The oil rich and cash poor

Refinery investment: Chevron’s Todd Grubin says his company sees it as being about matching markets to crude supplies.

Although the oil business is a profitable one, it is also conservative. Risk-averse investors involved in a risky business look twice before giving their money away. And we're talking about large amounts of money.

To put some numbers around it, look at the figures quoted by the Arab Petroleum Investments Corporation (Apicorp). In assessing the potential cost for industry projects leading up to 2011, it estimates Saudi Arabia alone is looking at a bill of US $85 billion. Qatar comes in second, facing an outlay of up to US $60 billion. This level of investment needs some substantial returns. While ‘how much?' is an obvious question, ‘how fast?' may be more relevant.

In an interview with Oil & Gas Middle East, Vahan Zanoyan, chairman and CEO of PFC Energy International, a consultancy, pinpointed the issue.

"At the same time as major consuming countries have begun questioning the reliability of the traditional suppliers of energy, the major producing and exporting countries have started questioning the reliability of long-term markets," he said. "They often cannot justify the vast new investments in production capacity that they are asked to undertake."

Apicorp has raised the same concerns in the last few months, writing that entities ‘might consider delaying or even cancelling some of their capital projects on the grounds of expected lower returns'. Refinery investment, it seems, is particularly vulnerable because ‘the uncertainty of future revenues outweighs that of costs'.

Some projects have already fallen victim to the uncertainty, with Qatar Petroleum and Exxon Mobil dropping plans to build a US $18 billion gas-to-liquids (GTL) plant in Qatar, due to spiralling costs. The price for that facility, which would have processed gas into market-ready refined products, rose to the estimated US $18 billion, after starting out at a more palatable US $5 billion in 2003.

Qatari Energy Minister Abdullah al-Attiyah was swift to say other projects in Qatar are not under threat. He gave Shell the nod, as he told the industry that the company would be breaking ground for a multi-billion-dollar GTL plant a few days after Exxon Mobil's cancellation announcement. Exxon Mobil is still in the running for other development projects in Qatar, but they come with a significantly smaller price tag.

Despite such setbacks the calls for funding still come. The Abu Dhabi National Oil Company (ADNOC) has been speaking with a tone of regional leadership recently, using the Middle East Fuels Symposium to remind the industry of the need to invest in the refinery infrastructure. ADNOC's head of marketing research and analysis, Ali Obaid Al Yabhouni, acknowledged that money is already being spent, but it seems more needs to be done.

Although hesitation exists, so does some optimism. With its recently consolidated regional branding, the freshly rebranded Chevron Alkhalij is open to involvement in refinery projects. Last year, Chevron's international entity secured a 5% stake in the Reliance Industries refinery project in India. The deal included options to go up to a 29% share. Although the company also dipped out on attempts to get involved in Saudi Arabian refinery projects, according to Todd Grubin - Chevron's country chairman in Dubai and vice president of operations - it's still looking.

"The Reliance project is an indication of our interest in investing in and growing refineries, especially in this part of the world," he said. "We're looking and although there's nothing firm, we're always interested in refinery investments where they make sense and fit into our system. It's about matching markets to crude supplies."

Much further upstream, the offshore sector is calling for investment too. Elevated oil prices have seen rigs and support vessels being put to extensive use, but more are required to fill the gap in supply. Despite the apparently obvious opportunity, institutional investment has not flowed in freely. Some in that sector of the industry suggest potential investors don't understand the risks. Perhaps the problem is that they do?

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