Downstream Monitor - MEA Week 03

Issue 190 21•January•2015 Week 3

Gulf tide turns against subsidies The time is nigh for cutting subsidies in the Middle East as governments,

feeling the pinch from low oil prices, pass the pain on to consumers.

Price bears down on major projects Budgetary constraints and changing economics have forced GCC

governments and their international partners to re-examine their planned hydrocarbons projects.

Sino-Iranian downstream ties strengthen Chinese expertise will be central to Iran’s Abadan refinery expansion, as part

of a strengthening of ties between Beijing and Tehran.

COMMENTARY 3

Gulf governments call time

on subsidies 3

Major Gulf projects at risk

from domino effect 5

China follows Russia in ramping

up Iranian investments 7

POLICY 8

Turkey and Iraq to strengthen ties 8

Solar still a slow mover in Gulf 10

Chad, Cameroon pressure

Boko Haram 11

EU considers Libya embargo 11

REFINING 12

Fujairah refinery suffers new delay 12

FUELS 13

Shell opens GTL base oil

terminal in Jebel Ali 13

PETROCHEMICALS 13

QP, Shell cancel Al-Karaana

petchem project 13

TERMINALS & SHIPPING 14

Shell bolsters base oil storage,

reduces exposure elsewhere 14

Mauritius aims to be product hub 15

TENDERS 15

Cash-strapped Yemen forced to

tender for oil products 15

NEWS IN BRIEF 16

SPECIAL BRIEFING 20

SPECIAL REPORTS 21

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Downstream Monitor MEA 21 January 2015, Week 03 page 3

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Gulf Co-operation Council (GCC)

governments hit by the continuing slump

in crude prices are starting to trim their

budgets, with a particular casualty being

the fuel and power subsidies enjoyed

across the region. Kuwait, Oman and

Abu Dhabi have recently reduced

subsidies on diesel, natural gas and

utilities, risking domestic discontent but

reflecting the substantial budgetary

burden of unsustainable fuel subsidies.

The International Monetary Fund

(IMF) estimates that the energy subsidy

burden on GCC governments ranged

from 9% to 28% of revenue in 2011,

since when rising energy prices have

increased that burden.

Across the Middle East, more than

33% of power is generated using

subsidised oil, the International Energy

Agency (IEA) said in November 2014.

There has a gradual building of

consensus among Gulf monarchies on the

need to reduce subsidies, in order to

shore up their legitimacy, but the

unpopularity of turning the talk into

action was demonstrated in Yemen,

where gasoline and diesel subsidy cuts in

July provoked the Shia Houthi grouping

to march on the capital Sana’a in

September. This prompted the

dissolution of the government and a

partial reversal of the subsidy reform.

Taking a stand

The oil price fall – which was recently

below US$47 per barrel – has

nonetheless hardened regional resolve.

UAE energy minister Suhail Al-Mazroui

told reporters in mid-2014 that the

government was not happy with the

amount of electricity being consumed,

which he said was two to three times the

global average. On January 1, Abu Dhabi

raised electricity prices to curb

consumption, and ordered nationals to

pay for water for the first time. Its

neighbour Dubai – having implemented a

limited electricity tariff increase in 2011,

to counter sovereign debt concerns – has

submitted a recommendation to the

energy ministry to cut gasoline subsidies

by up to 20%.

Oman doubled natural gas prices for

businesses as of January 1. The

sultanate’s Finance Minister Darwish Bin

Ismail Al-Balushi insisted that spending

cuts are required, and argued that subsidy

reductions for basic services need to be

considered.

In Kuwait, where the per capita

electricity usage is among the world’s

highest, generating around US$16 billion

of annual subsidy, a start has been made

by eliminating subsidies on diesel and

kerosene.

The emirate has said power and

gasoline are reprieved, for now, but the

Ministry of Electricity and Water is

selling power for just 5% of the cost of

production.

COMMENTARY

Gulf governments call

time on subsidies

The time is nigh for cutting subsidies in the Middle East as governments, feeling the pinch

from low oil prices, pass the pain on to consumers

By Kevin Godier

Gulf countries are losing perks from free water to cheap fuel as governments seek to trim their budgets

Kuwait, Oman and Abu Dhabi reduced subsidies on diesel, natural gas and utilities this month

The subsidies will be gradually removed, but this will be a painful process





The initial measures “set the stage for

further cuts,” according to Shanta

Devarajan, the World Bank’s chief

economist for the Middle East and North

Africa. “The fall in oil prices makes the

case for subsidy cuts stronger, since

governments are facing a decline in

revenue,” he told Bloomberg.

In the region’s biggest economy, Saudi

Arabia, Saudi government support to the

Saudi Electricity Co. (SEC) in 2012-13

was worth around US$40 billion,

compared to an overall subsidy bill for

electricity and gasoline of around

US$13.3 billion in 2010. Gasoline sells

at US$0.45 per gallon (US$0.12 per litre)

in the kingdom, the second cheapest

among 61 countries tracked by

Bloomberg.

Welfare or fiscal streamlining

Countries in the six-member GCC have

undoubtedly used subsidies to keep

social unrest at bay among their

ballooning populations. However, a

factor that cannot be ignored is that

cheap domestic energy prices have

triggered a surge in consumption, which

risks reducing the oil available for

export.

“With energy demand in the GCC

doubling every seven years, these

countries can no longer afford to keep

subsidising domestic consumption of

their chief export,” said Jim Krane,

author of Dubai: City of Gold and a

research fellow at Rice University’s

Baker Institute for Public Policy in

Houston, Texas. “Governments have

genuine fiscal pressure that adds punch

to their call for everyone to tighten their

belts,” he was quoted as saying by

Bloomberg.

State-run Saudi Aramco warned in

May 2014 that it will have “unacceptably

low levels” of oil to sell in the next two

decades if domestic power use keeps

rising at 8% per year.

Notwithstanding the window of

opportunity offered by low oil prices, the

World Bank has contended that action on

subsidies should be taken for another

reason. In an October 2014 report, the

bank said burgeoning energy subsidies

are partly to blame for other problems

within the GCC region, including

increasing pollution and a high rate of

road accidents.

Time to act

The plunge on oil markets has

demonstrably added to existing pressure

on the region’s rulers to implement

spending cuts proposed before the fall in

prices.

According to Arqaam Capital, a

Dubai-based investment bank, even if oil

were to recover to average US$65 a

barrel this year, the GCC nations will

post a combined budget deficit of 6% of

GDP. The GCC members can afford to

make the phase-out of subsidies at a

measured pace, due to their accumulation

of hundreds of billions of dollars in

foreign reserves able to soften the blow

of falling oil revenue.

Subsidies will be gradually removed

providing there is no major blowback

from citizens. Indeed, Al-Mazroui said

on January 13 that lifting fuel subsidies is

“just a matter of time.”

Beyond the GCC, the lower oil price is

likely to be giving Iranian politicians

another opportunity to push economic

reforms, including subsidy cuts. In

December 2010, the government ended a

subsidy regime estimated at US$70

billion, replacing it with a cash subsidy

programme. However, sanctions meant

that planned government revenues

anticipated from rising energy market

prices never materialised. President

Hassan Rouhani has already raised petrol

prices by 75% since the rapprochement

with the West.

None of this alters the reality that

subsidy reform is politically very

difficult, especially for the monarchs of

the GCC, who fear popular anger from

populations that are yet to embrace the

shift in mindset required to accept larger

utility bills.

Saudi, the UAE, Qatar and Kuwait

probably possess the financial resources

to negotiate a few years of poor

revenues, which may be required if the

OPEC policy of maintaining market

share continues. However, as the GCC

adjusts to the massive crude price fall

that appears set to continue into 2015,

Oman and Bahrain look rather

vulnerable, lacking the hard currency

reserves that their richer neighbours can

fall back on.

Differences between GCC members

will begin to emerge if oil remains under

US$50 per barrel for any length of time,

but NewsBase Research expects further

cuts to subsidy programmes before that

juncture.

COMMENTARY





When wealthy state-owned giant

Qatar Petroleum (QP) and

partner Royal Dutch Shell

announced the abandonment of

their planned US$6.4 billion Al-

Karaana petrochemicals project

on January 14, the move was a

shock but hardly a surprise.

The other flagship of QP’s

now-moribund petrochemicals

expansion – the similarly-sized

Al-Sejeel – had already been

shelved three months earlier

while regional giant Saudi

Aramco informed prospective

contractors at the turn of the

year that the US$3 billion

upgrade of its largest refinery at

Ras Tanura had been placed on

the backburner for a year.

On the other hand, Gulf Co-

operation Council (GCC) leaders’ loud

insistence on their resilience in the face

of sliding oil prices and their

determination to proceed with major

projects is more than empty rhetoric.

While quite naturally reassessing plans in

the light of lower disposable income,

Gulf governments are already delivering

on promises to proceed with schemes

deemed ‘strategic’ and essential for long-

term economic development.

Just days after Ras Tanura was

mothballed, Aramco tendered the main

construction contract on the US$5 billion

Fadhili gas-processing plant, while Oman

– by common consent the regional

country most harmfully affected by the

oil price collapse – is pushing ahead even

with downstream development as it looks

to long-term economic and social needs.

Downstream downturn

Al-Karaana, which was conceived by QP

and Shell in 2011 to produce around 1.8

million tonnes per year (tpy) of

petrochemicals from a mixed-feedstock

steam cracker fed with gas from the

development of the Barzan gas field,

seems with hindsight a predictable

casualty.

Even before the downturn of the past

six months, Shell has been engaged on a

cost-cutting and asset-shedding drive

prompted by its first-ever profits warning

in January 2014. However, the earlier

shelving of the US$7.4 billion Al-Sejeel

polymers scheme – which was

entirely government-sponsored

through QP and affiliated

partner Qatar Petrochemical Co.

(QAPCO) – indicates Doha’s

increasing doubts as to the

viability of its planned large-

scale expansion into

petrochemicals.

At that time, the client

indicated that alternative

projects “yielding better

economic returns” would be

studied. Notice of Al-Karaana’s

fate, however, was accompanied

by news that the ethane saved

would be redistributed among

the various smaller existing

players in the sector.

For Doha, the rethink seems

driven by the demand rather

than supply side. The government, and

by extension QP, have both the financial

and gas resources to proceed, but a weak

global petrochemicals market and

subdued Asian economic growth

compromises the economic viability of

such projects.

While Qatar is blessed with an

enviable fiscal cushion to withstand

cheaper crude and enjoys one of the

region’s lowest break-even prices, such

comfort also allows selectivity in

pursuing economic diversification

projects: the tiny indigenous population

enjoys the world’s highest per capita

income, removing the job-creation

imperative driving downstream projects

in Oman and Saudi Arabia.

COMMENTARY

Major Gulf projects at

risk from domino effect

Budgetary constraints and changing economics have forced GCC governments and their

international partners to re-examine their planned hydrocarbons projects

By Clare Dunkley

Qatar’s petrochemicals ambitions have been demolished by falling global prices

Abu Dhabi and Riyadh have prioritised gas while cutting back on refining

Saudi, Kuwait, Qatar and the UAE all benefit from a buffer in the form of large foreign reserves





Riyadh’s recent moves on three major

projects illustrate a more complex set of

imperatives – with Fadhili out to bid, the

so-called Ras Tanura Clean Fuels Project

on hold and the contractors on the

expansion of the Khurais oilfield

expansion requested to extend the

duration of the work by around 12

months to facilitate Aramco’s cash-flow

management. Like Qatar, the Saudi

government is well-endowed to

withstand a prolonged downturn in

revenues, with a reserves cushion

sufficient to fund the deficit level

envisioned for 2015 for some six years.

The expansionary budget unveiled in

late December was touted in Riyadh and

elsewhere as a signal of such resilience –

to the chagrin of struggling OPEC

counterparts such as Iran and Venezuela.

However, the expenditure increase of

0.6% to 860 billion riyals (US$229

billion) was the smallest in more than a

decade and, as elsewhere, the importance

and timing of capital projects was

prudently reviewed. This was

acknowledged by Economy & Planning

Minister Mohammed al-Jasser in early

January, when accused of deviating from

the government’s five-year plan.

“Making changes to the five-year plan

is possible if the oil price plunge

demands that,” he told a gathering in

Riyadh. “Every year we make a review

of the plan.”

Top of the pile

However, the need to raise gas

production to meet soaring domestic

demand and to fuel major planned

industrial expansion is an urgent

requirement for future economic

development to support the GCC’s

largest population and as such, gas

projects such as Fadhili top Aramco’s

priority list.

The US$5 billion scheme, which will

process sour gas from the Khursaniyah

oilfield and non-associated gas from

Hasbah, has been delayed only because

of the need to increase its planed capacity

to 2.5 billion cubic feet per day (71

million cubic metres) of gas by 2018, as

part of a wider programme to raise

production to 15 bcf (425 mcm) per day

by that year from around 10 bcf (283

mcm) in 2013. A more relaxed approach

to the US$3 billion expansion of Khurais

– on which main contractor Saipem of

Italy has reportedly been requested to

extend the construction phase by 12

months, pushing back completion to

2019 – is likewise understandable.

Aimed at raising the field’s capacity by

300,000 bpd to 1.5 million bpd, the

project’s rationale – alongside an

increment at Shaybah – is to provide for

a supply cushion enabling output to be

eased at older fields, rather than to

increase the theoretical 12.5 million bpd

national capacity.

Thus neither the glut of global supply

nor the current slump in revenue per

barrel affects the underlying logic, while

rendering the project a natural candidate

for postponement in straitened times.

Meanwhile, the US$3 billion upgrade

of the 550,000 bpd Ras Tanura refinery

in the Eastern Province, on which the

main engineering, procurement and

construction (EPC) contracts had been

tendered but not awarded, was a logical

casualty of Aramco’s cost-cutting drive.

Aimed at lowering the sulphur content of

output and diversifying the product

range, the project had already been

retendered without a planned paraxylene

(PX) unit after original bids came in well

over budget – with the more modest

resulting scheme entailing addition of a

naphtha hydrotreater, a catalytic cracking

reformer, an isomerisation unit and a

toluene unit.

The suspension before revised bids

were due in February reflects refining’s

low priority on Aramco’s spending

wishlist. CEO Khalid al-Falih spoke in

late November about the difficulty in

making refining profitable – his solution,

already being implemented before the

revenue crunch, was integration with

petrochemicals.

The prognosis for the long-troubled

greenfield refinery planned in the remote

Jazan Economic City seems poor, with

South Korea’s SK Engineering &

Construction reported to have walked off

one of the main EPC contracts in late

2014 over spiralling costs.

Priority push

Such projects elsewhere are finding out

the hard way where they lie in

governments’ priorities.

Beleaguered contractors awaiting

tenders on the much-delayed refinery

planned at Fujairah by Abu Dhabi

government-owned International

Petroleum Investment Co. appear

doomed to endure further delays, as

prospective financiers report being

informed of reassessment of the US$3.5

billion scheme’s viability in the current

oil price climate.

Such issues have as yet had little

impact on the flagship Abu Dhabi

Company for Onshore Oil Operations

(ADCO) concession.

However, in common with Saudi

Arabia, the UAE is facing a looming gas

shortage forcing it to resort to growing

reliance on imports – and thus home-

grown gas development schemes are high

on the agenda of Abu Dhabi National Oil

Co. (ADNOC).

The commissioning of the landmark

US$10 billion Shah sour gas

development in early January was

accompanied by pledges from Energy

Minister Suhail al-Mazroui to move

forward with the similarly-sized Bab

scheme, due to deliver an additional 500

million cubic feet (14 mcm) per day of

sales gas by 2020 – with contracting

progress on the ground confirming the

government’s commitment.

ADNOC is also undertaking major

oilfield expansion projects aimed at

boosting capacity to 3.5 million bpd by

2017 and Al-Mazroui was adamant that

the goal stood.

“In a time of unstable oil prices, we

remain dedicated to reaching our long-

term production goals and our

investments will remain there,” he

asserted.

Most of the main construction

contracts on the programme, on- and

offshore, were awarded before the

downturn but the award of a US$2.3

billion deal in mid-December to Italy’s

Tecnimont for third-phase expansion of

the offshore Al-Dabbiya field would

seem to validate the minister’s claim.

COMMENTARY





Lucky for some

Able to revel in even greater fiscal

complacency, Kuwait can, like the UAE,

afford to keep up the pursuit of increased

crude output – with political rather than

economic obstacles traditionally the

hardest to surmount in the drive to boost

capacity to 4 million bpd by 2020 from

around 3.1 million bpd today.

Hence, after a delay of more than 10

years, a US$4.3 billion EPC contract was

finally awarded in early January to UK-

based Petrofac as the latest incarnation of

a project to develop heavy oil from fields

in the north.

Kuwait, where the fiscal year runs

from April 1, has posted a surplus for the

past 15 years and in the six months to

November 30 maintained this track

record, recording a 9 billion dinar

(US$30.6 billion) positive balance.

Like Qatar, Saudi Arabia and the UAE,

Kuwait’s foreign reserves buffer built up

through years of high oil prices could

cover several years of deficit should

circumstances require it.

Indeed, the state’s seeming

determination finally to implement the

decade-old plan for a US$16 billion

greenfield refinery at Al-Zour – with the

first EPC bids submitted in the past two

months – exemplifies such economic

comfort. Oman’s calculations differ

substantially from those of its better-

endowed GCC brothers, sharing the bane

of hydrocarbons dependence and scarce

natural gas while battling a long-term

decline in oil production and urgently in

need of job-creating downstream

diversification. Thus, necessarily defying

the apocalyptic warnings of fiscal

vulnerability issued by the major

international ratings agencies in

December, Muscat published an

expansionary 2015 budget at the end of

the month, setting in stone repeated

assurances from the finance and oil

ministers that strategic economic

development projects would proceed as

planned – unaffected by inevitable

trimming of expenditure on other areas.

While most in the GCC were largely

unaffected by the Arab Spring of 2011 –

bar Bahrain, where regional turmoil

merely exacerbated longstanding and

continuing tensions – protests in Oman

were sufficiently widespread to seriously

alarm the government – thus the need to

create employment for a fast-growing,

young and potentially restive population

became seen as an urgent necessity.

Since downstream development,

especially of the petrochemicals sector, is

central to the solution, such projects

cannot be abandoned according to the

simpler economic viability criterion

applied by the likes of Qatar. The

sultanate’s flagship petrochemicals

project, the US$3.6 billion Liwa Plastics

complex at Sohar being developed by

state-owned Oman Refineries &

Petroleum Industries Co. (ORPIC) has so

far progressed steadily towards the EPC

phase in recent months – with the results

of first-stage prequalification published

in the local press in early December to

hammer home the impression of

business-as-usual. An even more

concrete signal of determination came a

week later with the award of a US$320

million contract for a long-awaited multi-

products pipeline linking the northern

industrial city’s expanding refinery with

Muscat. Whether such insouciance is

sustainable as prices fall towards US$40

per barrel remains to be seen but the

finance ministry’s budget statement was

emphatic that any austerity would not be

felt by the general population: “Due to

low oil prices, it was necessary to make

some temporary measures to maintain

financial stability,” it revealed

gnomically. “These measures will not

affect the common people, their living

standards or employment.”

As veteran autocrat Sultan Qaboos’s

prolonged medical treatment abroad

raises thorny questions about the

succession process, awakening latent

fears of potential instability, the

government is acutely aware of the need

to keep the populace quiescent – at the

expense of fiscal discipline if needs be.

Others in the GCC can afford to exhibit

greater fiscal rectitude, proceeding

selectively with priority projects while

awaiting the oil market upturn all

apparently assume to be inevitable.

With Iran’s oft-repeated target of

increasing its total crude oil and

condensate production capacity to 5.7

million barrels per day by March 2019

and a swathe of recent sanctions-busting

announcements from the European

Union (EU) and Russia (see Week 01),

the move is on in Tehran to dramatically

increase adjunct refining capacity.

The target is in line with its pre-

revolution 1976/77 average of 5.5

million bpd, although production topped

6 million bpd for much of that period.

COMMENTARY

China follows Russia in ramping

up Iranian investments

Chinese expertise will be central to Iran’s Abadan refinery expansion, as part of a

strengthening of ties between Beijing and Tehran

By Simon Watkins





Given China’s perennial disregard for

the ongoing US-led sanctions against the

Islamic republic in its desire to secure

energy supply for the future, it comes as

little surprise to learn that Beijing has

signed an agreement to bolster the

financing of Iran’s refinery sector to the

tune of at least 2.6 billion euros (US$3

billion) – to begin with – according to

deputy head of the National Iranian Oil

Refining and Distribution Co.

(NIORDC), Shahrokh Khosravani.

Expansion plans

The bulk of this amount will initially be

directed towards expanding output at the

existing Abadan refinery, which, before

being largely destroyed in September

1980 by Iraq during the initial stages of

the Iraqi invasion of Iran’s Khuzestan

province, had a capacity of 635,000 bpd,

but currently sits at around 429,000 bpd.

According to Iran’s Deputy Oil

Minister, Abbas Kazemi, last week,

Iranian engineers were working in China

with a local group of their peers on the

detailed design and logistics of the

Abadan refinery expansion project. This

will be broadly geared towards

modernising and expanding processing

technology used at the plant’s units.

More specifically, such changes are

intended at increasing production of fuels

adhering to Euro-5 Standard quality

specifications, reducing environmental

pollutants, and expanding diesel and

gasoline production by improving

production technology.

Petchem push

There are wider objectives as well,

though, once the Abadan revamp begins

in earnest.

To begin with, a Tehran-based source

close to NIORDC told NewsBase this

week that the Abadan plan is also geared

towards dramatically increasing the

refinery’s production of feedstock for

associated petrochemical plants, given

the enormous expansion of this high-

value sector planned by Iran.

In this context, the beginning of the

year saw deputy managing director of

Iran’s National Petrochemical Co.

(NPC), Mohammad Hassan Peyvandi,

saying that the country plans to increase

its annual petrochemical production to

180 million tonnes by the end of 2022,

from the current capacity of 60 million

tonnes, if sufficient feedstock is

available. Such an increase would cost

around US$30 billion, Peyvandi had said

earlier, and again it was China that

announced shortly thereafter that it

would invest up to US$4.5 billion in

Iran’s petrochemical sector (see

Downstream MEA, Week 46).

“This money is separate from the new

funding announced,” said the Tehran-

based source, “and is mainly earmarked

for beginning 12 new projects in

Tehran’s petrochemical industry,

although part of it will be used to resume

operations at the second phase of the

Assaluyeh petrochemical plant

development project.” As an adjunct to

this, according to a recent statement from

Esfandiar Zar Ali, managing director of

the Biran Arya Refinery Complex, the

north of Bushehr is also to be the site of a

new US$748 million refinery complex

for petrochemical products situated in 50

hectares (0.5 square km) of land close to

the Bahregan oilfield, again not part of

the new funding just announced.

Close co-operation

“It is no coincidence that [Iran’s Deputy

Minister of Energy for International

Affairs, Esmail Mahsouli] said [in

November last year] that the government

had raised the foreign currency quota on

China’s involvement in Iranian projects

to more than US$52 billion from its

previous US$25 billion.” This neatly

aligns with a further piece of NIORDC’s

Abadan plan, which is to build a new

210,000 bpd processing unit as part of

the Abadan project that would include

units for crude distillation, hydro-

treating, continuous catalytic reforming,

hydro-cracking, isomerisation, hydrogen

production, amine treatment, and the

construction of units for sulphur and

LPG recovery.

All of this will make the Iranian Oil

Ministry’s petrochemicals targets look

more realistic; including annual

production of 11.5 million tonnes per

year (tpy) of ethylene, 11.5 million tpy of

polymer and 3.4 million tpy of urea, with

an adjunct objective of becoming the

world’s leading producer of methanol at

7.5 million tpy, which would represent

18% of global capacity.

The visit by Turkish energy minister

Taner Yildiz to Baghdad this week was

never expected to result in any

groundbreaking agreements. Prior to

departing, Yildiz told reporters that he

would be promoting Turkey’s long-

mooted proposal for a new Iraqi export

line to carry Basra crude to Turkey’s

Mediterranean oil export hub at Ceyhan

as well as discussing relations between

Baghdad and the Kurdistan Region of

northern Iraq. However, with much of

north-west Iraq still occupied by the

forces of the Islamic State (IS) militant

group, any such project is clearly some

years away from serious discussion, even

assuming Iraq would be open to risking

transiting crude through a pipeline,

which would necessarily be prone to

sabotage. Rather, Yildiz’s visit appears to

have been aimed primarily at discussing

how energy relations between the two

countries and their respective relations

with the Kurdistan Regional Government

(KRG) can progress, given both the

KRG’s demands for increased autonomy,

and the ongoing militant insurgency.

COMMENTARY

POLICY

Turkey and Iraq to strengthen ties





As such it is no

surprise that only scant

details of the visit have

been released.

Pipeline posturing

Yildiz’s comments on

his trip have been

confined to emphasising

the amount of

humanitarian aid

Turkey has been

sending to Iraq to help

those made homeless by

the IS insurgency and to repeating

statements made the previous week that

the current volume of oil from Iraq’s

northern fields and for the Kurdistan

Region is flowing through the Turkish

section of the Kirkuk-Ceyhan pipeline.

Prior to departure, Yildiz had said that

flows to Ceyhan had reached around

450,000 barrels per day and are soon

expected to rise to 500,000 bpd and to

continue increasing through the year to 1

million bpd.

The only new announcement made is

that of the confirmation that Turkey and

Iraq have agreed to launch formal

technical discussions on a gas pipeline

link between the two countries.

News that the two sides will talk about

gas comes as little surprise given that

Turkey’s state gas importer BOTAS

announced late last year that it would

begin construction of a 42-inch (1,067

mm) transit line in 2015, linking its

existing transit infrastructure with the

Kurdistan border. The project is expected

to be completed within two years.

The line will have a maximum

capacity in excess of 20 billion cubic

metres per year, far in excess of demand

in Turkey’s impoverished south east, and

significantly higher than expected

demand growth for the whole country

over the coming decade, suggesting that

the line will ultimately be used to export

Iraqi gas through Turkey to markets in

Europe.

Setting the scene

Where exactly in Iraq the gas will come

from is as yet unclear. Officials from

Anglo-Turkish upstream operator Genel

Energy have said on numerous occasions

that they have gas reserves in the region

and can begin exports by 2017 or 2018 –

the same time frame suggested by

BOTAS’s planned pipeline.

In addition, Turkey and the KRG

signed a number of gas agreements in

2013 allowing for Turkish state oil

company TPAO to develop gas fields in

the region and to export the gas back to

Turkey, details of which have not bee

disclosed but any such initiative is

unlikely to be realised before 2018.

Baghdad also has gas reserves that

could be exported to Turkey, although

when they could be made available is

also unclear.

What is apparent though from the fact

that the two sides have agreed to discuss

the issue is that the new government in

Baghdad is willing to look forward to a

time when there will be a final agreement

with the KRG, allowing the export of gas

to Turkey through a line that crosses the

border from the KRG-controlled area to

Turkey.

This by extension also bodes well for

the continuation of the current

rapprochement between Baghdad and

Erbil. While in the short term that will

likely result in the continued ramping up

of crude flows to Ceyhan as announced,

in the longer term it promises also to

boost co-operation between the three

sides to remove IS from north west Iraq

where its presence has resulted in the

permanent closure of the Iraqi section of

the Kirkuk-Ceyhan conduit, between the

Kirkuk oilfields and Baghdad’s metering

station at Fishkhabour.

The flow of crude from Kirkuk is now

being realised through

a new bypass pipeline

running through the

Kurdistan Region that

is expected to be

running at full 1

million bpd capacity by

early 2016.

Working together

The removal of IS

would free up the

existing line which

boasts a maximum

capacity of 1.5 million bpd, and when

repaired would give Iraq – both Baghdad

and Erbil – the potential to transit a total

of up to 2.5 million bpd to the Turkish

border.

The Turkish section of the line

however still has a maximum capacity of

just 1.5 million bpd, suggesting that as

and when the militants are removed

Turkey will need to expand its existing

pipeline capacity before thinking about

pressing Baghdad further to develop an

entirely new pipeline to carry crude from

Basra to Ceyhan.

In 2012, a subsidiary of Turkey’s Calik

group – Ikideniz Petrol applied for

permission to develop just such a

pipeline with a reported capacity of 1

million bpd. The current status of the

application is unclear but the

development of such a line to connect to

the existing 1 million bpd Kurdish line

and the 1.5 million bpd Kirkuk line

offers several possibilities.

Firstly, it could be used to continue to

ramp up the existing flow of mixed crude

from fields in the Kirkuk area and

Kurdistan Region. It would also offer the

possibility of increasing production of

heavy crude from the Gulf Keystone

Petroleum-operated Shaikan field – the

region’s largest – north-west of Erbil,

currently exported by truck through

Turkey. Or alternatively again, the spare

capacity could be used to carry crude

from Iraq’s southern Basra fields, should

Baghdad agree to Turkey’s offer to

develop a new pipeline from Basra to the

Iraq-Turkey border. The key to realising

any of the three is continued co-operation

between Ankara, Baghdad and Erbil.

POLICY





Despite the ample sunshine, most of the

Middle East has remained on the

sidelines of large-scale solar

development, mainly as a result of the

cheap power provided through its

hydrocarbon reserves.

However, now the industry is

beginning to take off, as governments

grapple with the impact of a surging

demand for energy, budget-crippling oil

and gas subsidies and plummeting oil

prices. Dubai meanwhile, has been one

of the region’s keenest proponents of

solar power and has now announced

plans to double the size of a solar project

that it claims will produce some of the

world’s cheapest electricity.

The regional government of the

emirate says that the US$330 million

scheme will now have a capacity of 200

MW when it is completed in 2017. A

consortium led by Saudi Arabia’s

ACWA Power will lead construction,

reflecting both the firm and its country’s

growing presence in the Middle Eastern

solar sector.

If the price of oil remains low, then the

kingdom may welcome the ability to

displace some of its domestic energy

consumption with solar power, leaving

more oil available to export.

The electricity produced by the scheme

will be sold to Dubai’s electricity utility

DEWA for US$0.0585 per kWh, which

ACWA says will be the lowest by some

distance for solar-generated power and

among the cheapest for all sources of

energy.

The scheme is part of Dubai’s plan to

build 1,000 MW of solar capacity by

2030, enough to meet 5% of its projected

electricity demand. New solar

developments may also support the

power-hungry desalination plants, which

produce most of the region’s potable

water.

Many Middle Eastern countries have

renewable energy targets in place,

ranging from 2% of electricity generation

by 2020 in Qatar, to a 20% target by the

same date in Egypt. Saudi Arabia has an

ambitious target to source 50% of

electricity from non-hydrocarbon

resources by 2032: 54,000 MW from

renewables (of which 41,000 MW will be

from photovoltaics and CSP, 9,000 MW

from wind, 3,000 MW from waste-to-

energy and 1,000 MW geothermal) and

17,600 MW from nuclear, according to a

report from Oxford Energy.

Furthermore, the cost of solar power

has fallen to a quarter of its 2009 level

and by 2020 is expected to offer the

lowest cost power in the world,

Solairedirect president and founder,

Thierry Lepercq told a solar conference

in Saudi Arabia last September.

Indeed, he added that the kingdom

would offer some of the lowest prices of

US$0.05-0.07 per kWh. If ACWA’s

latest claims are to be believed, such a

threshold is already here but this may not

change the long-term outlook drastically.

Saudi solar?

NewsBase Research (NBR) remains

sceptical about Saudi Arabia’s ambitious

diversification plans. The commitments

are not new, and Riyadh has seemingly

made little progress in recent years. The

Kingdom still has no significant

renewable power generation capacity,

sourcing around 55% of its electricity

from oil fired power plants, and the

remaining 45% from natural gas.

NBR estimates that Saudi currently

burns around 800,000 barrels per day of

crude and products for power generation.

Although there is a clear incentive for

Saudi to reduce its dependence on oil

fired generation, lowering domestic oil

demand and freeing up volumes for

export, the scale of investment necessary

to achieve its 50% renewables target by

2032 is significant.

Given the low Saudi lifting costs

(around US$1-2 per barrel, and only

US$4-6 per barrel including capex), the

production cost per kWh is only around

US$0.01, even though the opportunity

cost of oil on the export market is

currently around 10 times that – US$40

billion per year, even at current US$50

oil prices.

However, as Saudi Aramco needs to

apply enhanced oil recovery (EOR)

techniques to ageing fields and tighter

formations to maintain production, this

will increase the lifting fees by around

US$10-20 per barrel.

But with pressure on Saudi budgets

likely to set in over the next few years,

and the market already well-supplied

without additional Saudi exports, there

will also remain a strong incentive to

defer investment in renewables in favour

of additional generation from already

established sources. State-run Aramco

warned in May 2014 that it will have

“unacceptably low levels” of oil to sell in

the next two decades if domestic power

use keeps rising at 8% per year.

As a result – and as NewsBase

understands from several senior services

sources – Riyadh is determined to

emulate the US’s shale gas success, and

despite having suffered several

disappointments – notably by Shell at

Kidan in the Rub’ al Khali (Empty

Quarter) region – emphasis remains on

gas as the silver bullet for Saudi’s

growing demand for power and

petrochemicals. It is in this final point

that the solar plan falls down. Having

spent heavily in downstream, albeit at a

more leisurely pace of late, the kingdom

is positioning itself as a major

petrochemicals player, targeting

consumers in Asia, and increasing the

value it extracts from each barrel of oil

equivalent. It remains to be seen how

successful Saudi Arabia will be in its

hunt for gas, but it is thought that the

country is home to 8.2 trillion cubic

metres – enough to rank sixth in the

world.

Furthermore, the build times of power

plants are significant. We have forecast

Saudi power generation demand to more

than double by 2032, but still expect a

large proportion (around 40%) to be

generated in oil fired power plants –

consuming 1.2 million bpd.

POLICY

Solar still a slow mover in Gulf





Even accounting for potential

decommissioning of some existing

plants, we have not seen any convincing

evidence that Saudi will be successful in

significantly reducing its dependence on

hydrocarbons for power generation over

the time periods currently being

discussed. Hesitation about Saudi solar

prospects was proven valid on January

20, when the King Abdullah City for

Atomic and Renewable Energy

announced it was to push back the

country’s plan to produce 33% of its

electricity from solar panels by 2032.

The goal has now been shifted to 2040.

Included in this initiative is US$109

billion worth of solar power investments,

which will be put on ice while Saudi

reassesses the programme.

Chad is stepping up its efforts against

Boko Haram, the Islamist group

operating in and around northern Nigeria,

in concert with Cameroon.

N’Djamena and Yaounde are said to be

working together to reclaim Nigeria’s

town of Baga. Some NGOs, such as

Amnesty International, have said as

many as 2,000 people may have been

killed in fighting in this area in early

January, although official Nigerian

sources put the figure at closer to 150.

The Chad-Cameroon force appears to

be acting without support from the

Nigerian army, which has struggled

against the local terrorist group.

Boko Haram captured the town at the

start of the year, sacking a military base.

The group has proved capable of

operating around northeast Nigeria,

northern Cameroon and, to a lesser

extent, western Chad and Niger.

Chad has the most capable forces in

the region and Boko Haram has mostly

avoided potential conflict with its army,

leading some to speculate that

N’Djamena has ties to the Islamist group.

Such moves have been linked to Chadian

desire to control Lake Chad, which may

hold oil and gas resources. This has not

been proved and the prospect of

exploration and production in the area is

dim. The United Nations Security

Council (UNSC) expressed support for

talks between Nigeria and its neighbours

on the issue, which are due to be held on

January 20 in Niger.

According to the UK’s Daily

Telegraph, Cameroon has sent 7,000

troops, of a total 12,500 in its army, to

the north to fight Boko Haram. On

January 18, Boko Haram appeared to

have taken around 80 people – mostly

children – from villages in northern

Cameroon. Al Jazeera has reported that

at least 24 of the hostages were freed by

Cameroonian forces.

The terrorist group gained some

prominence in April 2014 after fighters

abducted more than 200 girls from a

school in Chibok, in Nigeria’s Borno

State. Despite global pressure, the Abuja

administration of Nigerian President

Goodluck Jonathan has failed to take

substantive action in tackling the Boko

Haram threat. US offers of assistance, for

instance, came to nothing on human

rights concerns linked to the Nigerian

army. Jonathan did visit Maiduguri, the

capital of Borno, last week during his

election bid.

AKE Intelligence, in a note on January

19, warned that “large-scale attacks and

kidnappings” by Boko Haram “have

become a near daily occurrence and the

country has fast become the site of the

world's most deadly terrorist incidents”.

The group, AKE said, controls 70% of

Borno while also holding a number of

towns in neighbouring Yobe and

Adamawa states.

“Jonathan's expected win in the

upcoming presidential elections will

likely further entrench north-south

divisions, especially if swathes of the

north are unable to vote due to rising

violence,” it said. Security in the north

will continue to deteriorate and there is a

risk of terrorist attacks in Abuja or Lagos

during the election cycle, which may run

until mid-March.

The European Union is considering an

oil embargo on Libya as a way of

supporting the United Nations’ special

envoy, Bernardino Leon’s, efforts to

broker a solution to the political crisis in

the oil-rich North African country.

Talks have started in Geneva with the

aim of reaching a peace deal.

This could lead to the development of

a unity government, at a time when a

self-declared government in Tripoli is

vying for power with the internationally

recognised government, based in Tobruk,

led by Prime Minister Abdullah al-

Thinni.

According to a discussion paper drawn

up by the EU’s diplomatic service, an oil

embargo is one of a range of tactics that

might speed a solution to the Libyan

crisis.

Seen by Reuters, the options paper

served as the basis for talks between EU

ministers in Brussels on January 19.

POLICY

Chad, Cameroon pressure

Boko Haram

EU considers Libya embargo





It said that the possibility of an oil

embargo as a means of applying pressure

for a resolution has been discussed by the

EU’s 28 member states. However, it also

warned that pushing for the UN to adopt

an oil embargo would be a risky strategy,

Reuters reported on January 17.

“This ... would put pressure on parties

to cease hostilities and participate in the

dialogue process. However, this option

should be considered with the greatest

caution as it would take a heavy toll on

the Libyan economy and society, and

may trigger unforeseen reactions,” the

paper said.

Such steps would have drawbacks,

with the UN already having banned

illegal exports of oil from Libya.

It estimated Libyan oil production at

200,000 barrels per day, down from

900,000 bpd in November. The “worst-

case scenarios of civil war and the

disintegration of Libya itself” were

possible outcomes.

Leon said at the outset of the UN-

brokered talks on January 15 that he

hoped armed factions would observe a

ceasefire to support the process, which he

hoped the Tripoli-based faction would

join. “Libya is falling really very deeply

[into] chaos,” Leon said in Geneva

before the meeting.

The Tripoli-based General National

Congress (GNC), on January 18,

expressed interest in participating in

peace talks, on the proviso that these be

held in Libya, not Geneva. Meanwhile,

the Tobruk-based House of

Representatives’ (HoR) armed forces

declared a unilateral ceasefire, apparently

in response to the peace talks.

The problem for the talks continues to

be one of how inclusive they will be.

Even if the GNC and HoR reach some

sort of understanding, which seems

unlikely, a number of armed militias are

operating within the country and may not

be willing to lay down their weapons.

As of January 20, the talks appear to

have broken down and the ceasefire is

faltering.

The longstanding plan for Abu Dhabi

government-owned International

Petroleum Investment Co. (IPIC) to

construct a greenfield refinery at the

eastern port of Fujairah appears to have

fallen victim once again to global market

conditions.

Prospective financiers have been

informed of a new delay while the client

assesses the project’s viability and

funding structure in light of falling prices

for oil prices.

A deal had been expected to be

launched to the banking market in late

2014, but no word has been heard on the

engineering, procurement and

construction (EPC) contracts since the

repeatedly postponed submission of

technical bids in July.

While the ongoing evolution of

Fujairah as a world-scale oil storage and

trading hub and the completion in 2012

of the Abu Dhabi crude pipeline have

improved the refinery’s logic since first

conceived, immediate factors are more

bearish – most obviously the oil price,

but more specifically the slowing

demand from key prospective Asian

consumers, as well as international and

regional rapprochement with Iran

decreasing the incentive for traders to

bypass the Straits of Hormuz.

The structure of the funding

arrangement to be offered to lenders is

reported to be undergoing some re-

examination to ensure that sufficient

safeguards would be in place to cope

with further oil price falls.

However, whether the project will

proceed at all appears somewhat

doubtful, with other downstream projects

in the region – notably the Ras Tanura

refinery expansion in Saudi Arabia and

both of Qatar’s flagship petrochemicals

schemes – being suspended or shelved.

Technical bids for two main EPC

packages covering the process units and

the offsites and utilities on the estimated

US$3.5 billion, 200,000 barrel per day

facility were submitted in July by firms

from an exclusively Asian shortlist, 10

months after the tender was floated, but

no deadline was set for commercial

offers.

The list includes GS Engineering &

Construction, Hyundai Engineering &

Construction, Hyundai Heavy Industries,

Samsung Engineering and SK

Engineering & Construction.

France’s Technip completed the front-

end engineering and design in 2013.

HSBC is the financial adviser.

The scheme has a troubled history.

When first launched in 2006, oil prices

were on a steep upward trajectory and

IPIC signed up super-major

ConocoPhillips as partner on a 500,000

bpd facility at a forecast cost of around

US$5 billion, to tie in with the Emirati

company’s planned 1.8 million bpd

pipeline to transport Abu Dhabi’s crude

from Habshan – Abu Dhabi Crude Oil

Pipeline (ADCOP) – to an alternative

export outlet at Fujairah. Conoco

withdrew a year later, citing soaring

project costs.

POLICY

REFINING

Fujairah refinery suffers new delay





The pipeline was completed in 2012,

providing the refinery with cheap and

easily accessible feedstock, and the

downstream scheme remained on IPIC’s

slate – albeit scaled back to 200,000 bpd

– as part of a wider drive to almost

double refining capacity to 1.35 million

bpd by 2017. The expansion of the

biggest refinery, at Ruwais, to take

capacity to 817,000 bpd from 400,000

bpd, was commissioned last year.

Meanwhile Fujairah has also been

developed by the federal government into

a major hydrocarbons trading hub, with

storage capacity approaching 10 million

cubic metres and EPC bidding under way

for a 9 million tonne per year LNG

import and regasification terminal – the

central importance of which to the

UAE’s future fuel supply plans Energy

Minister Suhail al-Mazroui emphasised

in mid-January.

However, the refinery is evidently

regarded as less than urgent and a

considerable further delay pending

improved economic conditions is

regarded as highly probable.

Shell announced last week that it opened

a GTL base oil hub in Jebel Ali in Dubai

and that the first delivery to the storage

facility was made in late December.

In partnership with Qatar Petroleum

(QP), Shell operates the Pearl GTL plant

at Ras Laffan in northern Qatar, the

largest GTL plant in the world. The

US$18 billion facility draws on 1.6

billion cubic feet (51 million cubic

metres) per day of natural gas from

Qatar’s North Field and is designed to

produce 140,000 bpd of GTL through

two trains and 120,000 bpd of natural gas

liquids (NGLs) and ethane.

The plant came into operation in mid-

2011.

The new facility at Jebel Ali is Shell’s

fourth GTL base oil storage hub

alongside existing hubs at Houston,

Hamburg and Hong Kong, the company

said in a statement, adding that the new

UAE hub gives it global reach and

coverage to supply GTL base oil.

GTL base oil is a key component in

finished oils, particularly premium oils

for engines, process oils and transmission

fluids. Pearl also produces clean diesel

and kerosene, naphtha and normal

paraffin.

Shell said the Jebel Ali hub will supply

customers in the Middle East and also to

India and Pakistan. “Shell is the only

company with a dependable supply of

GTL base oil,” Dennis Cheong, Shell

Vice President Supply Chain, said in a

statement. “This new hub accomplishes

the full integration of our transportation

and storage of GTL base oil globally.”

State oil company Qatar Petroleum (QP)

and the Royal Dutch Shell have

cancelled their planned multi-billion-

dollar Al-Karaana petrochemicals project

at Ras Laffan, blaming the prevailing oil

market climate.

When abandoning the other, even

larger, flagship Al-Sejeel polymers

scheme in September, QP said it was

seeking alternative options yielding

better returns, but on this occasion the

company said that the ethane allocated

for Al-Karaana would be redistributed

among existing producers – thus

essentially sounding the death knell for

the state’s major petrochemicals

expansion ambitions in the medium-term.

While oil and gas-based projects are

being reassessed across the region and

the world in the light of lower upstream

and downstream prices, QP’s move is

nonetheless surprising since the small

wealthy country is regarded as one of the

least vulnerable to the recent market

shock – with a relatively low break-even

oil price and healthy government

finances.

However, such economic wellbeing

also renders less urgent than elsewhere

economic development and

diversification projects, while Shell is

heavily exposed to the worldwide

industry downturn.

REFINING

FUELS

Shell opens GTL base oil

terminal in Jebel Ali

PETROCHEMICALS

QP, Shell cancel Al-Karaana

petchem project





The US$6.4 billion Al-Karaana

complex, in which Shell was to take a

20% stake alongside QP, had reached the

engineering, procurement and

construction (EPC) bidding stage, with

contractors and technology providers

bidding on a mixed-feedstock steam

cracker and three process units producing

1.5 million tonnes per year (tpy) of

monoethylene glycol (MEG), 300,000

tpy of linear alpha olefins (LAO) and

250,000 tpy of oxo-alcohols. The

partners signed a heads of agreement

(HoA) in 2011 for the project, which

with Al-Sejeel formed part of a huge

expansion into petrochemicals in an

effort by Doha to diversify away from

LNG exports and move down the gas

value chain.

Al-Sejeel, an entirely local US$7.4

billion joint venture (JV) of QP and

Qatar Petrochemical Co. (QAPCO), was

to have produced high-density

polyethylene (HDPE), linear low-density

polyethylene (LLDPE), polypropylene

(PP) and butadiene – and was at the EPC

prequalification stage when shelved.

Output from the Barzan gas development

project – the last to be approved for the

supergiant North Field before a

moratorium imposed in 2005 – has been

reserved for domestic use, primarily in

power and petrochemicals.

“The decision came after a careful and

thorough evaluation of commercial

quotations from EPC bidders, which

showed high capital costs rendering it

commercially unfeasible, particularly in

the current economic climate prevailing

in the energy industry,” QP and Shell

said in a statement, which emphasised

their continued strong relationship by

noting Shell’s shareholdings in the

Qatargas 4 LNG and Pearl GTL (gas-to-

liquid) ventures.

While Doha might be relatively

insulated from the worst ramifications of

the plunging price of oil, Shell by

contrast had embarked on a cost-cutting

and asset-selling drive even before the

slump, following the firm’s first-ever

profits warning a year ago. In October,

the European super-major cancelled a

polyurethane (PU) plant JV planned with

Saudi Basic Industries Corp. (SABIC) on

the grounds of unfavourable project

economics.

In the same week that Royal Dutch Shell

cancelled its involvement in Qatar’s

US$6.5 billion Al Karaana

petrochemicals project (see previous

story), it announced the completion of its

newest global gas-to-liquid (GTL) base

oil storage hub, in Dubai’s Jebel Ali.

This appears to be an entirely shrewd

piece of commercial logic, given the

contango that is building in the oil

futures markets.

With spot prices still looking

vulnerable to the downside, whilst

longer-term forecasts are for a lift to

US$60-80 per barrel average by year-end

2015 (see chart), there is every reason to

believe that the major spot/six-month

contango that became a hallmark of the

2008-09 global recession will re-assert

itself. NewsBase expects the 2015

average price to be at the lower end of

this range.

The onus looks to have shifted from

engaging in very capital-intensive new

projects to simply completing lower-

capital ones that are already near to

finalisation, and storing as much

hydrocarbons assets as possible.

According to global shipbrokers, in

order to cover the costs associated with

storing oil at sea – including hiring a

ship, fuel, insurance, and finance – the

gap between the spot crude oil price and

the six-month futures contract needs to

be at least US$6.50 per barrel. Currently

it is edging up to a point just below that,

for both Brent and WTI.

The initial stages of the 2008/09

contango were marked by a dramatic rise

in ship-based storage but, given very big

stock-build forecasts for the first half of

this year at least – more than 1.5 million

barrels per day, in fact – Mike Wittner,

head of oil market research for Societe

Generale, in New York, predicts not only

that the contango markets are here to stay

for the foreseeable future but also that we

could see a super-contango in the first

half. “This will encourage all kind of

stock-building in whatever tank is

available, be it on ships or on land,” he

said recently.

This new storage hub for base oil – a

key component in finished oils, with

GTL base oil specifically enabling the

development of premium oils for

engines, as well as in speciality products,

including process oils and transformer

fluids – is Shell’s fourth, adding to those

already in Houston, Hamburg, and Hong

Kong. According to Dennis Cheong,

Shell Lubricants Supply Chain vice

president, in Singapore, the new hub will

cater to customers in the Middle East and

to certain markets beyond, such as Egypt,

India, Pakistan, and South Africa.

PETROCHEMICALS

TERMINALS & SHIPPING

Shell bolsters base oil storage,

reduces exposure elsewhere





Keen to make use of its strategic

location, Mauritius has entered into an

agreement for the construction of an oil

terminal on the island, allowing it to

import and re-export crude oil and

petroleum products.

The deal took the form of a

Memorandum of Understanding (MoU)

between Mangalore Refinery and

Petrochemicals Ltd (MRPL), STC

Mauritius and Indian Oil Corp. (IOC).

The joint venture (JV) terminal would

be constructed through an investment of

around US$130 million, facilitating the

re-export of petroleum products from

Mauritius to other islands in the Indian

Ocean and mainland Africa, thereby

making it a petroleum hub while also

increasing the country’s oil security.

Mauritius is keen to become a “real

bridge” for India to invest and connect

with the rest of Africa and Europe,

according to the island’s vice prime

minister Showkutally Soodhun. “We

want that Mauritius be a bridge for India,

a real bridge for India, and through

Mauritius they can come and invest and

go to Europe and Africa: This is very

important,” he added, noting that

bilateral relations between India and

Mauritius were getting “even more

cemented, and our economic, social and

political links are getting even closer.”

Last week, Soodhun announced that

India would provide 100% of Mauritius’

petroleum products for the next three

years, in a deal worth US$1 billion.

Seychelles and Mauritius announced in

2013 that they were to jointly explore for

petroleum in an area in the Indian Ocean

that both countries own, but updates on

progress have been scant.

According to the CEO of Seychelles

upstream regulator PetroSeychelles, an

authority established to deal with the

licensing and to oversee the activities in

the area, all revenues would be split

50:50.

The two islands received permission in

2012 from the United Nations to ‘extend’

their continental shelves off their

respective coasts to forestall any future

maritime territorial disputes.

Aden Refinery Co. (ARC) in early

January issued its latest fuel import

tender, seeking supplies from February to

April, its second such call and reflecting

former supplier Saudi Arabia’s

withdrawal of much of its support since

the government’s effective takeover in

September by Iran-backed Shia Houthi

forces.

Feedstock for the refinery itself, by far

the country’s largest, with notional

capacity of 140,000 barrels per day, has

been cut off by repeated attacks on the

pipeline which runs from the main

producing Ma’arib fields to the Ras Isa

terminal on the Red Sea coast – from

where some crude would in the past be

shipped to Aden in the south for

processing. Such attacks and the security

problems faced by producers – as the

Houthis, residual government forces, Al-

Qaeda militants and local Sunni

tribesmen battle for supremacy – have

stymied the country’s oil exports and

rendered it close to bankruptcy, with

Riyadh left in a quandary over whether to

continue its emergency support.

ARC’s latest tender calls for a total of

900,000 tonnes of products – nine,

60,000-tonne cargos of gasoil and 12,

30,000 shipments of 90-octane gasoline.

Tenders last month for 240,000 tonnes of

gasoil and 120,000 tonnes of gasoline

were the first since August, the

intervening months having been covered

by grants – presumably from Saudi

Arabia, which had been supplying

products in the period between the fall of

former President Ali Abdullah Saleh in

2011 and the recent Houthi incursion.

In 2012, Riyadh deposited US$1

billion at the Central Bank of Yemen to

shore up reserves while providing an

additional US$1.2 billion-worth of oil

and oil products.

In July, shortly before the Shia rebels’

takeover – ironically sparked by Sana’a’s

efforts to control the budget by reducing

fuel subsidies – the kingdom again

stepped in with a further US$1.2 billion

to purchase fuel and US$435 million to

contribute to the government’s Social

Security Fund, following a visit by

beleaguered new President Abdu Rabu

Mansour Hadi to Saudi King Abdullah.

How far Riyadh has gone in

withdrawing support is unclear. The

ARC tenders demonstrate that

guaranteed direct donations have ceased,

but December’s terms stipulated that

delivery could be deferred from the

agreed date for those grants that might be

forthcoming, while also requesting that

the cargoes not be of Iranian origin –

perhaps to avoid the impression of being

bankrolled by Tehran.


Mauritius aims to be product hub

TENDERS

Cash-strapped Yemen forced

to tender for oil products





The situation presents an obvious

dilemma for Saudi Arabia, which, while

loath to prop-up an ally of Iran, is also

fearful of instability on its doorstep and

of strengthening by default either Iran or

Al-Qaeda militants. The closing

communiqué from the Gulf Co-operation

Council (GCC) summit in Doha in

December condemned both the Houthis

and the Islamists, calling on the former to

restore all civil and military institutions

to ‘State authority’ and to withdraw its

militia from all territories.

However, in a further potential risk to

remaining oil production, the Houthis in

early January were threatening to invade

the oil-rich Ma’arib province – ostensibly

to protect it from Al-Qaeda-linked

forces. Fighting in the area not only

bodes ill for sustained operation of the

sabotage-prone 120,000-bpd export

pipeline but also for foreign producers

feeding it with crude.

The country’s major players, among

them Calvalley and Nexen of Canada and

Norway’s DNO International, have

frequently been forced to cease work

over security concerns.

Exports in 2014 averaged only around

100,000 bpd, down from more than

400,000 bpd a decade ago – with severe

month-to-month fluctuations dependent

on the pipeline’s status.

POLICY

Mega projects drive

demand for Saudi

industrial gases

sector

The industrial gases sector continues to

witness growth in Saudi Arabia, buoyed

by expansionary spending and mega

infrastructure projects, a new study has

confirmed. Saudi Arabia’s industrial gas

infrastructure will continue to grow in

support, not only of the energy sector,

but also in the developing non-energy

sector including the industrial, gas and

chemical sectors, said a report released

by the National Commercial Bank.

As the market continues to be

fragmented, the pricing of gases differs

across the regions due mainly to

logistical factors. According to industry

insights, project funding comes mainly

from shareholders and local banks, with

long-term bank loans being a preference

amongst the sources of financing. Over

the forecasted period, future investments

will continue in the production of

nitrogen, hydrogen and oxygen.

The report also said that growth in the

international industrial gases sector is

driven by growth in Asia (namely China,

India and Korea), overall high energy

costs and climate change initiatives. In

the Middle East, SABIC is the largest

producer of air separation gases, with a

market share of 27.8%.

ARAB NEWS, January 17, 2015

COMPANIES

Oil slump slashes

SABIC profit

Saudi Basic Industries Corp (SABIC),

one of the world’s largest petrochemicals

groups, reported a 29% plunge in fourth-

quarter net income, widely missing

analysts’ forecasts because of the tumble

of global oil prices. Chief executive

Mohamed al-Mady said his company’s

outlook for 2015 depended on oil prices

and was therefore unpredictable, but that

SABIC faced challenges early in the

year. The Gulf’s largest listed company

earned 4.36 billion riyals (US$1.16

billion) in the three months to December

31 compared to 6.16 billion riyals a year

earlier, SABIC said as sales sank 10%

from a year ago to 43.4 billion riyals.

Profit was well below the average

forecast of analysts polled by Reuters,

who had predicted earnings of 5.5 billion

riyals. It was also below the company’s

third-quarter net profit of 6.18 billion

riyals. Mady said his company, which is

70% state-owned, would stick to its long-

term strategy of focusing investments in

China, North America and Saudi Arabia,

to be close to raw materials or SABIC’s

markets. He said it would continue to

look hard at acquisition opportunities in

the United States and at investing in the

US shale gas industry. A year ago, he

said the company expected to enter the

shale market in 2014.

REUTERS, January 18, 2014

Sasol plans saving

amid low oil

Sasol, which is building an US$8-billion

US petrochemical complex, said it wants

to conserve cash after oil, to which its

revenue is linked, more than halved over

the past six months. The world’s largest

producer of motor fuel from coal said in

October it approved the decision for the

Lake Charles, Louisiana plant in October

and completed a US$4-billion credit

facility two months later. The cracker

will convert ethane, a natural-gas liquid,

into ethylene used to make chemicals

that go into antifreeze and water bottles.

Sasol expects to decide on a gas-to-

liquids plant at the same site within two

years. In 2012, it said the GTL facility

would cost as much as US$14 billion.

Developments for the US project come

as oil has fallen more than 50% over the

last six months. Some plans have not

survived the decline, with Qatar

Petroleum and Shell last week saying

they’ve ended plans for a US$6.5 billion

petrochemical plant in the Middle East

nation. Sasol is looking to save “in the

context of the current oil-price

environment,” spokesman for the

Johannesburg-based company Alex

Anderson said. “Opportunities being

evaluated include further cost reductions

in addition to the 4-billion-rand (US$345

million) cash-cost savings from our

business performance enhancement

programme, as well as the reprioritisation

of capex plans.”

BLOOMBERG, January 19, 2015


NEWS IN BRIEF





REFINING

Kuwait controls

minor fire at refinery

A minor fire broke out at the heavy oil

unit of Kuwait National Petroleum Co’s

(KNPC) Shuaiba refinery but was

quickly controlled, state news agency

KUNA reported. “The fire has been put

under control at a record time of 30

minutes,” a KNPC spokesman said.

GULF BUSINESS, January 15,

2015

NNPC to boost

domestic refining

capacity

The refining capacities of the local

refineries are expected to be boosted by

the arrival of new equipment for their

turn around maintenance, the Nigerian

National Petroleum Corporation has said.

This comes as the corporation has

frowned at the continued politicisation of

its operations. The Group General

Manager, Group Public Affairs Division

of the NNPC, Ohi Alegbe, said that the

report on 152 billion naira being spent on

revival of the ailing refineries is untrue

and politically-induced. The corporation

noted that as a public entity with

fiduciary responsibility to the

government and people of Nigeria, the

NNPC is focused on its mandate and

would not be distracted by the spate of

politically inspired polemics against its

operations.

ALL AFRICA, January 13, 2015

Nigeria plans gas

turbines to revive

refinery

As a measure to breathe new life into the

petroleum sector, Nigeria has revealed

plans to construct three 25-MW gas

turbines at Port Harcourt Refining

Company Limited (PHRC) to improve

production, NNPC’s Group General

Manager, Group Public Affairs Division,

Ohi Alegbe in Abuja said in a statement.

According to him, the gas turbines will

be installed and operated by an

independent power producer, to boost

productivity through uninterrupted power

supply at the refinery. It stated that the

turbines to be installed had the capacity

to generate 72 MW of power, exceeding

the amount of megawatts required by

PHRC. “The arrangement with the

independent power producers is aimed at

ensuring steady power supply to the

refinery. With the installation, PHRC

would focus majorly on the core mandate

of refining petroleum products for the

public,” the statement said.

STAR AFRICA, January 18, 2015

New Saudi-Sinopec

oil refinery starts

exports

A major new joint-venture refinery in

Saudi Arabia shipped its first clean diesel

cargo, the company Yanbu Aramco

Sinopec Refining Co (Yasref) said. The

start-up of the refinery is expected to

weigh on diesel prices as the rise in

supply will far outweigh demand, which

has been sluggish because of weak

economic growth, traders said. The

400,000-bpd refinery, a joint venture

between Saudi Aramco and China’s

Sinopec, started trial runs in September

and had originally planned its first

exports by November.

Yasref said it loaded 300,000 barrels of

diesel from the refinery, located in

Yanbu on the Red Sea coast. Yasref is

the second refinery to start up in Saudi

Arabia in the past two years and will

complete state company Saudi Aramco’s

transformation into a leading exporter of

diesel. The company did not specify

where the shipment headed to but one

trader said that it was likely being sold

into Egypt. The cargo was being sold as a

500 ppm sulphur gasoil grade, although it

most likely had a lower sulphur

specification of 75 ppm, two traders said.

Once production is stable and secondary

units are running, the refinery will likely

export the 10 ppm sulphur diesel grade,

which is compatible with European

standards, traders said. Yasref will

produce 263,000 bpd of diesel, 90,000

bpd of petrol, 6,200 tonnes per day of

petroleum coke, 1,200 tonnes per day of

pelletised sulphur and 140,000 tonnes a

year of benzene, according to the

company website.


Kenya acquires

stake in Uganda

refinery

Kenya has agreed to acquire a 2.5% stake

in the planned Uganda oil refinery for an

estimated 5.6 billion shillings. Energy

and Petroleum PS Joseph Njoroge said

Kenya would take up the stake as part of

a commitment among East African

Community (EAC) member states to

close ranks on projects that benefit the

bloc. “In line with the spirit of regional

integration we committed to support each

other in key infrastructure projects and

we shall lend support to the Ugandan

one. We shall take up a minimal 2.5%

stake in the refinery project,” Mr Njoroge

said. The facility is slated to process

60,000 bpd of oil and much of Uganda’s

projected crude output is expected to be

exported via a pipeline through Kenya,

which is yet to be built. Either a

consortium headed by South Korea’s SK

Energy or another led by Russia’s RT-

Global Resources, which are both

currently locked in bidding for the

refinery, will take up a 60% stake in the

project as well as develop and operate it.

The Ugandan government had invited

both Kenya and Rwanda to buy shares in

the remaining 40% stake. Kenya will

contribute capital equivalent to its 2.5%

stake, which is 5.6 billion shillings based

on the US$2.5 billion set as the initial

construction cost of the refinery.

BUSINESS DAILY, January 19,

2015

FUELS

Kuwait misses clean

diesel deadline

Bangladesh has begun importing cleaner

diesel with less sulphur contents to

ensure a better environment by way of

averting pollution, a top official said

Saturday.

NEWS IN BRIEF





However, Kuwait, a major supplier of the

petroleum fuel, is going to miss the

January 2015 timeline on the excuse of

necessary changes to its refinery.

The first consignment of 0.05% sulphur-

content diesel reached country’s main

seaport in Chittagong on January 5 with

20,000 tonnes of diesel from the

Philippine National Oil Company

(PNOC), a senior BPC official said. He

said the second cargo ship carrying

similar quantity of gasoil with the same

sulphur content will reach Chittagong

seaport next week from Petco, the trading

arm of Malaysia’s Petronas.

The BPC earlier used to import only

0.25% sulphur-containing diesel to meet

country’s mounting demand in transport

sector, power plants, irrigation and in

industries.

FINANCIAL EXPRESS, January

18, 2015

Nigeria announces

drop in petrol prices

The Nigerian government has announced

a cut in petrol prices a month before

presidential and parliamentary elections

in the country, which is considered

Africa’s largest oil producer.

The price of a litre of petrol will fall from

97 naira to 87 naira (US$0.47), said

Nigerian Oil Minister Diezani Alison-

Madueke. Nigerian President Goodluck

Jonathan, who will compete in the

February 14 polls, approved the measure,

the minister added.

Crude oil exports account for 70% of

Nigeria’s revenue and some 90% of its

foreign exchange earnings. The country

extracts nearly 2 million bpd of crude but

imports most of its fuel because it does

not have refining capacity. To keep

prices low at petrol stations, the

government pays subsidies. Jonathan

tried to remove the subsidies in late

2011; however, it caused a general strike

and mass protests which forced the

government to reintroduce the subsidies

to a lesser extent.

The development comes as oil prices

have plunged by over 50% since June of

last year because of oversupply by a

number of oil producing countries such

as Saudi Arabia as well as lacklustre

global economic growth.

PRESS TV, January 19, 2015

Nigeria under

pressure to cut

petrol prices further

Nigeria’s government was under pressure

to cut petrol prices further, with unions

saying people were being “short-

changed” over the global crude price

plunge. The main opposition accused the

government of tokenism before the

February 14 elections, after Petroleum

Minister Diezani Alison-Madueke

announced a 10-naira (US$0.05)

reduction. A litre of fuel at the pump in

Africa’s most populous nation and top oil

producer now costs 87 naira. But the

opposition and unions said the price of

petrol as well as diesel and kerosene

should be slashed further. The All

Progressives Congress said that the new

price of petrol was “mere tokenism at a

time the price of crude oil has crashed by

about 60%”.

AFP, January 20, 2015

Saudi research on

fuel flexibility to

enhance gas

turbines

GE has signed a co-operative research

agreement with King Abdullah

University of Science & Technology

(KAUST) to undertake cutting-edge

research on enhancing the fuel flexibility

of GE’s advanced gas turbines. The

collaborative research, led by Saudi-

based international professionals and

students from KAUST along with GE’s

global team, will focus on the impact of

using heavy liquid fuels on advanced gas

turbines. The goal of this ground-

breaking study is to help advance the

overall fuel flexibility of gas turbines,

which in turn can positively impact

power plant availability, enabling power

producers to meet the growing demand

for electricity in the Kingdom.

According to Director at KAUST Clean

Combustion Centre Bill Roberts, the

university’s co-operative research with

GE is a strong example of the academic-

industry linkages KAUST fosters. “Our

goal is not only to shape a future

generation of energy and industry-skilled

professionals but also contribute to

innovative technologies that are

developed in the Kingdom,” Roberts

said. “The research collaboration with

GE will further strengthen our

contribution to the Kingdom’s energy

sector.”

SAUDI GAZETTE, January 18,

2015

PETROCHEMICALS

Nigeria plans to stop

petchem imports by

2018

Nigeria’s Minister of Industry, Trade and

Investment Olusegun Aganga has said

that Nigeria will stop importing

petrochemical products by 2018. Aganga

said that with the Nigeria Industrial

Revolution Plan imports of

petrochemical products, which currently

costs the nation about US$10 billion

annually would be a thing of the past.

“The message of this administration is

very clear. We can no longer be a

country that is import dependent

especially on product we can produce in

this country. There are many sectors we

should have developed as a country but

we relied for decades on exporting raw

materials which is oil. That era is gone

and this is why the president launched

the Nigeria Industrial Revolution Plan in

2012,” Aganga said. According to

Aganga, if the investment goes according

to plan, by 2018, we will no longer

import petroleum products into the

country and that will save us a minimum

of about US$10 billion. “We spend about

US$3 billion importing steel, we spend

about US$6 billion importing cars and

spare parts and also spend about US$1.7

billion importing sugar where we can

grow sugar cane to get sugar. Jonathan is

actually the solution to the debacle we

have had for decades and the idea is a

matter of time to let him get the plan

completed,” he added.

STAR AFRICA, January 13, 2015

NEWS IN BRIEF





Industries Qatar may

expand petchem

output

Industries Qatar, the Gulf’s second-

largest petrochemicals firm, is

considering expanding production to take

advantage of excess feedstock left by a

project’s cancellation, the company said.

State firm Qatar Petroleum and Shell said

they had decided not to proceed with the

US$6.4-billion Al-Karaana

petrochemical project in the Gulf state,

deeming it “commercially unfeasible”

given weaker oil prices. Industries Qatar

said that it was conducting feasibility

studies to “take advantage of the ethane

feedstock available following the

decision not to proceed with the

proposed Al-Karaana Petrochemical

Project”.

The company said it would conduct the

studies in collaboration with Qatar

Petroleum, Qatar Chemical Co and Ras

Laffan Olefins Cracker Co. The studies

would aim to “develop and expand the

number of petrochemical plants with

beneficial returns for these companies,

and to the petrochemical sector in

general,” Industries Qatar said. The

company’s board recommended a 2014

dividend of 7 riyals per share, down from

the 11 riyals paid in 2013 and below

analysts’ average forecast of 11.13 riyals.


PIPELINES

Iran hopeful of IPI

pipeline project

Iran is keen to “develop” business

relations with India and is hopeful that

Iran-Pakistan-India Pipeline project will

be back on track, said Representative of

Iran’s Supreme leader Ayatollah

Khamenei in India Mehdi Mahdavipour.

Iran is keen to “develop” business

relations with India and is hopeful that

Iran-Pakistan-India Pipeline project will

be back on track, said Mahdavipour.

“Once the pipeline is completed, the

direct supply of petroleum will be

available at a very low cost to Indians

and will prove helpful to generate power

in the country,” he said.

The representative of Khamenei was

speaking at a function on January 17.

“Installation of gas and oil pipeline has

been completed up to the Pakistan

border,” he said. Dialogue with Pakistan

for its further installation are on and hope

the pipeline will reach India very soon,

Mahdavipour said.

DNA, January 18, 2015

NNPC to intensify

battle against oil

pipeline sabotage

State-owned Nigerian National

Petroleum Corp said it remained

committed to end to the frequent

sabotage attacks on oil pipelines that

criss-cross the Niger Delta, which

continues to pose a major threat to

Nigeria’s economy. “It is quite a pity that

the activities of vandals persist in spite of

the efforts being made by the

government and security agents to

address the problem. The menace does

not only disrupt our operations, it also

introduces huge losses to the national

economy and toll on human capital,”

NNPC spokesman Ohi Alegbe said.

The NNPC spokesman said that apart

from the revenue loses attacks on

pipelines were also a major source of

pollution and a health hazard. Theft from

crude oil pipelines has grown into a

major problem for Nigeria, which derives

some 80% of government revenue from

the oil industry. Besides robbing the

country of an estimated US$6 billion per

year in revenue, it causes pipeline

shutdowns since thieves often sabotage

the lines before tapping the crude.

PLATTS, January 14, 2015

Tanzanian

committee pushes

for oil pipeline

network

Tanzania’s Parliamentary Energy and

Minerals Committee has directed the

government to scout for investors to put

up a pipeline network to transport

petroleum products to upcountry regions

as well as making use of Mtwara and

Tanga ports to offload the commodity.

Members of the committee also want the

state to beef up security on existing oil

offloading facilities at the Port of Dar es

Salaam, particularly the single point

mooring and pipelines transporting fuel

to oil depots around the city.

“Transporting fuel through pipelines is

both cheap and secure as compared to

trucks. It is high time the government

considered this option,” the committee’s

Vice-Chairman, Jerome Bwanausi,

explained.

TANZANIA DAILY NEWS,

January 16, 2015

UAE to import more

fuel from Qatar via

Dolphin pipeline

The United Arab Emirates seeks to

import more fuel via the Dolphin gas

pipeline amid concerns about securing

the best price possible for its natural

resources. The UAE gas supply crunch

continues to thwart the future of the

country’s power needs, but the emirati

government recently announced plans to

imports more gas from Qatar, as

extremely low gas prices makes imports

through the Dolphin Pipeline a more

attractive proposition for the country than

developing the relatively-expensive-to-

produce domestic gas reserves.

Energy Minister Suhail Al Mazouei

addressed this issue at an industry

presentation in Abu Dhabi, where he

announced plans for UAE including

boosting imports of LNG and developing

the country’s deposits. The Dolphin

brings natural gas from Qatar offshore

fields via undersea pipeline from the Ras

Laffan processing plant to receiving

facilities at Taweeleh, where it can then

be shipped on to Fujairah and Oman via

overland pipeline.

ICN.COM, January 14, 2015

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Downstream Monitor - MEA Week 03

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