Saudi Refineries to Cut Crude Export Cushion
From The Nation
Saudi Arabia’s drive to build new refineries means its maximum capacity to export crude, the big gun it aims at other producers wanting higher oil prices, is set to decline over the next five years.
Major oil importers are not alarmed, as actual Saudi crude exports are well below their maximum and because more U.S. and Iraqi crude will become available. But India’s refining industry has reason to worry about the emergence of a rival processing more than a million barrels a day. The three new refineries, each able to process 400,000 barrels per day (bpd) of mainly heavy crude, could consume nearly a tenth of the kingdom’s current officially declared production capacity of 12.5 million bpd when they are all fully operational in 2017.
Saudi Arabia has so far used its unique ability to produce much more crude than needed to counter price hawks led by Iran in the Organization of the Petroleum Exporting Countries and keep prices at levels that do not over burden the world economy.
Now the world’s largest crude exporter has invested tens of billions of dollars raising refinery capacity to maximise profits by selling more products while cutting a fuel import bill that has ballooned since 2007 as domestic demand grew.
The trio of refineries will continue major exports of petroleum in the form of diesel and gasoline, moderating any erosion of the kingdom’s overall clout in crude oil markets. Some traders at Asian refiners, the biggest buyers of Saudi crude, were relaxed about the availability of crude. “I am not worried about the supply situation. Supply of crude is ample, especially from the (Middle East) Gulf,” a trader at north Asian refiner said.
“Iraq’s production is increasing, that could make up. But, refining margins will definitely be a concern if Saudi Arabia begins to export products.” Fereidun Fesharaki, chairman of Facts Global Energy, said the new refineries will result in lower exports of Arab Heavy crude, one of the Saudi grades, pushing up its prices. “Despite growing demand at home, most of the products will go to exports and have a regional impact on product markets and the flow of products globally,” Fesharaki said in FGE’s latest global refining report.
Even when making up for supply losses from Libya and Iran over the last two years, Saudi Arabia has rarely needed to pump more than 10 million bpd and Saudi officials have said they see no need to increase capacity beyond the current sustainable levels of around 12.5 million bpd. A surge in North American shale oil production and rising Iraqi exports have taken much of the pressure off Riyadh to maintain such a large and costly spare capacity cushion that it has never and may never test.
“The rapid increase in shale oil production will lower U.S. import of crude oil from the Middle East in the next few years,” a senior trader at a western oil company in Singapore said, adding that lower U.S. demand would push more west African crude into Asia.
“Margins will be affected if Saudi products hit the markets, especially with the global economy slowing as well, unless there are more closures of old refineries,” he said.
