'Value-added' across the board (page 1 of 2)

This is a good thing, not just for the Kingdom, but for the GCC as a whole. Adding value to a national commodity domestically is far better than simply exporting it 'raw' and allowing other nations to add value to it and keep the proceeds in the process. Developing a bigger refining and petrochemical sector will also create numerous employment openings and opportunities for the region's private sector.

Saudi Arabia started the ball rolling in late 2004 when it signed a deal with Japan's Sumitomo Chemical to build, what is billed to be the world's largest, integrated refinery and petrochemicals complex; PetroRabigh. The complex estimated to cost about $10bn, will produce 18.4 million tons per annum of high value petroleum products and 2.4 million tons of ethylene- and propylene-based petrochemical derivatives annually.

Then, just last week Saudi Arabia signed two major deals with international oil companies, both for constructing multi-billion dollar refineries. One will be built on the Kingdom's east coast and one on its west coast. Total, France's major oil company, signed a deal with Aramco, estimated to be worth $6bn, to develop one of these refineries. It will be built in Jubail on the Gulf coast and is forecast to be able to produced 400,000bpd of refined products.

Under the deal, Aramco and Total will form a new joint venture company and will each hold stakes of 35 percent. According to an Aramco press statement, released at the time, the remaining 30 percent stake will be offered to the Saudi public in the not too distant future.

A few days after the Total deal, in what seems to be a 'carbon copy', Aramco and ConocoPhillips signed a $6bn deal to build a 400,000bpd oil refinery in the Red Sea city of Yanbu. It was reported that Aramco and the Houston-based company will also offer 30 percent of their new joint venture in an initial public offering. Both of these refineries are scheduled to come online in 2011.

Staking Out A New Economic Role

For all the talk of economic diversification, every state has certain inherent competitive advantages and these are best utilised. Yes Saudi Arabia should endeavour to move away from an overdependence on oil, but it would be uneconomic not to take advantage of it. Depending upon oil export receipts alone is not fruitful, and diversification into refining, downstream activities and investing in industries that depend on a heavy oil feedstock is the optimal way forward.

The recent Aramco joint ventures are part of a much larger $50bn investment program to refine more domestically and at refineries built in partnership with other states. Aramco is planning to build new refineries or expand existing ones in China, Indonesia and South Korea. Crucially all of these off-shore refineries will be optimized to work with Saudi Arabia's heavier grade of crude oil. In the next decade the Kingdom hopes to increase its refining capacity by as much as 60 percent.

One considerable advantage that Saudi Arabia will gain by building more refining capacity domestically and investing in refineries globally (predominantly in Asia) is that most if not all of these will be tailored for Saudi 'heavy crude'. Unlike many Western refineries that are geared for lighter varieties of crude Aramco's refineries will be designed to utilise the Kingdom's heavier grades of oil. Therefore Saudi Arabia can count on its oil being purchased even if there were to be a future drop in aggregate demand for oil.

Total will share the marketing of the refinery production, a joint press release said.