Downstream focus may help GCC refineries' capacity rise to 7.4mn bpd by 2022: S&P

Oil tankers fill up at an offshore oil refinery in the Gulf (file). The dip in oil and gas prices has encouraged Gulf producers to reorient their focus on downstream projects, rather than curb spending altogether, Standard & Poors says

By Pratap John/Chief Business ReporterThe total capacity of GCC refineries may reach approximately 7.4mn barrels per day (bpd) by 2022 as Gulf producers reorient their focus on downstream projects in view of a decline in oil and gas prices, a new report has shown.The dip in oil and gas prices has encouraged Gulf producers to reorient their focus on downstream projects, rather than curb spending altogether, said Standard & Poors in a report.Gulf States are expanding their refineries to develop a downstream industry and export more value-added products, diversify away from oil and gas income, and meet rising domestic needs for fuel, it said.Currently, Gulf refineries’ total capacity stands at 4.3mn bpd, S&P said, quoting consultants Frost & Sullivan.S&P thinks that in certain jurisdictions the oil price decline could lead to an increased focus on renewables and other means of securing energy supplies that are less dependent on the cyclicality and volatility of oil prices.An example would be the fiscal pressures Gulf sovereigns are facing as a result of recent commodity price declines, and the consequent potential for energy subsidy reform that could pave the way for more renewable projects in Gulf Cooperation Council (GCC) markets.Historically, S&P said, power plants using subsidised fossil fuels have had an economic advantage over renewable projects, typically wind or solar.However, lower government revenues stemming from cheaper oil and natural gas have prompted some administrations to rethink their energy subsidies. Oman, Qatar, and Bahrain have all raised the price of gas supplied to downstream industries.And any change in energy subsidies to the power sector that paved the way for more cost-reflective tariffs will, in its view, improve the regulatory environment for renewable power projects in the region.“Despite the pressure of low oil prices, many governments have a commitment to use project finance as an effective tool to meet essential infrastructure needs, both within and outside of the oil and gas industry. They take the long term view and have not allowed the recent price drop to influence capital spending.“Saudi Arabia, Kuwait, and the UAE have all announced limited changes to their capital budgeting plans for 2015-2016, despite low oil prices.”The commodity price dip has also encouraged Gulf producers to explore shale opportunities. Speaking at an investment conference in Riyadh in January 2015, Khalid A al-Falih, chief executive officer of Aramco, said publicly for the first time that the company had already earmarked $3bn for shale gas exploration.Historically, investment in shale projects has required high oil prices because of the significant development costs associated with the exploratory phase, S&P pointed out. However, countries which built up fiscal reserves when oil prices were high, like Saudi Arabia, have a compelling reason for a presence in the shale sector, especially given recent technological advances in extracting oil and gas from shale.Market estimates put Saudi Arabian shale gas reserves at about 600tn cubic feet, and according to S&P, Saudi Aramco was in talks to secure 40 extra rigs to cover shale gas operations, indicating that it expected “large-scale production over the medium term.”Because of lower prices, however, some Middle Eastern and African countries have revised the subsidies they bring to certain projects. This, in turn, has elevated the importance of cost-reflective tariff arrangements and market-based pricing.“We think this will pave the way for more private-sector participation in some emerging markets in the utilities sector, particularly by way of participation through PPPs in competing generation plants.”