were found to comply with the environmental impact statement (EIS) guidelines and require no further work.

Roland Butler, NLRC's vice-president for community and environmental affairs, says the component studies form part of the provincial environmental assessment.

Environment minister Charlene Johnson also advised the Newfoundland and Labrador Refining Corporation (NLRC) that the amended project EIS meets the requirements of the Environmental Protection Act and EIS guidelines.

That gives the $5 billion project final environmental approval from the province, a process that has taken close to 15 months and involved intensive public scrutiny.

Just because these component studies and the EIS have been released from further work on the provincial side doesn't mean the project is a go just yet.

"There is still the federal assessment," says Butler.

The public still has an opportunity to comment on the marine terminal and comprehensive study report that have been out since December. That will be open for review and public comment until Jan. 24.

"We have been getting the word out and making people aware that it is there."

Following the Jan. 24 deadline all public comments received will go the Canadian Environmental Assessment agency for review. That is then passed to the federal environment minister John Baird for a decision.

Butler doesn't describe it as the project getting the green light.

"It is difficult to call it a green light because it is a whole series of steps. For the environmental assessment process we will see a conclusion upon final decisions from the province and the federal government. The work we have been doing on all the other aspects, that will continue and we will hopefully keep on track with our program."

In the meantime Butler says there is still quite a bit of preparatory work being done and that will continue.

Suncor Predicts Fewer Delays after Falling Short in 2007

Suncor Energy Inc. executives are promising higher reliability and more predictability at its giant oilsands operations after falling short of 2007 targets because of maintenance shutdowns and other problems.

"I'm relatively optimistic about 2008," chief executive Rick George said after Suncor reported a full-year profit of $2.8 billion, down from $3 billion in 2006. The past year involved "a massive amount of change, and in that, especially given the size and the scale of these plants, not always easy in terms of getting this stuff up, running and smoothing them out," he said.

The maintenance issues included a scheduled 50-day upgrader turnaround at the oilsands operation to tie in new facilities, and a 120-day shutdown at Suncor's refinery in Sarnia to refit for sour crude oil processing. That refinery is still not back to full production. There were also unscheduled closures during 2007 at the oilsands and in Sarnia.

CUBA

Cienfuegos Refinery Begins Processing Crude Oil

The Camilo Cienfuegos refinery in the central Cuban province of Cienfuegos has begun processing crude oil following its recent re-opening.

Oil industry executives told reporters that the plant began refining its first 65,000 barrels of crude oil on January17 to obtain fuel oil, diesel, naphtha, gasoline and turbo fuel.

The refinery's technical staff also worked on the enlargement of storage tanks and have now concluded the assembly of a geodesic dome in the third tank, with a capacity of 50,000 cubic meters.

The recent modernization of the plant gives more protection to the environment and guarantees safety in the industrial processes.

In addition, the production flow can be regulated from a control station that has a System of Distributed Control through which processes are carried out automatically.

The beginning of operations of the Cienfuegos refinery also means the birth of a petrochemical area in central Cuba as part of the agreements signed under the Bolivarian Alternative for the Americas (ALBA).

ARGENTINA

Shell Refinery to be Fined by Argentina

Anglo-Dutch energy major Royal Dutch Shell will be fined by Argentina for failing to reduce retail gasoline prices, according to Reuters, which quoted a government source.

The Argentine government has decided to impose a lien on Shell's refinery after its failure to pay $20.7 million in fines for violating the country's fuel supply laws, according to the government source.

Reuters reported that the Argentine government was considering taking the measure against the 100,000 barrel per day Shell refinery after the oil firm resisted the government's effort to lower fuel prices. The refinery is reportedly a key producer of diesel in Argentina.

This is not the first instance the government took action against Shell for resisting its policies. Reuters noted that Shell's Dock Sur refinery was shut down briefly in 2007 on environmental grounds.

ECUADOR

Ecuador to Spend $300 Million on Esmeraldas Revamp

Ecuador will invest $2 billion in its oil industry this year in a bid to increase production by 11 percent, Energy Minister Galo Chiriboga said January 16.

Some $1.7 billion will be used to increase production at state oil company Petroecuador and another $300 million will be used to revamp the Esmeraldas refinery, Ecuador's largest, Chiriboga said in an interview.

Ecuador is South America's fifth-largest oil producer and churns out an average of 510,000 barrels of crude a day.

Chiriboga said Ecuador wants to increase this production by 11 percent this year with the investment.

In a speech marking his first year in office, President Rafael Correa blamed Ecuador's 2.67 percent economic growth--one of the lowest rates in the region--on a 9.8 percent decline in oil production. He said the slide was caused by his predecessor's failure to invest in the industry.

Last year, Ecuador reactivated its membership in the Organization of Petroleum Exporting Countries, which had been suspended since it stopped paying cartel dues in 1992.

Correa, a close ally of Venezuelan leader Hugo Chavez, replaced the head of Petroecuador in November, and in October, signed a decree that nearly doubled the state's share of windfall oil profits--earnings on oil sold above prices fixed in company contracts.

A US-trained economist and former economy minister, Correa has repeatedly promised to boost state control of the economy--concerning financial analysts who doubt nationalizations can increase productivity and growth.

VENEZUELA

Pdvsa Finishes Commissioning of El Palito Refinery

State-run oil holding Petróleos de Venezuela (Pdvsa) has finished commissioning of the135,000-bpd El Palito refinery, after it came to a standstill due to a power outage since mid-January, a source at the plant told Reuters.

A catalytic cracker and other units in El Palito, western Carabobo state, were out of order due to a power failure, reported Pdvsa.

The catalytic cracker remained non-operative after Pdvsa tried to increase the processing volume of the unit, with a capacity of 54,000 bpd.

Venezuela to Build $5 Billion Refinery in Ecuador

Venezuela is to build a 5 bln usd oil refinery in Ecuador to go onstream in four years, Ecuador's oil minister Galo Chiriboga Zambrano said at the end of January.

The refinery, with a capacity to refine 300,000 barrels of crude per day, will be built in the province of Manabi, he said.

It will be financed by both countries and supplied largely with crude from Ecuador, said Chiriboga, currently in the Austrian capital for a key meeting of OPEC ministers.

'We're going to build it. The feasibility study will be ready in June. The plant itself will be finalized in four years,' the minister said through a translator.

The plant would be financed 'one part by Ecuador, the other by Venezuela,' Chiriboga continued. 'The idea is to promote investment of Latin American countries in refineries.'

Initially the refinery would be run on Ecuador crude.

'But later on, it would (use) Venezuelan oil when ours is depleted.'

Asked whether a change in government in Venezuela might jeopardize the project, the minister said: 'We're negotiating with the Venezuelan state not with President (Hugo) Chavez.'

Similarly, Venezuela was negotiating with the state of Ecuador, not President Rafael Correa, he added.

ASIA

CHINA

China's Sinopec to Expand Wuhan Refinery's Capacity by 30 Percent

Sinopec, will soon expand the capacity of a major refinery in Wuhan city by 30% to ease a fuel supply shortage in central China, its parent company said January 21.

The company will increase the refinery's crude oil processing capacity to 6.5 million metric tons a year or 130,534 barrels a day from the current 5 million tons a year once a new vacuum distillation unit comes online, said China Petrochemical Corp., or Sinopec Group, on the Web site of the State-Owned Assets Supervision and Administration Commission under the State Council.

Sinopec Dec. 25 completed construction of the unit, with an annual processing capacity of 5 million tons of crude oil, said the statement, without disclosing when it will come online.

The company will shut down some of its old units to be replaced by the new unit, said the statement, without elaborating.

Sinopec will soon build more units at the refinery, including a 1.2-million-ton-a-year delayed coking unit and a 2-million-ton-a-year hydrocracking unit, which will together increase the refinery's combined capacity to 8 million tons a year or 160,657 barrels a day, it said.

Demand for gasoline and diesel in central China is increasing rapidly as a result of the region's booming economy, but oil refining facilities in the region have remained at low capacities over the past few years, resulting in shortages from time to time.

A part from supplying more gasoline and diesel to central China, the refinery will also supply feedstock to a nearby ethylene facility which is under construction, it said.

Sinopec started building the 800,000-ton-a-year ethylene facility Dec. 18.

South Korea's SK Corp. is in talks with Sinopec to jointly invest in the ethylene facility.

CNPC Looks to Large Refineries for Growth

The expected operation of four refineries each with a processing capacity of 10 million tons or more will greatly boost the growth of China National Petroleum Corporation (CNPC) in 2008, said a senior official of the country's largest oil producer in January.

The four refineries are located in Dalian, Fushun, Dushanzi and Qinzhou. The first three are being expanded and the last is a new one being built.

CNPC deputy general manager Zhou Jiping said the company also plans to kick off the construction of another super refinery this year in Sichuan province in southwest China. Its capacity shall also exceed 10 million tons.

CNPC expects to raise its crude production by one million tons and natural gas output by 11.5 billion cubic meters in the coming year.

Priority must be given to the development of new oilfields as well as stabilization of the output of old ones if the crude production target is to be met, said Zhou.

"The year of 2008 stands for a pivotal juncture for CNPC, during which a number of major projects will be carried out and all these strategic programs are vital to improving the production pattern and enhancing competitive strength of the company," Zhou said.

In 2007, sales of natural gas grew 21.3 percent over the previous year and became CNPC's fastest-growing business, he said.

The assets of CNPC hit 1.54 trillion yuan (US$212.4 billion) as at the end of 2007, up 7.1 percent year on year. Its newly-installed production capacities of crude oil and natural gas hit 13.66 million tons and 10.3 billion cubic meters, respectively.

Profit generated by overseas exploration and drilling also increased quickly, Zhou said without elaborating.

With overseas projects extending to Africa, central Asia, the Middle East, America and Asia-Pacific region, the company earlier this month vowed to speed up its overseas expansion while maintaining domestic output growth.

China Trader Sinochem Starts Building 1st Refinery for $2.47 Billion

State oil trader Sinochem has kicked off building its first wholly owned refinery in China, an industry newspaper said, in line with an earlier plan and putting the trader on track to become China's fourth major refiner. The 100,000 barrels per day refinery will be erected in Quanzhou city in the southeast coastal province of Fujian.

It will process heavy residue oil and is slated for operation in 2010, China Petrochemicals News said January 31.

The project will cost 17.7 billion yuan ($2.47 billion), and include berths for refined fuels and storage facilities, the paper said. Sinochem plans to expand the refinery to 240,000 bpd with additional investment of 25 billion yuan, or $3.48 billion, said the paper, a plan in line with what industry officials have said.

Sinochem, until 1993 China's monopoly oil trader, wants to establish itself as a solid No.4 oil firm in China after Sinopec Corp, PetroChina and offshore oil and gas producer CNOOC, by beefing up its exploration and refining arms.

Its only other refinery holding is in the 200,000 bpd West Pacific Petrochemical Corp (WEPEC) refinery in northeast China, a joint venture with French major Total and PetroChina.

The plant is virtually controlled by PetroChina.

THAILAND

Thailand’s IRPC Plans $2.1 Billion Expansion

IRPC Plc, formerly known as Thai Petrochemical Industry, is considering a new investment of US$2.1 billion for a naphtha cracker and residue refinery, aiming to create higher margins for products. Chief executive Piti Yimprasert said the goal was to generate new by-products and significant future profits.

The $2.1-billion project includes $1.5 billion for a naphtha cracker and the remainder for a residue refinery plant.

The previous investment plan worth $1.4 billion began last year and runs until 2011, and would increase refining capacity from 215,000 barrels per day to 260,000 barrels.

Once completed, the IRPC refinery would produce one million tonnes of naphtha per year and process it on site.

The company is now conducting a study on production configuration and design. It will call construction bids by the middle of this year.

IRPC is also considering investing an additional of $600 million in oil residue, a byproduct from oil refineries.

''We are studying residue projects in two options, the first one is to convert residue to refined oil, another one is to transform it into coal via gasification to replace coal imports,'' Mr Piti said.

The new two projects would wrap up by mid-year and would be ready to start after the current oil refinery expansion is done, which would generate more residue to meet economies of scale of 300,000 tonnes a year from 100,000 tonnes a year currently.

It has already allocated 4,000 rai of land for the new plants at an existing petrochemical complex in Rayong.

For the new investment, 50-70% would come from cash and accumulated profit.

IRPC would likely join with its parent PTT to pool its residue products with PTT's other oil refining subsidiaries, such as PTT Aromatics and Refining and Thai Oil, into a single conversion unit to cut costs.

This year IRPC will focus on production improvement, cost cutting and environmental management.

It has cut logistics costs by two billion baht a year, reduced staff from 8,000 to 6,000 through a 500-million-baht early retirement programme and made production improvements that reduced costs by nearly eight billion baht a year.

It is also looking to enter the biofuel market in ethanol and biodiesel.

Mr Piti expects this year that IRPC will refine 190,000 barrels of oil a day, expecting revenue to rise 5% from 200 billion baht last year.

Oil and chemical products prices in 2008 are expected to remain as high as of last year, driven by high demand in global markets. Gross refinery margins would be around $6-7 a barrel.

EUROPE / AFRICA / MIDDLE EAST

EUROPE

EU to Phase in CO₂ Auctions for Refinery

The European Union, responding to industry pressure, will phase in auctions for greenhouse gas emissions permits for refineries and airlines from 2013 as part of a plan to combat climate change, an EU source said on January 21.

Speaking after senior European Commission officials put finishing touches to proposals to be adopted January 23, the source said the power generation sector would have to buy 100 percent of emissions permits in auctions from 2013.

But in response to lobbying from governments and key industries, officials had agreed that refineries and airlines would start at a level of 20 percent of permits auctioned in 2013, with the rest issued for free, rising by 10 percent a year to reach 100 percent in 2020.

The move is part of an EU plan to cut greenhouse emissions by a fifth from 1990 levels by 2020 to fight global warming.

"The business argument generally prevailed," said a senior EU source, speaking on condition of anonymity because the proposals have not yet been formally adopted.

European oil majors Shell and BP had mounted a campaign to have their refineries spared from having to buy emissions permits at auction, arguing it would put them at a competitive disadvantage against non-European rivals.

The United States, which some call the world's biggest polluter, has so far refused to accept any binding curbs on greenhouse gas emissions.

The source confirmed an earlier Reuters report that three energy-intensive industries -- steel, aluminum and cement -- would enjoy an easier regime, receiving their quota of emissions permits for free in 2013 and being phased in more gently.

The Commission will review the situation of energy-intensive industries in 2011 in the light of whether there has been an international agreement by then to curb emissions of carbon dioxide (CO₂), the main gas blamed for global warming.

Other sectors such as fertilizers or paper and pulp will be able to apply for the status of energy-intensive industries but will have to produce evidence of competitive damage, he said.

The source said the Commission would set national targets for reducing emissions from buildings, heating and cooling and transport, not covered by the EU's Emissions Trading Scheme.

As previously reported, the wealthiest old EU member states such as Ireland will have to cut CO₂ emissions by 20 percent by 2020 from 2005 levels, while the poorest new members, Bulgaria and Romania, will be allowed to increase emissions by 20 and 19 percent respectively to enable an economic catch-up.

Germany will have to cut non-ETS emissions by 14 percent and Sweden by 17 percent, the source said.

On renewable energy sources, the Commission will set national targets for the level of power generation to be drawn from wind, wave, solar and hydro-electric sources and biomass by 2020, varying according to countries' wealth and starting point.

Thus Sweden will have the highest target with 49 percent, while Romania will have a goal of 24 percent of power from renewables, Germany 18 percent, Ireland and Bulgaria 16 percent.

Europe’s February Refinery Maintenance to be Light

Europe's oil refinery sector is expected to undergo relatively light planned maintenance shutdowns in February, a Reuters survey showed January 31.

European refineries will shut at least 380,000 barrels per day of crude distillation capacity, or about 2.4 percent of Europe's total 16 million bpd.

The extent of the February shutdowns so far is slightly less than the same month last year, when 425,000 bpd went offline.

So far, reported March 2008 shutdowns are to take at least 118,000 bpd offline. In the same month last year, shutdowns came to about 391,000 bpd.

Maintenance in Europe during the first half of each year normally peaks in February and March -- January 2008 maintenance shut only an estimated 19,300 bpd.

The figures include capacity of crude distillation units closing for scheduled maintenance only, confirmed by refiners or provided by industry sources and traders by Jan. 31.

They exclude the fire-related outage at Norwegian Statoilhydro's Mongstad and temporary run cuts at some plants due to poor margins.

They also exclude maintenance without specific dates and scale such as Hungary's MOL MOLB.BU and ConocoPhillips' Wilhelmshaven in Germany.

Offline capacity of secondary units, such as a reformer at Total's Grangemouth in Britain, are not converted to crude distillation capacity terms or included in the Reuters estimate, unless this is done by companies or industry sources.

This is due to the complexity of calculation and different production methodologies depending on plant configurations.

The European Union requires refineries in member nations to switch to diesel with sulfur content of 10 parts per million (ppm), or 0.001 percent, from January 2009.

Industry analysts said many Northwest European refineries can already make ultra low sulfur diesel ahead of the regulation and this in part contributed to light maintenance this year.

But Mediterranean refineries may still carry out work on deslphurization and diesel units.

"Most Northwest European refineries are already producing 10ppm diesel," said an analyst with a bank, who asked not to be named. "But some refineries in the Mediterranean are still producing 50ppm."

Greece, where the four refineries have combined capacity of about 442,000 bpd, is likely to experience heavier maintenance than other European countries in the first half of the year.

Hellenic Petroleum will shut its 100,000 bpd Elefsis refinery for 40 days in May and June, making it the largest shutdown in the Mediterranean reported so far. The company also plans to close its 67,000 bpd Thessaloniki plant for two weeks from March 1.

Works at Elefsis include a diesel unit.

In the north, the biggest shutdowns in coming month are expected at LUKOIL's 140,000 bpd Burgas in Bulgaria in February and Total's 227,000 bpd Leuna in Germany in May and June.

Germany may see the highest frequency of maintenance in Northwest Europe for the first half of the year.

Light maintenance may help oil product inventories to rise from current low levels as the market focus will shift from winter fuels to gasoline towards spring and summer.

The United States is also set to have relatively light maintenance in spring. That may signal that gasoline import demand from the U.S. east coast, the largest petrol export market for European oil companies, may slow this year.

However, the potential increase in European fuel stocks may be offset by temporary run cuts at some plants to defend refining margins.

"Maintenance looks light. But I think it is refinery run cuts on top of maintenance and how it is going to be extended that really matters to the market now," the analyst said.

So far in Europe, Swedish Preem's Gothenburg, ConocoPhillips Wilhelmshaven and Hellenic's Elefsis have reduced crude refining volumes.

FRANCE

ExxonMobil to Shutter Naphtha Unit at French Refinery

Production is to be restricted at Exxon Mobil Corp.'s naphtha processing unit in France in October. The steam cracker in Gravenchon, Normandy, will be idled for 4-5 weeks of routine maintenance.

Another shutdown has been planned at the 233,000 bpd refinery in February and March of 2009, when the fluid catalytic cracker, an alkylation plant and a gofiner unit will be shuttered for repairs.

HUNGARY

Hungary Says New CO₂ Plan to Curb Windfall Profits

Hungary's new greenhouse gas emissions plan for 2008-12 will clamp down on windfall profits generated at some firms in the previous allocation period due to oversupply of pollution permits, a ministry official said.

Hungary's government seeks to pass a decree on the revised carbon dioxide (CO₂) limits under the EU's emissions trading scheme next month after the European Commission cut its proposal by 12.4 percent to 26.9 million tons a year for 2008-12.

Most other EU states faced a reduction in their original emissions plan for 2008-12 by Brussels last year.

While Hungary has challenged the cuts at a European court, the environment ministry said the revised plan for the 2008-12 emissions trading period will hit those firms hardest which earned undue profits due to an oversupply of permits in 2005-07.

"The new algorithm was set up with a view to (firms) that may have passed on costs of emissions cuts to clients and those that earned undue, or windfall profits from overallocation," Environment Ministry official Jozsef Feiler said.

Figures published by the European Commission showed Hungary handed out about 16 percent more pollution permits in 2005-06 than the actual verified emissions in that period, undermining efforts to curb overall emissions in the bloc.

Feiler declined to name firms most affected by the revised plan but said growth and competition prospects were also taken into account when implementing the cuts.

"This is a transparent system, but naturally, firms are always asking for more (pollution permits)," he said.

The power sector alone accounts for about 45 percent of Hungary's emissions quotas, while district and industrial heating take up another 17 percent of the annual 26.9 million tons of carbon dioxide emissions allowed in 2008-12.

Hungary MOL Announces Refinery Maintenance Program

Hungarian oil and gas group MOL said it plans regular turnaround maintenance at its Százhalombatta refinery in the first quarter of 2008 and at the Bratislava unit in Q2. In 2009, Százhalombatta refinery will see maintenance in the second quarter while the Bratislava refinery will not have maintenance next year.

“Relative to the Polish oil companies, maintenances had more moderate impact on MOL's P&L in the past. Thus, we believe the news indicates only moderate pressure on 1Q08 and 2Q08 downstream profits and thus we do not intend to adjust our FY08 downstream EBIT forecast," Péter Tordai of KBC Securities said on January 21.

On the other hand, however, the analyst welcomes the news since until now MOL was the only oil company in CEE who declined to comment on planned maintenances.

Therefore, he takes the news as “a sign of improving transparency".

ITALY

Italy Planned to Revise CO₂ Plan to EU by End of 2007

Italy aimed to send a revised plan for its carbon dioxide (CO2) emissions to Brussels by the end of 2007, an environment ministry official said in December.

The European Union's executive, the European Commission, said in May that Italy must cut emissions from companies covered by the bloc's emissions trading scheme (ETS) to 195.8 million tonnes a year in 2008-2012, about six percent less than Rome had initially proposed.

Technical experts were working on finalizing details of the plan. And the official said he hoped it would be completed on time.

"Then the plan will be published on the ministry's website and sent to Brussels. We hope to do it by the year-end to respect the Commission's objectives," the official said.

Italian environment officials have said the country would comply with Brussels' request, but resistance from the smokestack industries which bear the brunt of CO2 emission cuts has delayed sending the revised plan to Brussels.

The ETS — part of Europe's efforts to fight global climate change — sets limits on the amount of CO2 that smokestack industries may emit. Companies sell permits to emit if they fall below their caps or buy them if they emit more CO2 than allowed.

Italy accounted for about 10 percent of the total carbon allowances issued for the 2005-2007 phase of the EU scheme, making it one of the largest players in the EU market.

LITHUANIA

Lithuania PKN Refinery Says Back to Full Capacity

Lithuania's Mazeikiu Nafta refinery, owned by Poland's PKN Orlen PKNA.WA, said on January 21 it was back at full capacity after finishing repairs on a fire damaged vacuum distillation unit.

The unit was hit by a blaze in October 2006.

"Today we have reinstalled the repaired unit, which will allow Mazeikiu to process 10.3 million tonnes per year," Mazeikiu spokesman Jacek Komar said.

Mazeikiu, which had a full turnaround last autumn, is to invest some $300 million to modernize the refiner this year, including a new hydrocracking unit, he added.

Before the repair of the unit, throughput was down to just under 7 million tonnes.

Mazeikiu Nafta Recommissions Vacuum Distillation Tower

On January 20, Lithuania's Mazeikiu Nafta refinery recommissioned its vacuum distillation tower. The company started up the unit immediately after completion of tying-in the rebuilt vacuum distillation tower to the refinery’s other process units.

The vacuum distillation tower suffered from the fire, which erupted on October 12, 2006. This unit was rebuilt by the end of December 2007.

Having recommissioned the vacuum distillation unit, the refinery’s throughput capacity will reach the pre-fire level.

NETHERLANDS

Shell Plans Pernis Work in April, September and an Additional $1.44 Billion Investment over Time

Royal Dutch Shell has planned turnarounds for its 412,000 barrels-per-day Dutch Pernis refinery around April-May and in September 2008, an industry source said on January 22.

The source said the refinery, Europe's biggest, planned to shut one unit in the spring and one unit in September, with both turnarounds expected to last between four to six weeks. He said it was not yet clear which units would close.

"For next year there are some bigger operations going down than normally but, on the other hand, every year they have a large program for turnarounds," the source told Reuters.

Shell was not immediately available for comment.

The oil major has said it plans to shift the focus of Pernis towards wider exports and away from traditional markets, and that it is considering investing 1 billion euros ($1.44 billion) in the refinery over the next five to seven years.

ROMANIA

Romania to Contest EU Carbon Emission Cuts

Romania has asked for an annulment of a 2007 European Commission decision to cut its carbon emission quota, a government official said.

The European Commission decided in October to cut the new EU member's emission quota for 2008-2018 by 20.7 percent and lower its 2007 ceiling by 10 percent.

The centrist minority government filed the annulment request with the European Court of Justice on December 21, said Adrian Ciocanea, head of the cabinet's European Affairs Department.

Several other member states have criticized the emission cuts, saying they were too restrictive.

"The government is now waiting for the court's stance ... during this time, the Commission's decision remains valid," Ciocanea was quoted as saying .The Commission is under pressure to take a hard line in the second phase of its emissions trading scheme after lax targets in the first phase, from 2005-07, saw heavy industry receive too many permits, causing a market surplus and subsequent price collapse.

TURKEY

IOC may Get Lower Stake in Turkey Refiner

The country’s largest oil refiner, Indian Oil Corp. Ltd (IOC), that was looking to acquire a 51% stake in a refinery coming up in Turkey, will now have to be content with a lesser stake because more firms from other nations are interested in the project, which could serve as a gateway to lucrative markets in Europe.

Some analysts say the firm’s plans to look at Europe and the US make sense. IOC will now partner with KMG of Kazakhstan, State Oil Company of Azerbaijan Republic (Socar), Eni SpA of Italy and Turkey’s Calik Enerji A.S in the 15 million tonnes per annum (mtpa) integrated refinery being built at a cost of around $10 billion (Rs39,400 crore) at Ceyhan in Turkey.

“We had earlier applied along with Eni SpA of Italy and Calik Enerji AS for the integrated refinery project. Since more companies had evinced their interest to the Turkish government, they are of the opinion that we all should participate together for the project. The consortium has changed now,” a senior IOC executive who did not wish to be identified said.

“We earlier wanted to have a management control. With the new firms coming in we may have to revise it. We do not have a final proposal to evaluate (yet),” Sarthak Behuria, chairman and managing director, IOC said.

With the additional partners coming in, IOC’s share in the project will also come down to around 25% from its originally envisaged 51%. The company is hoping that the refinery will help it tap the market for petroleum products in Turkey as well as make inroads into markets in Europe and the US. Only a part of the product from the export-oriented refinery is meant for domestic consumption. The rest will be routed to Europe and the US.

“It is also good for us as we are not flush with money and a joint participation along with more companies will help us in mitigating risk. We are looking at a 25% stake in the project which will result in us investing around Rs3,000 crore over the next six years. However, the details are yet to be finalized. Even the final refining capacity will be decided by a market survey,” the executive added.

“I do not think that the dilution of share will be a problem for IOC,” said Deepak Mahurkar, associate director, oil and gas industry practice at audit and consulting firm PricewaterhouseCoopers.

The pre-feasibility report for the Ceyhan refinery project has been submitted and the refinery is expected to be completed in 2012. To fund its overseas plans, IOC has lined up a capital expenditure of Rs43,000 crore over the five years to 2012.

Some analysts say that IOC’s plans to look at Europe and the US make sense as no new refinery has been set up in these markets in the past decade. Not everyone agrees with that assessment. “Global refining will be flush (in terms of capacities) by 2012.

There is a good chance that the demand for petroleum products will come down due to the economic downturn,” added Mahurkar.

IOC is also looking at two other projects in Turkey: A $2 billion pipeline from the Black Sea to the Mediterranean Sea, and a 52-53% stake in Petkim Petrokimya Holdings AS, a petrochemicals complex as reported by Mint earlier. The pipeline is expected to ship Caspian crude to the refinery.

IOC had a total debt of Rs28,834 crore on its balance sheet and expects it to reach Rs32,000 crore by March.

Currently, India has a refining capacity of 149mtpa of crude, and IOC has a 40.4% share of the business.

On January 31, the firm announced its results for the three months ended December and said net profit rose 17% from a year ago on the back of an increase in the refining margins combined with the effects of rupee appreciation and subsidy-sharing efforts by the government.

The government mandates the price at which fuel can be retailed in the country and compensates refiners and marketers of fuel such as IOC through subsidies.

IOC is also in talks with Petrobras, Exxon Mobil Corp., Chevron Corp. and Reliance Industries Ltd for bidding for oil and gas blocks offered in the seventh round of the government’s new exploration and licensing policy. It also plans to bid on its own for the nine small blocks that have been offered by the government.

UNITED KINGDOM

Exxon Plans Partial UK Fawley Refinery Maintenance in February

Exxon Mobil Corp. (XOM) will partially shut its 300,000 barrel-a-day Fawley refinery in the U.K. for maintenance in February, oil product traders said.

A crude distillation unit would shut for around five weeks in February, curtailing the refinery's processing capacity by roughly 75,000 barrels a day, according to traders based in London.

The refinery's fluid catalytic cracker, or FCC, would also shut for six weeks in February, said a London-based gasoline trader. But another trader said he doubted the FCC would also be shut down.

KENYA

Essar Oil Buys into Kenya Refinery with Plans for $400 to $450 Million Upgrade

India’s Essar Oil is expanding overseas. The company bought a 50% stake in an oil refinery in Kenya from three Western petroleum giants, in its first purchase of a refinery beyond its home-country borders.

The refinery in Mombasa, previously half-owned by Chevron, BP and Royal Dutch Shell, is the only one in eastern Africa. It currently produces liquefied petroleum gas, gasoline, diesel, kerosene and fuel oil. The refinery will be upgraded, an investment of $400 million to $450 million, Essar Oil said in a statement. It did not reveal the cost of the acquisition.

Products from the Mombasa refinery, in which the government has a 50% stake, are sold in the Kenyan market and exported to neighboring countries, including Tanzania, Uganda, Burundi and Rwanda. Demand for petroleum products in these markets is estimated at 5 million tons per annum.

The acquisition is expected to be completed by early 2008, said Essar. The refinery has a capacity of 4 million tons per annum. Essar Oil is looking to ramp up its overall refinery capacity to 1 million barrels per day. To supply its refining operations, the company also has three exploration and production blocks in Madagascar and one in Nigeria.

“We are very pleased that our first refinery acquisition outside of India will be made in Kenya,” said Naresh Nayyar, chief executive of Essar Energy Holdings. Essar Energy Overseas, a subsidiary of Essar Oil, made the acquisition and will work with the government to supply the growing Kenyan and adjacent markets. Last month, Nayyar said Essar Oil planned to raise $4 billion, half of it overseas, for expansion.

Essar Oil's assets include developmental rights in proven exploration blocks in India and abroad. It also has a marketing network of more than 1,250 gas stations across India, with plans to increase the network to 2,500 outlets.

Indian oil companies like Essar Oil, Reliance Petroleum and Bharat Petroleum are looking at overseas markets, as their profits have taken a beating in India, where there is a state-imposed cap on prices.

Essar Oil’s shares have appreciated around eight times since early November, buoyed by a bullish stock market and the steep appreciation of the larger Reliance Petroleum.

“The stock has run up quite fast and could see a deep correction, so you should be booking profits on it,” said technical analyst Ashwini Gujral. The Kenya acquisition is unlikely to make a significant difference because a stock like Essar Oil is discounted “way into the future,” said Gujral.

NIGERIA

Nigeria Slates New Oil refineries for 2011 or 2012.

Nigerian National Petroleum Corp. (NNPC) has announced that the company will work with international oil companies to build two refineries in southern Nigeria to meet the country's demand of refined oil. The refineries will be in the port cities of Okrika and Brass at the Niger Delta in southern Nigeria. The designed refining capacity of both the refineries is 200,000bpd. NNPC's report submitted to the country's Ministry of Mines and Power stated that the commencement ceremonies of the new refineries are slated for 2011 or 2012.

RUSSIA

Krasnoyarsk Krai Expected to Make Oil Refinery Announcement

In February, the Krasnoyarsk Krai's administration is expected to announce its plans on the construction of a new oil refinery in the Krasnoyarsk Krai.

No details of the project have been disclosed yet. Note that the program of the development of the local oil and gas complex approved by the authorities last spring envisages the construction of several oil refineries there. At present, the only oil refinery located in the Krai is owned by OC Rosneft.

AZERBAIJAN

Baku Oil Refinery Stops Rig for Petrol and Liquefied Gas Production

The Heydar Aliyev Baku Oil Refinery Plant has terminated the operation of a catalytic cracking rig, which produces high-octane petrol and liquefied gas, the State Oil Company of Azerbaijan (SOCAR) said.

Operations at the rig has been terminated for a short period for repair during which time a new modern device will be installed so as to increase the rig’s efficiency. “Reserves of the petrol and liquefied gas have enabled the repair and installation of a new rig to be carried out, SOCAR said.

BRUNEI

Proposed 200,000 bpd Brunei Oil Refinery to Export to East Asia

Brunei has finally taken the first step towards its objective of penetrating the regional market for refined oil products with the signing of an MoU between PetroBru and the Petroleum Unit of the Prime Minister's Office in January.

The MoU is for the conduct of a feasibility study for the proposed oil refinery and storage facility in the sultanate.

In an interview with The Brunei Times, Mohd Zaman Noordin, chief executive officer of PetroBru, said the proposal is aimed at seizing a share of the Southeast Asian market for refined oil.

"From an economic and technical point of view, the viability of the project is there because of its vast current supply and demand for refined oil products in the Southeast Asian region," he said.

"We are also situated close to the East Asian region where we hope to enter the markets of China, Vietnam and Indonesia," he added.

He explained that by looking at the current demand curve for refined oil products, there is still "indeed a shortage in supply".

The three-month study, to be conducted by Wood Mackenzie, will be the first phase. Government offices concerned will provide the consultant with relevant data to determine the economic viability of the refinery project.

Depending on the results of the first study, another feasibility and engineering study will be carried out and this will take between 12 and 15 months by a company that has yet to be identified.

"Based on current estimates of refining 200,000 barrels of crude oil per day, the whole development of the project in that capacity could cost between US$2 to 3 billion," he said.

Brunei currently has one oil refinery run by Shell. It serves local consumers with a refining capacity of 10,000 barrels per day.

PetroBru's preferred site for the development of the oil refinery and storage facility is the proposed Pulau Muara Besar transshipping hub.

The project will also complement the Pulau Muara Besar transshipment port development program, which has allocated 480 hectares for the development of the petrochemical industry.

IRAQ

Massive Fire in Iraq's Largest Oil Refinery

Reports suggest that one worker was killed and at least 36 people injured following an explosion at a fuel storage tank that caused a large blaze at Iraq's largest refinery.

The fire is thought to have started in a liquefied petroleum gas (LPG) unit at the Baiji refinery complex, some 180 km north of Baghdad.

The refineries have capacity of 310,000 barrels a day, according to the U.S. Energy Information Administration, and have been operating at less than full capacity due to power cuts and other problems including fires.

A police official in Baiji blamed the fire on an accident, and not sabotage which has plagued Iraq's oil sector since the US-led invasion nearly five years ago.

Iraq Plans Two Oil Refineries at $300 Million

An official at the Kurdish Regional Government (KRG) in northern Iraq has announced that the government is planning to establish two refineries valued at a total of USD 300 million with Canadian oil companies. The KRG will provide four production-sharing contracts to finance the building of two oil refineries with a capacity of 20,000 barrels daily.

The four contracts are valued at USD 800 million, the first refinery will be situated in Miran and will be completed by 2010 and undertaken by Canada-based Heritage Oil. The second refinery, located at the Taq Taq oil field, would be established by Genel and Canada's Addax Petroleum and completed in early 2009.

SAUDI ARABIA

Delays Threaten Saudi Aramco's Three JV Refineries Construction

A report in Middle East Economic Survey (MEES) newsletter has highlighted the mounting delays in the tendering process for Saudi Aramco's three joint-venture (JV) refineries, two of which are being developed with France's Total and ConocoPhillips, respectively.

The report, writes Global Insight energy analyst Samuel Ciszuk, has also managed to receive an official answer denying persistent rumors claiming that the Jizan refinery project—to which a JV partner has not yet been secured—is dead.

What seems more and more certain, however, is that the global cost escalations are hitting the Saudi projects with full force, causing many to question the economy behind the projects at this time and adding further uncertainties for subcontractors and suppliers. It also seems that the delays affecting the more advanced Jubail and Yanbu' projects are now surpassing one year.

Saudi Arabia has, unlike many of its neighbors, made sure to maintain refined products export capacity over the years, with its current refining capacity standing at around 2.1 million b/d and domestic consumption averaging 1.3 million b/d.

To add value to its exports, create new domestic employment opportunities, and industrialize its economy further by building on its hydrocarbons and petrochemical experience and know-how, however, the Saudi government—through NOC Saudi Aramco—launched a refinery expansion program in 2004-2005 aimed at adding almost 1.8 million b/d of refining capacity.

While extraordinary refinery margins in the refining industry were one source of optimism surrounding such a huge combined program, it is the access to large volumes of supplies and the tight global refined products supply picture for the coming years, coupled with Saudi Aramco's economic muscle, that have made the ambitious program look feasible.

To spread the risks, disburse profits to the population, and attract the latest technology, three out of the four planned refineries were launched as JV projects, giving 35 per cent of the stake to Saudi Aramco, 35 per cent to a private partner, and 30 per cent to the Saudi population through initial public offerings (IPOs). The fourth project—and currently the most advanced — is the domestic-market-focused 400,000-b/d Ras Tanura heavy oil refinery, solely financed, owned, and operated by Aramco.

According to MEES, both Total and ConocoPhillips are getting somewhat cold feet about the continuous cost escalations at their JV projects with Aramco.

Front-end engineering and design (FEED) for Total's Jubail JV refinery and ConocoPhillip's Yanbu' refinery—both with a 400,000-b/d capacity—by France's Technip and United States' Bechtel, respectively, are reported by the newsletter to have surpassed US$10 billion at both projects. This is in stark contrast to original budgets of US$6-6.4 billion, set during mid- to late 2006.

With the widespread world market shortages underpinning these escalations set to continue, the final construction costs for the projects seem virtually impossible to predict. The consortia are still officially committed to the projects, although local rumors suggest that the level at which the refineries will no longer be economically viable as investments is drawing dangerously near.

In addition to the construction-cost aspect, the delays suffered by the projects—no doubt caused mainly by the shortages of know-how and material—have passed the one-year threshold.

With FEED plans, according to MEES's sources, due late in the first quarter of 2008, the tendering of construction contracts cannot be expected to be awarded before late this year, as Total and ConocoPhillips will have to agree with Saudi Aramco over the final configuration of the projects, as well as agree on feedstock supplies and prices in the interim.

This would appear to push the refineries' completion date to late 2012 in a best-case scenario, or more likely the first half of 2013.

The most uncertain part of Saudi Aramco's refinery capacity expansion plan was always going to be the 250,000-400,000-b/d Jizan export refinery on the Red Sea coast. This too was planned as a JV project.

Following Chevron's withdrawal from early negotiations, citing serious doubts about the commerciality of the refinery—especially given its location—the project has been constantly surrounded by rumors of its shelving or outright scrapping.

Being a part of a politically motivated plan to build an industrial and economic city in the kingdom's impoverished south-eastern region in order to create jobs in an area with high levels of unemployment and Islamic militancy, the export-oriented refinery is about as far from its feedstock as it could possibly be without leaving the country.

The surrounding mountainous terrain would also make a pipeline costly, leaving shipment by boat from Yanbu' — or the Persian Gulf — the more probable solutions.

Initial talks with Malaysia's Petronas about project participation were reported in mid-2007, although no further progress has been reported. With its original viability under question, escalating costs are a real threat to this project, making rumours of its demise quite believable.

MEES, however, succeeded in receiving an official denial from the Saudi Oil Ministry, calling the rumors ‘completely false’, with another source close to the JV saying that "the project is alive and well".

The latter has claimed that delays have been due to the greenfield characteristics of the whole industrial/economic city, with the configuration of the refinery being dependent in turn on the configuration of the zone's port and surrounding infrastructure. The source expected a request for partnership to be tendered before the end of the first quarter and the project to be awarded by late 2008.

With the Saudi refinery-capacity expansion program seen as one of the safest parts of the future global refined-products supply planning due to Saudi Aramco's financial muscle, the news that delays are mounting and uncertainties are surrounding its implementation are escalating, have the potential to upset plans significantly.

Notwithstanding Saudi denials, the specter of cost escalations reaching 60 per cent and rising should be seen as a great threat to the program, especially the Jizan project, which is Saudi Aramco's weakest link.

That rumors of Aramco working on a completely different 400,000-b/d project to replace Jizan — and/or another one of the facilities — were strenuously denied to MEES might be more a result of positive thinking than the opposite. The risk that Saudi Aramco should shelve one or two of the projects until cost levels stabilize, should one JV partner withdraw, is perhaps not yet looming, but is large enough to be factored into mid-to long term planning.

McIlvaine Company,

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