By Ed Attwood
As Kuwait Petroleum International diversifies its revenue streams into large emerging markets in Asia, president and CEO Bakheet Al Rashidi explains why his company is investing in some of the biggest refinery projects in the world.
About 200km south of the Vietnamese capital, Hanoi, lies the small seaside town of Nghi Son. Right now, the name is mainly familiar only to locals and foreign tourists. But after an hour spent in the company of Bakheet Al Rashidi, you get the impression that Nghi Son is never far from his mind.
That shouldn’t come as too much of a surprise. For Kuwait Petroleum International (KPI), the organisation Al Rashidi runs, a new megaproject on the outskirts of Nghi Son represents not only a considerable investment, but also symbolises the company’s efforts to diversify its revenue streams into high-growth emerging markets in Asia.
As the international arm of Kuwait’s national oil company, Kuwait Petroleum Corporation (KPC), KPI’s traditional role has been to refine and market fuel, lubricants and other petroleum products in its core market, Europe. It’s a sizeable operation; the firm runs nearly 5,000 petrol stations (mainly under the Q8 brand) in 23 countries, operates two refineries processing around 300,000 barrels of oil a day (where KPI's share is 200,000 barrels a day) and sells fuel to over 200 airlines at 60 airports across the world.
Those operations altogether pulled in $17.8bn in revenues during the 2013-2014 financial year. As impressive as those figures might be, KPI has been for some time now looking further afield as better public transport and more efficient engines crimp Europe’s capacity to galvanise its bottom line.
All of which explains why the deal to build a vast $9bn refinery and petrochemicals complex in Vietnam — billed as the biggest foreign direct investment (FDI) project in the country and the largest facility of its type in South East Asia — was the biggest challenge facing Al Rashidi when he took the reins at KPI two years ago.
The fact that Al Rashidi was successful in overcoming that first hurdle perhaps reflects his lengthy career in refineries. Prior to taking the job at KPI, he had served as deputy chairman and managing director at Kuwait National Petroleum Company (KNPC), KPC’s domestic refining and distribution arm. In that role, he oversaw some of the largest refining complexes in the world, at Mina Abdulla, Mina Ahmadi and Shuaiba. Previous to that, Al Rashidi had worked in the KNPC head office as a corporate planning manager — part of a team that reviews and approves megaprojects — and before that, he had spent 18 years as a technical services manager in refineries.
But while KPI’s president may be au fait with the technical complexities of such a huge project, he’s also convinced of the benefits it will eventually bring to Vietnam. KPI’s share in the joint venture building the refinery complex is 35.1 percent, a stake that is matched by Japan’s Idemitsu Kosan. Local energy giant PetroVietnam has a 25.1 stake in the project, while another Japanese firm, Mitsui Chemicals, holds the remaining 4.7 percent.
When completed in roughly two years’ time, the complex will start to serve Vietnam’s economy, which is one of the fastest-growing in the world. Vietnamese gross domestic product (GDP) is projected to grow by 6 percent this year, according to the International Monetary Fund (IMF). The Economist Intelligence Unit (EIU), thinks that growth will be even faster next year, at 6.5 percent, as strong domestic demand bolsters the economy.
“Vietnam today is one of the major customers for our products,” says Al Rashidi. “And it’s important that we have secure outlets for Kuwaiti crude, and we know that refineries are the backbone of any industry. Any country that wants to develop its industrial activities needs to start with a refinery.
“We need to ensure not only that our customers are consuming our oil, but they are developing their countries and employment as well. It’s also a good image for Kuwait as a country. We may not be big politically, but commercially we are very strong — and we want to keep that position.”
The KPI president says the benefits associated with the refinery don’t just extend to the gasoline, kerosene, petroleum gas and so on that it produces — it will also provide a major boost for local employment.
“Nowadays, the average refinery will consume between $7-$10 processing costs per barrel,” Al Rashidi says. “If you have a 200,000-barrel-a-day refinery, that’s $2m a day in running costs — so wages, materials and so on. This is good for any country, especially the employment part, and we in Kuwait need to make sure we have a role in that.”
Right now, Al Rashidi says the megaproject is 50 percent complete, an achievement he credits largely to the support of the Vietnamese government and KPI’s joint venture partners, as well as the set of contractors who are working onsite. The contracting team consists of Japan’s JGC and Chiyoda, as well as France’s Technip and South Korea’s GS Engineering and Construction and SK Engineering and Construction.
“The consortium is very professional, and we are satisfied with their performance," he says. "We are expecting the mechanical completion by the end of 2016, and by mid-2017 we will have the refinery commissioned.”
Vietnam is not the only Asian market where KPI is seeking to extend its influence. In Indonesia, the firm has been in talks with state-owned local partner Pertamina about another potential megaproject, with local media suggesting that investment into a new plant could total $6bn. But Al Rashidi plays down any physical movement on this project.
“Recently they [Pertamina] have been revisiting the refining sector in Indonesia, and we are still at the early stages,” he says. “And I think it will take some time to shape up this opportunity.”
Elsewhere, more progress has been made in China, where talks have been ongoing for some time with local partner Sinopec about building a potential $9bn refinery in Zhanjiang, in Guangdong province. While some media reports had suggested that the project had stalled, Al Rashidi says no final investment decision has been reached.
All three of these Asian opportunities are in fast-growing markets. Despite worries over a hard landing for China, the economy is steadily shifting from one that is driven by investment to one that is driven by consumer demand — something that should suit a successful refinery project. Indonesia’s GDP growth this year is estimated at just under 5 percent a year, according to the EIU.
Those figures compare strongly to moribund growth projections in Europe. The IMF thinks that the Euro Area will see 1.5 percent growth this year and 1.7 percent growth in 2016, after recording just 0.8 percent growth last year. But despite the pivot towards Asia, Al Rashidi says Europe will still remain a core market.
“Europe today is consuming almost equal the amount that the major Asian economies are consuming,” he says. “Today, it is consuming more than 12 million barrels a day — it’s a strong, mature market. But the growth is heading east. We’ve seen this for a number of years now and the fact remains that growth in Europe is declining.
“A few years back consumption in Europe was 15 million barrels a day, and the reduction has many reasons. We have seen more efficient cars, smaller engines, mainly because of the cost of fuel over the last four or five years. Product prices were high, and also the tax that many European countries charge — which in some cases cost more than the fuel itself.”
But that’s not to say that KPI has been standing still in Europe. It operates two refineries in Rotterdam and Milazzo (Italy), and has lubricant blending plants in Belgium, Italy, Sweden and the UK. It is the largest fuel station provider in Luxembourg and the second-largest in Italy, thanks to a buy-out of Shell’s retail business in the country last year. In addition, it also operates sizeable fuel station businesses in Sweden, Holland and Belgium. In tune with the push towards more environmentally friendly cars, KPI has installed electric car charging stations and liquefied petroleum gas filling spots in some of its outlets.
KPI is also a major player in European jet fuel distribution, with Al Rashidi pointing out that sales in this division rose by 14 percent last year. It is the second-biggest jet fuel distributor at London Heathrow and also has major operations at Paris Charles De Gaulle, as well as nearly 60 other airports.
When questioned as to whether KPI is specifically looking at other new acquisitions in Europe, Al Rashidi says that the firm is looking at “more than one”.
“Part of our 2030 strategy is to strengthen our position in Europe,” he adds. “I personally believe that Europe will continue to be a good market for us. If something adds value, then we will go for it.
“In Spain we are growing, and we have plans to enhance our operations there. For so many years we were downsizing, and now we are going back again. We think Spain will grow in a positive way in the coming five to ten years.”
The KPI president also says that the company is also focussing on Eastern Europe and Turkey. In terms of going into other large emerging markets, such as Africa, Al Rashidi says the political situation is such that he is reluctant to explore opportunities further at the current time.
The dramatic drop in the oil price, from over $100 about a year ago to roughly $50 for a barrel of Brent, has had major repercussions for KPI’s parent firm. In June, Adnan Abdulsamad, chairman of the Kuwaiti parliament’s budgets committee, announced that revenues from KPC and its units would fall by a third in the current fiscal year (2015-2016) to $52bn.
Al Rashidi says the fortunes of KPI are not quite in line with the parent company, given its position further downstream. He reveals revenues for 2014-2015 amounted to $18bn — a 1.2 percent increase on the year before — boosted by the recent acquisitions.
“As refiners, we are — if I can put it like this — a little bit luckier compared to the upstreamers,” he adds. “The upstreamers are affected directly by the crude price drop. But we play on the margin between the product price and the crude price — and this margin is not linked directly to the crude price.
“Sometimes you might have a high crude price where the margin is too thin. And the other way round — you might have a healthy margin when the crude price is low, and that’s what’s happening today, especially in Europe.”
From a more general perspective, the KPI president agrees with OPEC’s decision to allow the market to decide the price of oil, instead of paring back production in order to keep prices high.
“It might, let’s say, produce some uncertainty in the market, but that will be only for a short time,” he says. “Long term, I think we will get the right price for it, which is the average that’s good for both consumers and producer.
“If you look at the situation today, the price is low, and I think we will see an increase. I think 12 months to 24 months from now, we will see it between $60 and $80. This is short term, but in the long term, I can see it at $80.”
For the future, it seems that size will dictate who survives and who falls in the hotly contested refinery business. A recent report from consultant AT Kearney warns that the operators of one in every three refineries based in Europe and North America will need to reconsider their operating models or face closure, as margins compress and demand grows elsewhere.
Al Rashidi says the refinery companies that succeed in the future will be large (processing at least 200,000 barrels per day), complex and integrated.
“When the market is not strong enough, the smaller refineries will have negative margins,” he says. “I feel that they will soon not have a future in the open market.”
But the future for KPI looks promising — dependent, of course, on those refineries in Asia. The company is also helping its parent develop a larger research and development environment in Kuwait, through the efforts of the Kuwait Petroleum Research and Technology centre in the Netherlands. For Al Rashidi, though, the biggest challenge remains over in the east.
“The main challenge is to make sure those projects are sustainable and profitable,” he says. “We need to manage that growth in Asia, and we need to make sure the projects are good for us, for our partners, and also good for the country we are operating in.”For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.