The Middle East Refining Scene

and Oil Product Balances

Bassam Fattouh

PLATTS 11TH ANNUAL EUROPEAN REFINING SUMMIT, BRUSSELS, SEPTEMBER 2017

Oxford Institute for Energy Studies

Diesel: Structurally Long

Diesel is Mainly a Saudi Story

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Bahrain Iran Iraq Kuwait Oman Qatar Saudi Arabia UAE

Middle East Diesel Supply, thousand b/d

Most of the recent increase in regional diesel supply is

due to Saudi Arabia (and the UAE to a lesser extent)

Most of the decrease in regional diesel demand is

accounted for by Saudi Arabia (and Iran to lesser

extent); increase from Iraq and UAE not big enough

to offset declines from Saudi Arabia

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Saudi Arabia Kuwait Iran Iraq UAE

Middle East Diesel Demand, y/y change

thousand b/d

Source: JODI

Saudi Economy Slowed Down Markedly as Adjustment Bites

Annual Rates of Private and Non-Oil Sector, %

Growth in the private and non-oil sector has stalled

putting at risk Vision 2030 which relies heavily on a

vibrant private sector and SMEs

Gross fixed capital formation witnessed a very

sharp decline as spending on key infrastructure

projects falls

Source: Government of Saudi Arabia

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Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16

Private Sector Growth Non-oil Sector

Gross Fixed Capital Formation, y/y, %

Construction Sector Particularly Hit

June data showed signs of slower economic activity. POS sale transactions were down 1 percent year-on-year, reflecting slower activity due to Eid al-Fitr holidays, with the previous yearly decline being observed in July 2016, also during Eid al-Fitr holidays. For similar reasons, ATM transactions showed their largest declines, down 11 percent, since July 2016.

2

Real Economy

POS sale transactions

were down 1 percent and ATM down 11 percent year-on-year, reflecting slower activity due to Eid al-Fitr

holidays.

Non-oil PMI also dropped to 54.3 in June, but remains pointing to expansionary activity.

Meanwhile, a difficult year so far for the cement sector was underlined by June data, which showed the lowest level of production and sales of cement since September 2008.

August 2017

Purchasing Managers’ Index

Indicators of Consumer Spending (year-on-year change)

Cement Sales

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Jun-12 Apr-13 Feb-14 Dec-14 Oct-15 Aug-16 Jun-17

Increasing rate of contraction

Increasing rate of growth

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2.5

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2008 2011 2014 2017

Sales Production

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to

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Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Point of sale transactions

Cash withdrawals from ATMs

(p

erc

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Cement Sales, Million Tons

Cement sales, a key indicator of construction activity,

fell sharply

Value of Awarded Contracts by Year

(SAR millions)

Sharp drop in contracts awarded as government

tightens spending and revises contracts

2

Construction Contracts Award Index During the second quarter of 2016*

The value of awarded contracts during Q2’16 declined sharply by 27% compared to the first quarter of 2016. The SAR20.3 billion in awarding contracts during Q2’16 reversed the trend seen in previous years through 2015, recording lower quarterly values of awarded con-tracts in 2016. The decrease was mainly attributed to the reduction in awarding of mega-projects, as a result of the fiscal restructuring by the government. However, there was a significant increase in the number of smaller contracts that focused on strengthening the Kingdom’s infrastructure capabilities. After amounting to SR9.3 bil-lion in April, the value of awarded contracts in May dipped to SAR3.1 billion, which was one of the lowest value since April 2010. While Kingdom’s largest metro projects in Jeddah, Medina, and Dammam will stall in 2016, investment in oil and gas projects is continuing, as well as in power sector. The main contributing sectors in Q2’16 were oil & gas, which has accounted for 32% of the total value of awarded contracts to reach SAR6.5bn, followed by petrochemical at SAR5.6bn (28%), and resi-dential real estate at SAR2.9bn (15%).The power sector witnessed a rise in the value of awards compared to the previous quarter to reach SAR2.4bn (12%). The other sectors accounted for 13% share of the remaining value of awarded contracts. (Chart 1), (Chart 2). The momentum of the value of awarded contracts has declined during the first half of 2016. The sharp drop in contract awards activity followed the collapse of oil pric-es, as the government tightened spending and post-poned its spending plans. Approximately SAR48.2 billion

worth of contracts has been awarded though the first half of 2016 compared to SAR116.9 billion worth of con-tracts awarded during the same period in 2015. The pro-ject awards in the second half of the year and into 2017 will be dependent on the government’s current plan of scaling down and prioritization of projects. An upward trend in oil prices will ease the situation, but since this is an unlikely scenario, further decline in contract awards appear to be the most likely outcome. The Construction Contracts Index (CCI) dropped in two consecutive months from 125.8 points in April down to 109.4 in May. However, CCI rose to 117.5 in June. The noticeable drop in awarded mega-project contracts dur-ing the second quarter was the main factor in the reduc-tion of the CCI, as it exhibited unstable movements since the first quarter of 2016. The CCI recorded 66% drop at the end of the second quarter of 2016 compared to the same period in 2015, when CCI reached 285.1 points. The distribution of awarded contracts by region confirms that the Eastern Province continues to receive the largest share of sizeable projects. Approximately 48% of the value of awarded contracts was in the Eastern Province due to heavy investment by Saudi Aramco in the oil & gas sector. Makkah region's came second with 21% share, which was mainly attributed to weighty pro-jects in the petrochemical sector. The Riyadh region had a 17% share of the awarded contracts, mainly due to several contracts in the real-estate and urban develop-ment sectors. Al-Qassim region contributed 8% to the overall value of contract awards after a major contract in in the real estate sector was awarded by Sulaiman Al-Rajhi College, (Chart 3).

*See Appendix for the NCB Construction Contracts Index methodology

Chart 1: Value of Awarded Contracts by Year (SAR millions)

Source: Various sources, NCB

207.0

106.8

266.7

234.7

293.4

220.7 223.4

48.2

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350

2009 2010 2011 2012 2013 2014 2015 1H 2016

Oil & Gas Power Water Industrial

Healthcare Residential Real Estate Transportation Roads

Petrochemical Education Urban Development Others

SAR billion

Source: JADWA, Al-AhliNCB,

Big Impact on Diesel Demand

• Diesel demand fell in 2016 with the decline continuing into 2017

• Many contributing factors– General slowdown in economic activity

– Sectors such as construction and infrastructure projects particularly hard hit

– Pricing reform in 2015 increased diesel price

– New efficiency measures introduced

– More gas from Wasit plant diverted into the power sector substituting for liquid burn particularly diesel

• Looking ahead, as adjustment/reforms proceed and as diesel gets substituted in power sector, diesel demand will continue to be under pressure but the recent sharp declines will reverse

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Diesel Demand, y/y, thousand b/d

Source: JODI

While Diesel Supply Rising

• Startup of new refineries mainly geared towards maximizing diesel yield– 0.4 mb/d Aramco/Sinopec YASREF

JV

– 0.4 mb/d Aramco/Total SATORP JV

• In 2015, y/y growth in diesel supply reached 231 thousand b/d, in 2016, 110 b/d were added as refineries ramped up

• Jazan refinery expected to come online in 2019 will add to diesel supply + news about SATORP JV debottlenecking operations to take capacity to 0.46 mb/d by 2020

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Diesel Supply, thousand b/d

Source: JODI

Saudi Arabia To Strongly Compete in Diesel Market

• Saudi supply-demand balance reached a record level of 485 thousand b/d in February 2017

• Saudi Arabia turned into large net exporter of diesel competing in European and African markets with Asian refineries– Net diesel exports reached 355,000

b/d in 2016 from 7,000 b/d in 2014

• Saudi Arabia projected to remain structurally long in diesel beyond 2020 even if the economy rebounds

Saudi Arabia Diesel Balance,

thousand b/d

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Source: JODI

Capacity Additions will Increase Regional Diesel Exports

Country Year Company Refinery

CDU

Capacity b/d

Condensate

b/d

Iran 2017 NIORDC Persian Star Phase 1 120000

Qatar 2017 Qatargas Ras Laffan 146000

Kuwait 2017 KNPC Shuaiba (closure) -200000

Oman 2017

Oman Refinery Company

(Orpic) Sohar 82000

Iran 2017 NIORDC Persian Star Phase 2 120000

Iraq 2018 South Refineries Co Basra 70000

Iran 2018 NIORDC Persian Star Phase 3 120000

Saudi Arabia 2019 Saudi Aramco / Total SATORP 40000

Saudi Arabia 2019 Saudi Aramco Jazan 400000

Iraq 2019 Iraq Oil Projects Co Karbala 150000

Iraq 2020 Satarem / Wahan Missan 150000

Bahrain 2020 Bapco Sitra 93000

UAE 2020 IPIC Fujairah 200000

Oman 2020

Oman Refinery Company

(Orpic) Duqm 230000

Kuwait 2020 KNPC Al-Zour 615000

In 2017, most of the increase in capacity was concentrated in condensate splitter boosting naphtha output;

between 2018-2021, the increase in capacity will boost diesel output

Source: Energy Aspects

Gasoline: Towards Balance?

Gasoline Towards Balance

Middle East Gasoline Supply, mb/d

Middle East gasoline supply has increased sharply, but

the region is still short in gasoline

Gasoline demand in Iran, Iraq, and Saudi rebounded

in H1 2017, but growth rate is expected to

slowdown compared to past as further gasoline

pricing reforms are introduced

Middle East Gasoline Demand, thousand b/d

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Iran Iraq Saudi Arabia UAE Oman Kuwait

Source: Energy Aspects, JODI

Iran: Towards Self-Sufficiency in Gasoline?

• Iran historically relied on

gasoline imports to meet its

domestic requirements & meet

Euro-4 specifications

• Iran imported 49,000 b/d of

gasoline in 2016 and 64,000 b/d

in the first four months of 2017

• CNG widely used in transport

sector mainly in taxis and buses

but sale of gasoline cars has been

rising since lifting of sanctions

pushing up gasoline demand

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Gasoline Demand, thousand b/d

Source: JODI, Energy Aspects

Iran’s Ambitions Plans to Increase Downstream Capacity

• Start up of new unit at Bandar Abbas refinery increased gasoline output

• First phase of Persian Gulf Star Refinery launched in May (overall project consists of 3 phases, 120,000 b/d each phase; 230,000 b/d of gasoline)

• Once the phases of these projects are complete in 2018, Iran will stop importing gasoline (closure of ageing crude distillation units at Abadan refinery could delay the process)

• More ambitious plan to expand and upgrade capacity, but this will depend on foreign investment

Company Country DateBillion

USD Refinery Details

Daewoo

E&C KoreaMay-

16 10

Hormuz Extra

Heavy, Jask

MoU for construction of

new refinery

Hyundai/Da

elim/Chiyod

a Korea/Japa

n Jul-17 3Siraf Condensate

Splitters

Preliminary agreement

for eight 60,000 b/d

Daelim Korea Jan-17 1.9 Isfahan

Upgrade to boost light

products output

SK E&C Korea Aug-17 1.9 Tabriz

HoA for upgrade to boost

light products output

Sinopec China Sep-16 1.3 Abadan

Upgrade to boost light

products output

SK E&C Korea Jun-16 0.02 Tabriz

MoU to study increasing

gasoline, diesel output

Saipem Italy Jan-16 na Isfahan & Tabriz

MoU for revamp and

upgrade

Source: MEES, Energy Aspects

Saudi Arabia: The Gasoline Imbalance Gets Smaller

Saudi Arabia Gasoline balance,

thousand b/d

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Saudi gasoline supply-demand imbalance has

reduced sharply over the years

New car imports declined from 964 thousand units

in 2015 to 725 thousand units in 2016; Imports of

used cars down by around 45% y/y to 37.5 thousand

units in 2016

Annual Report of Foreign Trade Stat ist ics 2016

11

2.2. Imports by Sect ion

Main Import Products (Million Riyals)

Imported Products (by sect ion of the Harmonized System)

2015

2016

Value Change From

Previous Year

Percentage

Change (%)

Machinery and Mechanical Appliances; Elect rical Equipment 178321 129334 48987▼ 27.5▼

Vehicles and Associated Transport Equipment 120516 93925 26591▼ 22.1▼

Products of the Chemical or Allied Industries 55014 48312 6702▼ 12.2▼

Base Metals and Art icles of Base Metal 64473 47411 17062▼ 26.5▼

Prepared Foodstuffs; Beverages and Vinegar; Tobacco 30540 30843 304▼ 1.0▼

Vegetable Products 33857 30444 3413▼ 10.1▼

Live Animals; Animal Products 24130 20159 3972▼ 16.5▼

Text iles and Text ile Art icles 21627 20050 1578▼ 7.3▼

Plast ics and Rubber and Art icles Thereof 22146 18465 3680▼ 16.6▼

Other 104409 86693 17716▼ 17.0▼

Total 655033 525636 129397▼ 19.8▼

27.2

18.4

8.4 9.8

4.7 5.2 3.7 3.3 3.4

15.9

24.6

17.9

9.2 9.0

5.9 5.8

3.8 3.8 3.5

16.5

Machinery and

Mechanical

Appliances;

Electrical

Equipment

Vehicles and

Associated

Transport

Equipment

Products of

the Chemical

or Allied

Indust ries

Base Metals

and Art icles of

Base Metal

Prepared

Foodstuf fs;

Beverages and

Vinegar;

Tobacco

Vegetable

Products

Live Animals;

Animal

Products

Text iles and

Text ile Art icles

Plast ics and

Rubber and

Art icles

Thereof

Other

Main Import Product s (Share in Total Import s, %)

2015 2016

27.5▼

22.1▼

12.2▼

26.5▼

1.0▼

10.1▼

16.5▼

7.3▼

16.6▼ 17.0▼

Machinery and

Mechanical

Appliances;

Electrical

Equipment

Vehicles and

Associated

Transport

Equipment

Products of the

Chemical or

Allied

Indust ries

Base Metals

and Art icles of

Base Metal

Prepared

Foodstuf fs;

Beverages and

Vinegar;

Tobacco

Vegetable

Products

Live Animals;

Animal

Products

Text iles and

Text ile Art icles

Plast ics and

Rubber and

Art icles

Thereof

Other

Annual Change in Main Import Products, 2016 (%)

Annual Change in Main Import Products,

2016 (%)

Source: JODI

First Round of Sharp Price Increases but from Low Base

Saudi Arabia fuel prices, $

Further price reforms expected by the end of 2017, but more gradual and accompanied by cash transfer

schemes to offset the negative impact of higher energy prices on low-income households

Source: Saudi Government, Energy Aspects

Fuel Oil: The Star Performer

Saudi Fuel Oil: Strong Performance

• Fuel oil star performer in recent months with consumption averaging 0.47 mb/d in 2016, higher y/y by 70 thousand b/d

• Increase in fuel oil consumption almost offset decline in crude burn in 2016 as the Kingdom maximized its crude exports

– In some months, SA was a net importer of fuel oil

• Looking forward, surplus of fuel oil during winter months to decline as new power plants come online

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Saudi Fuel Oil Balance, thousand b/d

Source: JODI

Driven by Power Sector

Fuel oil will continue to receive a bid as 7 GW of new power capacity coming online will be fueled

by fuel oil; the IMO will have limited impact on Saudi refining sector though the regular trade flows

to optimize logistics and quality will continue

Saudi power projects 2016-19, Capacity GW

Source: JODI, Energy Aspects

Kuwait: Continued Reliance on Fuel Oil

• Steady increase in power demand implies that fuel oil supply-demand balance will continue to shrink despite increase of gas share in power mix

• Green field Al-Zour refinery delayed until 2021 would produce 0.225 mb/d of low sulphur fuel oil to feed the power sector

• Overall Kuwait would be fuel oil balanced with some occasional imports during summer

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Kuwait Fuel Oil Balance, thousand b/d

Source: JODI

Iraq: Not Far Behind

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Iraq’s Fuel Oil Demand, y/y change

thousand b/d Iraq Fuel Oil Balance, thousand b/d

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Source: JODI

Fuel oil consumption used in power sector has

been growing strongly in recent months

Until Iraq secures gas supplies from new sources,

fuel oil balance will erode as refinery projects are

delayed

Delay in Iraq’s Refinery Projects

Refining projects in Iraq continue to face delays as foreign investors’ appetite is weak

Thousand b/d Notes

Operational Capacity 576

Damaged 334

Planned

Karbala 140 Under construction

Basra Expansion 70 EPC awarded

Misan 150 MOU signed

Nasiriya 300 Bids Invited

Basra 300 Bids Invited

Kirkuk 150 Bids Invited

Basra 100 Bids Invited

Kut 100 Bids Invited

Samawah 70 Bids Invited

Source: MEES

Iran: The Challenge of Upgrading

• Iran’s fuel oil surplus will grow as

country retrofits its fuel oil power

plants and constructs new gas

power plants to increase share of

gas in power mix

• Much of surplus currently sold as

bunkers, but after 2020 this outlet

will become less important

• Iran keen to upgrade its refineries,

but this is very reliant on foreign

investment

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Iran’s Fuel Oil Demand, thousand b/d

Source: JODI, Energy Aspects

Conclusions

• Investment in refining strategic– Securing demand for domestic market

– Diversification into products away from crude

– Creating value down the value chain through integration with petrochemicals

• Very ambitious plans to increase refining capacity especially in Iraq and Iran, but this relies primarily on ability to attract foreign investment

• Ambitions to build capacity in products trading (Saudi Arabia, Iraq, Oman, Kuwait)– So far mainly to secure products for the domestic market but this will change

• Competition from Middle East refiners will only intensify, especially in the diesel segment

• Gasoline imports from the region will fall, especially as Iran is expected to achieve self sufficiency by 2018

• With some exceptions (Iran, Iraq), the regional net length in fuel oil is small and IMO’s decision for a transition to low-sulphur marine fuels will have limited impact on refineries (power sector is an important outlet in many countries)