Contax Project Snapshot: Jubail Grassroot Export Refinery

The planned GCC energy Capex landscape for 2008 to 2010 continues to show signs of growth over the period 2005 – 2007, with around US $377 billion worth of investments already on the table.

From a sector perspective, standing alongside the power sector, the refining and petrochemical sectors continue to dominate the energy Capex landscape with circa US $94 billion and US $73 billion respectively already planned for award by the end of 2010.

Saudi Arabia maintains its position as the Capex king with around 40% worth of the investment already planned within the GCC energy space.

However, following Contax’s recent analysis of project delays and cancellations within the region, it is anticipated that a number of these projects will not be realised in line with their original and intended timeframes.

Nevertheless, with these figures and growth rates, it is evident that the GCC, and in particular Saudi Arabia, is well on its way to solidifying its global ‘petrochemical and refining hub’ position and playing a pivotal role in bridging the global demand and supply gap.

A major project that is expected to help Saudi Arabia achieve this goal is the Jubail Grassroot Export Refinery (JER).

Background and strategic importance

Located within Jubail 2, an extension of Jubail Industrial City in the Eastern Province of Saudi Arabia, a Saudi Aramco led JV is planning to build a flagship 400,000 barrel per day (bpd) fully integrated grassroot export refinery.

In an effort to successfully develop and execute this project, Saudi Aramco has joined forces with France’s Total under a current 67.5:37.5 JV partnership.

Contax understands that upon operational start up, Aramco plans to offer 25% of the company to the Saudi public through an Initial Public Offering (IPO) on the Saudi stock exchange, thus resulting in a 3 party ownership structure; Aramco 37.5% : Total 37.5% : and Public Ownership 25%.

Since the project’s announcement and with the continuous escalation in project costs, there has been much discussion around the project economics, viability and partner commitment.

However, on 6 May Saudi Aramco and Total gave their final investment decision to go ahead with the project and are now awaiting approval from the Saudi Oil Ministry.

Following the approval, Contax understands that financing for the project will be sought during the second half of 2008 and lenders selected by early 2009.

With a currently estimated investment cost of US $12 billion, a 100% increase over its original budget of US $6 billion, the refinery will utilise heavy crude oil as feedstock.

The majority feedstock will be sourced from the nearby Manifa Offshore Oil Field, which is currently undergoing an 800-900 000 bpd redevelopment programme, and processed to produce diesel and jet fuels for domestic and export use.

The main export markets for the processed products will be fast growing markets in the Far East, Europe and North America.

Development of the JER project enables all involved stakeholders to satisfy a number of key strategic objectives. It can significantly increase Saudi Arabia’s contribution to global refining capacity through the conversion of its abundant heavy crude oil reserves into refined oil products for export.

Heavy crude oil is generally not preferred by global refiners due to the high cost of processing and poor extraction rate.It will also enable Saudi Arabia to take advantage of the current price disadvantage on its Arabian Heavy Crude.

Furthermore, Saudi Aramco will be able to maximise the existing value of its existing and new production activities and capitalise on synergies with international players to solidify its position within refining value chains and further expand its marketing channels.

Total will be able to expand its manufacturing base through the gaining of access to competitively priced feedstock, as well as strengthen its commitment to the Kingdom following its recent decision to pull out of the South Rub Al Khali (Srak) gas exploration hunt in Saudi Arabia’s Empty Quarter.

The project will also enable the creation of employment opportunities within Saudi Arabia, thus helping the country achieve one of its key aims: unemployment rate reduction.

Scope of work

The JER scope of work consists of 7 main packages:

• Aromatics package – will produce 700,000 tonnes per annum (tpa) of paraxylene, 140,000 tpa of benzene and 200,000 tpa of polymer grade propylene

• Coker unit

• Conversion package

• Distillation and hydrotreating

• Utilities and main piperack

• Crude storage tank packages

• Dredging and reclamation works Timeline and status

The front-end engineering and design (FEED) stage, which is currently being conducted by Technip, is scheduled for completion this quarter (Q2 2008).

Contax understands that once this phase of work is completed, it is expected that the engineering, procurement and construction (EPC) invitations to bid (ITB) for all packages, except the dredging and reclamation works, will be issued in June 2008.

EPC bid submission will then be expected during Q3 2008 with an award date scheduled for Q1 2009.

Should the current project timeline remain unaffected by the construction delays currently being faced within the industry, construction should commence in Q1 2009 and be completed by Q2 2012.

Challenges

With the current resource and material crunch challenges being faced by owners and contractors, the risk of continued project delays and cost escalations continues to rise.

To date, the project is already running one quarter behind schedule and has had a budget increase of 100% from US $6 billion to US $12 billion.

Nevertheless, with the recent announcement of the final investment decision, the FEED stage nearing to completion and initial discussions that have been held between the project owners and potential EPC contractors, Contax believes that the JER project has a high probability of going ahead.