Now is the time to build says SATORP CEO
Salem Shaheen says good timing helped slash 20% off project costs
The ambitions of Saudi Arabia to be the world’s number one player in the petrochemical industry find expression in the construction of world-class, mega projects.
From Jubail on the Eastern coast to Yanbu in the West, integrated refining and petrochemical projects are being established in partnership with major international companies.
While medium-scale petrochemicals projects are open to governmental and private investors, integrated projects are still largely restricted to Saudi Aramco, due to the huge investment these projects require, and because Aramco is already involved in the refining business and is looking to upgrade its existing refineries.
“There are several key drivers in moving forward with developing integrated facilities in Saudi Arabia,” Salem Shaheen, president and CEO of SATORP, tells Refining and Petrochemicals Middle East.
“There is the lower capital expenditures (CAPEX) of running one unit as opposed to a separate refinery and petrochemicals complex, as well as saving on operational expenditure (OPEX),” says Shaheen.
“Another driver is the flexibility of being able to switch from gasoline production to the production of aromatics. Also, due to the state-of-the-art technology of our brand new refinery, we are able to adapt to changing gasoline specifications,” explains the CEO.
“The fifth driver is the ability to include an aromatics complex, for example, in the initial construction phase as opposed to expanding upon something existing, which is more complex,” he adds.
SATORP is a joint venture between Saudi Aramco and Total, tasked with developing a 400 000 barrels per day, full-conversion refinery in Jubail integrated with a petrochemicals complex to produce olefins and aromatics.
As in every successful joint venture, the two partners complement each other, and bring to the table what the other is lacking.
“The main asset that Saudi Aramco brings is its relationship with the Saudi government, which has eased every step of the process to date. The second benefit is its knowledge of implementing mega projects in the Kingdom,” says Shaheen.
“Of course, this is in addition to the most obvious benefit: Its reputation its and hydrocarbon reserves,” he explains.
The other part of the venture is the French integrated oil company giant. “Total brings its experience and design, a history of good operations, technical and general capacities, conceptual capacities, experience in refining operations, and ability in trading products,” Shaheen adds.
“As Total is a fully internationally integrated company, it perfectly complements Aramco’s strong position in the region.”
The refinery, which is located in Jubail Industrial City, will process Arabian heavy crude oil from the giant Manifa field, and produce wide variety of refined and petrochemical products, including diesel with 10 ppm specifications instead of the 500 ppm (the content of sulfer), in order to meet the Euro 5 standards which dictate the reduction of sulphur content in diesel and gasoline.
The company plans to target both local and international markets. “The market for gasoline will be the Kingdom or the Middle East in general. A minor share, if any, will go to Asia and North America. Our jet fuel will go to Asia and Europe, although it could stay in the Kingdom. This is not clear at present. The Paraxylene will go to Asia,” says Shaheen.
Typically, a joint venture in Saudi Arabia is based on a 50/50 ownership between the local and the foreign partner. A project company is established (SATORP in this case), and each partner markets its own split.
But, with SATORP, the situation is different as it signed the off take agreements with Total and Aramco to market some products in the Kingdom.
“We have signed off take agreements to sell some petrochemical products,” he reveals. “The demand in Saudi Arabia is increasing, and Aramco may be buying some of Total share, mainly diesel,” he notes.
After signing the Memorandum of Understanding in 2006, the two partners spent two years conducting studies and negotiations, but they delayed the award of the engineering, procurements and construction (EPC) contracts due to high costs.
SATORP was able to cut its EPC costs by delaying the project to capitalise on falling prices during the global recession.
“We actually cut our costs by more than 20% and this will have positive impact by reducing our CAPEX and improving our internal rate of return,” Shaheen says.
“When there is a lot of tension, costs are increasing and the schedule is delayed. When the costs are down, there is more room to relax the schedule a bit.”
The company expects to achieve the mechanical completion of its integrated project during the second half of 2012 while the commercial production is set for early 2013.
“We have developed a revised schedule with the first order going in March 2013, just one quarter behind the original date of December 2012,” says Shaheen.
“The previous schedule has been delayed due to the longer EPC selection process but this has been reduced to a delay of just a three month. In the end, the cost of the delay in terms of operating margin will be much more than offset by our total cost savings.”
The company awarded the 13 EPC contracts in July 2009, after delaying the award for more than six months.
“Initially, we were supposed to award the contracts in the fourth quarter 2008, but due to the economic downturn, we delayed the award for three months, and then another three months,” he adds.
French engineering company Technip has been awarded two packages worth an estimated total of US$3 billion. The first, Package 2A, covers the conversion unit and is worth an estimated at $1.7 billion, while the second, Package 5A, is worth $1.3 billion and covers the construction of offsites and utilities.
Technip will share the second package with Taiwanese company CTCI. Spanish contractor Tecnicas Reunidas has been awarded Package 1, which covers the distillation and hydrotreating and is worth an estimated $1.2 billion.
Much hype has in the past surrounded the cost of the project, with estimates running as high as $15bn. Shaheen provides clarity: “The total cost of the project is around US$12bn.” Holding off the award of the EPC contracts had two benefits for the company.
“The first and most obvious being better profitability due to lower capital expenditure. In addition, the financing is easier to borrow as we are borrowing less money and the money market is not overheated,” points out Shaheen.
The company completed the project financing in June. Finances totalling US$8.5 billion were secured from multiple sources including US$4.01 billion from the Public Investment Fund and Export Credit Agencies, and US$4.49 billion from commercial financial institutions.
The senior loan facilities have a tenor of 16 years with an all in pricing of 1.85% (above LIBOR) for the US dollar commercial and Export Credit Agencies (ECA) covered loan facilities.
The reputation of the two partners facilitates their ability to secure the funding for the project. “We were afraid of the capital markets going dry.
However, we found that this was not the case. At present, with many projects slowing down or stopping altogether, there is less competition for the same capital,” says Shaheen.
“Both Aramco and Total are trustworthy companies with strong reputations which put lenders at ease.” Challenges do remain. Just as other companies in the region, SATORP faces a shortage of skilled people, not least due to the scale of the project.
“The biggest challenge that we are facing is time and manpower with such a complex project involving the collaboration of the project team, consultants, lenders, and contractors – a huge effort by all,” concludes Shaheen.
Satorp by Numbers
• Refinery complex size: 4.87 Km2.
• 130 million construction man hours by as many as 30,000 workers.
• 1 million cubic meters of concrete.
• 4250 pieces of equipment (reactors, column, drums, heaters, boilers, flares, exchangers, air fins, pumps).
• 30,000 tonnes of structure (pipe racks, steel structure, and access structure).
• 100,000 tonnes of pipes (7,000km).
• Materials, equipment and construction will amount to $5.5bn.