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Saudi Arabia, Refining And The Battle for Crude Market Share

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By John Richardson on 30-Mar-2016

By John Richardson

Oil_wellSAUDI ARABIA is determined to win its battle for greater market share of the global oil market, and at the same add value downstream to its hydrocarbon reserves. This is the consistent message I have picked over the last 18 months.

And so a report in the Financial Times that Saudi Aramco plans to double its refinery capacity to 10m bbls/day fits very neatly with these overall objectives.

The FT adds that Aramco, in a bid to both lock in greater crude sales and, as I said, add more value to oil, plans to achieve this doubling of refinery capacity through possibly acquiring more overseas refineries in China, India, Indonesia, Malaysia and Vietnam. This month, Aramco announced plans to take full control of the 600,000 bbs/day Port Arthur refinery in Texas, the biggest in the US. It already has part ownership, along with Shell and Motiva Enterprises.

“This is the future Saudi export strategy,” Krane, a fellow at Rice University’s Baker Institute for Public Policy told the FT. “Create captive markets in important importing countries by owning refineries in those countries. That way their market share is secured.”

Why not perhaps, therefore, Saudi acquisition of more refinery-based petrochemicals capacity overseas, and/or expansions at home?

The problem for Saudi Arabia is that for the time being at least, it is losing ground in the market share battle. Data quoted in the same FT article shows that the Kingdom’s share of exports to the key China market fell in 2015 as Russia gained ground. In South Africa, Saudi Arabia lost market share to Angola and Nigeria.

And of course the pressure on Saudi Arabia is going to build as Iran ramps up exports. Iran’s objective will be to recover lost economic ground now that sanctions have been lifted, even if this means driving global oil prices lower. With Iranian production costs as low as $1.7/bbl, Iran is in a strong position to win more market share.

There is another reason to believe that oil producers in general will rush to maximise output, at the expense of the price of oil over the next few years, and that is the pivotal COP21 climate change deal in Paris last year. Saudi Oil Minister Ali Naimi last month described the deal as an “existential” threat to oil demand.

And to stress again, the economic Supercycle is over. This will become more and more apparent to everyone, and so will be another motive for oil producers to intensify their market share battle. If prices are going to weaken anyway because of the end of the Supercycle, why not maximise production to win greater market share.

The energy world in general has changed for good. The sooner chemicals companies accept this the better, as they can build sensible scenario plans for the future.