Aramco, ConocoPhillips delay Yanbu refinery construction

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Nov. 6 -- Saudi Arabia's Saudi Aramco and ConocoPhillips, citing uncertainties in financial and contracting markets, have agreed to halt the bidding process for construction of their planned 400,000 b/d export refinery at Yanbu.

"Although the original schedule for the Yanbu export refinery project will change, [Aramco] remains strongly committed to completing this important project with ConocoPhillips," said Pres. and Chief Executive Officer Abdallah S. Jum'ah.

"We believe that a delay at this time will allow both the contracting and financial markets to better accommodate the project and will prove to be advantageous for the project company," Jum'ah said.

The companies had requested bids to be submitted during Dec 2008 but expect that the project will be rebid in second-quarter 2009. Meanwhile, to ensure project continuity, the firms will maintain joint engineering, start-up planning, and other preparatory activities.

The Yanbu refinery, which had a price tag of $6 billion when it was announced in 2006, was one of four plants Aramco planned to increase its refining capacity. But equipment and labor shortages have pushed costs up globally in the energy sector, casting doubt on whether the projects would go through as planned.

Uncertainty in Aramco
The decision regarding Yanbu follows earlier reports suggesting uncertainty in the Saudi national oil company regarding the effect that the current global financial crisis would have on its projects.

Earlier this week, an Aramco executive director said the firm is reviewing some of its long-term projects following the sharp decline in oil prices and a dramatic slowdown in demand growth for crude.

"We are going back to our partners and discussing with them the new economic circumstances," said Khaled al-Buraik, an executive director at Aramco. "We are not talking about delays, we are talking about reviewing."

Al-Buraik said a decision on the projects would be made based on the re-evaluation process, and that Saudi Arabia and other countries would be conducting their own reviews in the wake of changing dynamics.

"People would like to go and re-evaluate, and maybe some projects were evaluated at $80 or $100/bbl—now we are talking about $65/bbl," he said.

Al-Buraik said he thinks the whole oil industry will re-evaluate new expansions: "It will be reassessed based on the current economic circumstances," he said.

Al-Buraik's view diverges sharply with remarks made last week by Khalid G. Al-Buainain, Aramco's senior vice-president of refining, marketing, and international activities.

Crisis' minimal impact
"When it comes to our new crude-oil increments and gas expansion projects, the impact of the present economic turmoil will be minimal," Al-Buainain said at a meeting of the Society of Petroleum Engineers.

"By and large, our upstream projects are self-financing, or 'corporate financed,' meaning that we are not reliant on the banks or credit institutions to finance our expansion programs," Al-Buainain said.

Softening demand means an extra cushion for project timetables and more flexibility in production, he added.

The company also is involved in several joint ventures with international partners, from export refineries to petrochemical projects, and Al-Buainain expressed optimism that they will be unaffected by the current global economic situation.

"I can tell you that our partners are still highly committed and anxious to see these projects move forward. I think it is realistic to say that financing these megaprojects through borrowing in a tight credit market will be a challenge," he said.

"However, because of the uncertain nature of the global financial crisis, it is really too early to tell what sort of fallout there will be for the funding of these projects." He added that the economic viability of the projects is not in question.

Advantageous position
The construction boom in the Middle East might cool off because of the slowdown in credit, putting Aramco in a more advantageous position.

"Declining commodity prices that are a byproduct of the global economic slowdown will help to reduce the estimated price tags of these projects, as the cost of materials like steel and copper falls sharply," he said.

Equipment and qualified personnel are also likely to be easier to obtain as other projects in the region are canceled or delayed, both in the industry and in the construction and infrastructure sectors.

"As a result, short-term project economics may actually benefit from the current financial turmoil, and companies with a lot of cash will come ahead," said Al-Buainain.

"The day-to-day noise generated by the markets doesn't matter very much when it comes to [Aramco's] project portfolio," Al-Bunainain said.

Contact Eric Watkins at hippalus@yahoo.com.

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