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The Dallas Morning News: Building a Texas-size oil refinery

Shell, Saudi Aramco to invest $7 billion; Gulf Coast facility to be biggest in U.S.

10:55 PM CST on Monday, December 10, 2007
By ELIZABETH SOUDER and JIM LANDERS / The Dallas Morning News

Two foreign companies broke ground Monday on construction of the largest oil refinery in the U.S. in the Gulf Coast town of Port Arthur.

Motiva Enterprises LLC, owned by Royal Dutch Shell and Saudi Aramco, will invest $7 billion to expand an existing refinery.

That’s the biggest capital investment Texas has ever received, and it comes at a time when refiners are enjoying fat profits, state officials said.

“We are the largest producer, the U.S. is the largest consumer” of oil, said Abdulaziz al-Khayyal, senior vice president, industrial relations, for Saudi Aramco, the kingdom’s national oil company.

“We’ve always made a decision to be present in a significant way in all major markets,” he said.

Saudi Aramco is also building refineries outside of the U.S., but the Port Arthur project is massive.

The expansion will more than double the capacity for the existing refinery to 600,000 barrels a day. It will make enough fuel to fill about 700,000 cars a day. The project should be finished in 2010.

The Port Arthur project will surpass Exxon Mobil Corp.’s facility in Beaumont, currently the largest U.S. refinery.

National oil companies such as Saudi Aramco are building refineries and expanding existing ones for several reasons. Iran, Iraq and Venezuela are trying to build refineries to meet domestic demand and lessen imports of gasoline.

Earlier this year, Saudi Aramco teamed with Exxon Mobil and Sinopec to announce a plan to triple capacity at the Fujian refinery in China to 240,000 barrels a day.
Global demand

Saudi Aramco signed memoranda of understanding with ConocoPhillips and Total to build refineries in the Saudi port cities of Jubail and Yanbu to transform the heavier Saudi oil into gasoline and other products for the U.S. and European markets.

Each refinery would have a capacity of 400,000 barrels a day, with completion scheduled for 2011.

Most of the oil from Saudi Arabia and other Persian Gulf exporters now goes to Asia, and Saudi Aramco is investing heavily in new refining capacity in Korea, the Philippines and Japan as well as China.

The S-Oil refinery in Korea, where Saudi Aramco is a 30 percent partner, is undergoing an expansion that would nearly double capacity to a gigantic 1 million barrels a day.

“The kingdom is one of the key investors in refineries outside the region,” said Saudi Oil Minister Ali al-Naimi. “We have capacity now in the kingdom and outside to refine 3.2 million barrels a day. Over the coming five years, we will double that to around 6 million barrels a day.”

In the U.S., Shell and Saudi Aramco have a strategy of building a high-tech refinery that can handle the worst – and cheapest – types of crude oil. Doing so keeps costs low and profit margins as wide as possible.

“If the going gets tough, then you need places of this complexity,” said Rob Routs, head of downstream operations for Royal Dutch Shell.

Though refineries are enjoying wide profit margins now, Mr. Routs doubts the good times will last.

“Make no doubt about it, it will go back to that period of margins being very thin,” he said, “close to zero.”

In theory, a new refinery would add supply to the U.S. market and cause gasoline prices to fall. But there’s a risk for investors – if Americans stop using so much fuel.

Officials at Monday’s groundbreaking doubt that will happen anytime soon.

“U.S. refining capacity is very tight,” said U.S. Secretary of Energy Samuel Bodman, who was on hand to turn a ceremonial shovel.

“Tight supplies in a time of heightened demand lead to higher prices. It doesn’t, in my opinion, have to be this way,” Mr. Bodman said.

Gov. Rick Perry and U.S. Sen. John Cornyn skipped the ceremony because of schedule conflicts but sent staff.

No one has built a refinery in the U.S. in the last three decades, though many refineries have expanded.
Blaming big oil

At OPEC’s recent summit in Riyadh, Saudi Arabia, OPEC Secretary General Abdulla El-Badri faulted the big oil companies for not expanding their refineries quickly enough to keep pace with rising global demand.

He said that refiners were running at only 87 percent capacity and that this was one reason oil prices were so high.

On Monday, Mr. al-Khayyal complained about U.S. officials considering restrictions on foreign investments. But he said he hears a lot from President Bush’s administration about “needing to continue our partnership.”

“We have faith that the decisions made would be good for consumers,” he said.
The Saudis’ gain

The Saudis gain an important benefit from their refining expansions, including the Port Arthur project.

The Saudis have spare production capacity for heavier, high-sulfur crude oil that few outside refiners want to buy. They’re building refineries to handle this less desirable oil.

Refineries add value to Saudi crude oil and should bring additional revenue to the kingdom. With a chain of refineries designed to transform Saudi Arabia’s crude oils, the kingdom is locking in markets abroad for its products.

Mr. al-Naimi, the Saudi oil minister, said exports depend on what the market wants.

“If you want refined products, we will supply them. If you want crude oil, we will supply crude,” he said.

Costs for building refineries are inflating rapidly. Kuwait recently put out a tender for a new refinery of 400,000 barrels a day and expected bids would come back in the range of $6.35 billion. Instead, the lowest bid was $15 billion.

The Saudis say they’ve been able to keep their mega-project refineries and production capacity additions on schedule despite cost run-ups estimated by Cambridge Energy Research Associates at more than 70 percent. And as Mr. Naimi reminded the news media at the OPEC summit, the price of crude oil has gone up pretty rapidly as well.
Workers wanted

In Port Arthur, expansion managers are wrestling with their own cost issues.

“Labor is probably going to be our biggest challenge,” said Forest Lauher, head of the project expansion for Motiva.

The Beaumont native said there’s a shortage of skilled welders in the area, and he’s working with construction company Bechtel to train more.

Motiva will need at least 4,500 construction workers to build the facilities and 300 people to operate them permanently.

Mr. Lauher said he may have to hire from outside the area, even outside the U.S., to find enough workers.
Elizabeth Souder reported from Port Arthur, Texas, and Jim Landers reported from Saudi Arabia.

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