Q: OQ8’s new refinery has lengthy been within the works. What did it take to get right here? What have been the important thing moments?
A: It’s no understatement to say this can be a nation-building undertaking. Oman had numerous imaginative and prescient in Duqm, and the east coast of Oman usually, and there was numerous strategic logic with finding it outdoors the Strait of Hormuz and the Crimson Sea (MEES, 4 December 2006).
The opposite ingredient is that Duqm is dealing with rising markets. It is extremely near the Indian subcontinent, however what I’m very captivated with is the expansion of Africa, and East Africa notably. The subsequent few many years will actually be the many years of the Indian Ocean; the expansion of the Indian subcontinent, the remainder of Asia, and East Africa.
With these two key underpinning pillars of logic — geopolitical and rising markets — it simply is sensible that Duqm is the place you’d develop your refining capability.
And in the end, as our full identify Duqm Refinery and Petrochemical Industries Firm exhibits, it’s not simply the refinery – that was all the time supposed as part one – but in addition capturing extra worth from the additional downstream processing into petchems (MEES, 6 January 2023).
The dates and statistics are available: taking FID in 2018, awarding the foremost EPC contracts throughout three consortiums through the challenges of Covid. We took mechanical completion in July 2023 and reached full capability by the top of the yr.
We then took care, custody, and management from the EPC contractor again in Could, and that has enabled us to begin our Lender Reliability Take a look at, as a result of we’re debt financed. That preliminary debt financing has a major shareholder obligation, so we now have over $2bn on the books of each nationwide oil corporations [OQ & KPI], so arguably sovereign credit standing influences the result. We’re beneath numerous stress to launch that shareholder enterprise.
We have now a really onerous 90-day Lender Reliability Take a look at from 28 Could. To have began this simply ten months after mechanical completion for a serious $9bn greenfield undertaking in a distant a part of the world is actually world class by any stretch.
Being at full capability means we’re per design on yields and effectivity, we’re totally environmentally compliant, and we even have the related ecosystem functioning; crude imports and provide agreements, funds, offtake agreements.
Q: You point out this is without doubt one of the largest joint-ventures of its type. How do you handle the massive image technique choices between Oman and Kuwaiti companions?
A: I believe there have been varied fashions tried for governance, however now the board and shareholders have aligned on this being an impartial joint-venture with impartial governance. A part of that independence means each resolution I take and each resolution the board takes shall be within the curiosity of the three way partnership. And we now have the mandate to be a standalone, self-sufficient, aggressive refinery.
We’re the primary service provider refinery within the Center East. We don’t simply course of indigenous crude, we don’t simply sit on the finish of the pipeline. Actually, a part of the strategic intent from Kuwait was to be an outlet for his or her crude, and we understand that, however under no circumstances prices. It’s a very aggressive crude for us, however we shall be crude flexibility after the Lender Reliability Take a look at as effectively.
Clearly we’re in Oman, so we now have obligation to Oman, however we’re very clear that we create Kuwaiti and Omani employment alternatives. Equally, with in-country worth by way of our contract and procurement we try to embrace functionality within the area, like providers and suppliers equally from Kuwait and Oman.
Once more, each shareholders take 50% of the offtake, and this permits them to construct their advertising and buying and selling functionality.
We’re very happy with our 50:50 relationship and shareholding. So once we embrace our independence that isn’t in any respect on the detriment of the talent and functionality of our two shareholders. It’s nice, it’s a two-way dialogue, we nearly get to be this petri dish of innovation, and hopefully there are issues we will be taught. But additionally, once we need assistance we now have obtained unimaginable help to lean on.
Q: And does this embody choices round refinery yield and goal markets?
A: Being a three way partnership we’re accountable for articulating the technique of the corporate. I used to be very clear, once I joined, that I’m not right here to run a refinery I’m right here to develop an organization. So sure, OQ8 has the accountability to current a development technique that’s within the curiosity of the joint-venture.
Now the flip facet of that’s clearly, we now have a number of shareholders, in order that they have to judge these development choices amongst their different portfolio of development choices, as they’d. Capital is scarce, so we now have simply obtained to ensure that we current the expansion choices which are extraordinarily compelling. We have now to know what are somebody’s strategic intents, whether or not or not it’s development, whether or not or not it’s vitality transition, whether or not or not it’s shortage of capital.
Q: Are you planning to start refining third-party crudes within the close to future? What is important to decide on a selected crude?
A: Purely economics. When you have a look at our provide agreements which are already in place as a part of our financing doc, we now have provide agreements with each shareholders. In there, we have already got the power for both of our shareholders to provide us with a third-party crude. It was all the time envisioned, it’s not one thing new (MEES, 23 December 2022).
The power to judge that shall be purely on economics, however we hope to be a trading-led service provider refinery, capitalizing on alternatives as they current themselves, whether or not that be by way of dislocations of sure crude sorts. We are going to, as we get into extra steady operations, consider our personal provide technique. A few of it will likely be time period provide of indigenous crude or shareholder crude, a few of it will likely be time period provide of non-shareholder crude, after which we’ll create some buffer and we might want to consider what would be the relative weighting of extra opportunistic crudes.
All that is no totally different to every other service provider refinery, these are tried and examined processes. However they’re new to the area; making a crude acceptance matrix, having that portfolio of each economically evaluated and technically evaluated crudes with check runs of recent crudes.
I believe this yr goes to be attention-grabbing on how among the crude dynamics play out. A few key interventions are the brand new refineries coming on-line. We are able to speak about what this implies for product flows, however I believe it’ll be equally, if no more necessary, for what it means for among the crude flows.
Whenever you have a look at Mexico and the brand new Olmeca [Dos Bocas] refinery, what’s that going to imply now for consuming Mexico’s personal heavy crude? So with that, plus the Venezuelan sanctions, there’s much less heavy crude going into the Gulf Coast of America. Plus, America is already chubby in mild WTI crude. You’re going to see the Trans Mountain pipeline that simply began up from Canada, which is now flowing a ton of medium-heavy crude into the US West Coast and China, or East Asia, which generally takes Center Jap heavies. After which clearly you get among the nest African crudes now which are going to be consumed by Nigeria’s [new] Dangote refinery. I believe the crude combine goes to alter fairly basically.
When you ask me, being a service provider refinery, we’re oriented to heavier crude barrels, heavy bitter, and we’re proper on the doorstep of much more native and regional crude that may develop into extra accessible in-region as a result of it will likely be having to compete. A few of its conventional markets are actually changing into extra aggressive.
It’s notably the Canadian pipeline that I shall be watching to see what which means for Center Jap grades like Basrah Heavy, which have historically gone to the US West Coast or to China, however which could now get outcompeted by Canadian heavy crudes.
Q: So you’re undoubtedly leaving an area to play in these altering markets?
A: Right. Already in our basket of crudes that we’re economically evaluating and hoping to do a number of check runs on this calendar yr, shall be among the Kuwaiti heavies, and let’s simply say different regional heavy grades. I believe it will likely be a very long time earlier than we ever have a look at a Brazilian crude or one thing like that, simply given the dynamics that may circulation within the subsequent 12-24 months with these different refineries beginning up and the Trans Mountain pipeline.
The worldwide market is presently oversupplied with lighter crudes and I believe it can put numerous these different refineries which are historically extra oriented to importing heavy crudes beneath stress — I’m speaking right here US Gulf Coast notably — as a result of they don’t seem to be appropriately configured to reap the benefits of WTI. And what does it imply if there are much less medium-heavy crudes? I believe you’re going to see refineries in these OECD nations beneath rising stress, which is nice for us.
Q: Each OQ Buying and selling and KPC have offtake agreements with OQ8. What are the offtake relationships precisely?
A: They’re 50:50 offtake agreements on all offtake. In the intervening time we’re studying as we go, we’re a trading-led asset, so we’re growing a deep intimacy and understanding of market alternatives given the refinery’s functionality. We have now boards of governance, what we name a coordination committee, which is simply actually making an attempt to get that deep intimacy between the buying and selling and the refinery workforce for export alternatives.
We’re a full-export refinery, so our success will come from with the ability to seize market worth as and when it arises. So flexibility is essential, and suppleness comes from belief and intimacy. We’re build up our business workforce and we now have a quarterly steering committee between the 2 shareholders plus the 2 offtakers to proceed to drive the habits that builds belief.
Our survival will in the end come from capturing alternatives. An amazing instance of that’s that as we obtained into operation, being a center distillate-oriented refinery, our two possible markets are Europe and Asia: pretty binary. However really, we’re seeing 45% of our diesel ending up in East Africa. You may say with hindsight it’s apparent, however it’s what it’s, and it’s a fascinating alternative for us to now pay attention to and proceed to seize (MEES, 15 September 2023).
Q: Talking about export alternatives and suppleness, have you ever skilled any issues across the Crimson Sea disruptions?
A: Sure is the quick reply, however not in any means that’s distinctive to Duqm refinery. It has impacted international flows, it has impacted international freight charges, it has impacted international insurance coverage, it has impacted fleet availability as now tankers are full for longer and should do an extended route (MEES, 1 March). So completely it has impacted, however under no circumstances distinctive to Duqm. And if the market arbitrage is open we nonetheless take it, even when it takes 9 days longer to get there.
Now, is that the reason for our product ending up in East Africa? I’d say unlikely. I believe that may be a consequence of our proximity, not a consequence of the Crimson Sea essentially. With European refiners, we’re most likely equidistant to South Africa and but we’re nonetheless managing to be a aggressive provider, so that’s impartial of the Crimson Sea.
So no, I believe it’s extra round our skill to maintain the arbitrage open with the US Gulf Coast, when it comes to focusing on imports into Europe. Now the important thing distinction there’s European specs. There are fewer and fewer older refineries that may compete in that, and we will. We are able to make German pipeline winter grade diesel. So whether or not it takes 9 days longer to get there, there are only a few suppliers that may meet that specification: we will. If the arb is open, we can catch it.
And our offtakers, with the size and functionality of KPC and OQT, they’ve a worldwide footprint and are capable of seize the arb if and when its open. And I believe it’s only going to develop, as a result of the North Atlantic refineries shall be extra beneath stress.
Beforehand we talked about crude dynamics because of the brand new refineries, however each Dangote and Olmeca refineries will influence oil product provide within the Atlantic basin by lowering the alternatives for conventional European export refineries to now discover these retailers. I believe we’ll see one other wave of closures in Europe as a result of they’ve fewer retailers. It isn’t about whether or not we now have rivals delivering into Europe, it’s the truth that the European import market will develop, and it’s our alternative because the youngest trendy refinery on the earth which has been designed to satisfy these specs.
Q: You talked about Dangote earlier, do you see it offering any competitors to among the African markets Duqm provides?
A: I don’t assume we had been ever focusing on west Africa as a major outlet. Clearly if alternatives arose, we’d. So for me, Dangote is simply an enormous alternative to place extra stress on smaller, older, easier, export-orientated refineries within the north Atlantic as a result of now an enormous market has disappeared, or will disappear, which is Nigeria. It was a serious importer of diesel and an enormous outlet for these established refiners within the north Atlantic. So that’s the place Dangote will put that stress.
For me the golden age of refining continues to be to return (MEES, 13 October 2023). All worth predictions have all the time had this type of linear outlook, whereas everyone knows our business is cyclical. And lots of people deal with demand, you possibly can have your view on electrical autos and the way forward for fuels, however for me the vast majority of cycles prior to now have been pushed by provide causes reasonably than demand causes.
Our mission because the youngest, most automated, most knowledge wealthy refinery on the earth is to be essentially the most aggressive. And we now have obtained that mandate. We haven’t historically seen that in among the belongings which have extra national-oriented mandates for these corporations, however ours is to be aggressive. Solely by being aggressive can we develop, and solely by rising can we create nationwide advantages like everlasting, highly-skilled, highly-paid jobs.
I imagine in ten to fifteen years’ time folks will look again on Duqm and it will likely be the Fujairah of Oman, a key industrial hub given its strategic location. Now you might have a extremely profitable anchor funding like a refinery which began up exceptionally effectively, on finances, and is now incomes its proper to develop.
And searching ahead we additionally need to do work on understanding our the well-to-wheel carbon depth of our product. The Center East has low-carbon depth extraction, we will then course of this crude on the youngest and best refinery — we took greatest accessible know-how for warmth integration proper on the foundation of design — and we’re close to markets as effectively for simple transportation. So the carbon depth of our molecule needs to be very aggressive versus anyone who has obtained to take very tough to extract Canadian crude and transport it lengthy distances, course of it in an inefficient refinery solely to move it a higher distance to markets.
Proper now there is no such thing as a regulatory framework that may reward this. However I believe it’s coming and we shall be ready for that. Then having that may allow us to additional perceive if there’s a capability to extract a premium for additional reducing the carbon depth of our product. In any other case it’s a compliance or a subsidy mannequin, and so then it’s got to be authorities or others who would help it.
Q: OQ8 has plans for an built-in petrochemical plant at Duqm refinery. Are there any updates on progress with this?
A: So the undertaking was paused throughout Covid. And testimony to the profitable nature of this three way partnership between Oman and Kuwait, it has now attracted curiosity from different GCC nations. The petrochemical undertaking has gone by way of full recycle with Sabic’s involvement alongside OQ and KPI. They’ve concluded their feasibility [study] and now that’s being evaluated with shareholders. This shall be basic to our success and may all the time be seen because the second part of our funding.
For me, like I mentioned, I’m very bullish on refining. The golden age of refining continues to be to return. Demand is pragmatically acknowledged as being right here for many years to return. I draw refence to Cop28 the place vitality effectivity and renewables are talked about in the identical place.
No matter you consider demand, really it’s irrelevant. Now you might have a model new energy-efficient refinery that ought to displace — and we needs to be celebrating that displacement — a few of these older, much less environment friendly, extra carbon intensive refineries. Don’t see it as a development, see it as an uplift of the vitality effectivity of the worldwide refining capability, it doesn’t matter what you consider it (MEES, 26 April).
I believe petrochemicals is without doubt one of the areas the place we do need to get extra concerned within the downstream, however I additionally see a really compelling case for additional funding for elevated capability, and elevated product diversification, along with simply petchems. That might be lubricants, that might be bitumen, that might be gasoline, or different derivate merchandise.
Q: How do you see the Center East benefiting as an oil merchandise exporting area?
A: I believe there are two issues. Considered one of which is that it’s got each proper to maximise worth extraction all through the worth chain. Any nation that depends on major business alone is studying that may be a drawback. That goes if you happen to promote wheat as grain or promote wheat as bread and pasta. And the identical is true whether or not you promote crude oil, or whether or not you promote oil merchandise and petchems. They’re realizing that they’ve the chance to seize extra of the worth of those extra international commerce flows.
Earlier than, you’d import the crude to a market, refine it after which distribute it regionally. We are actually seeing the majority of product flows are far more international, so crude might be refined at supply and the merchandise are actually international commodities and might be shipped to markets everywhere in the world wherever on the earth the market is. That is the case with regards to each petchems and refined fuels.
Level quantity two is entry to capital. I believe Europe desires the vitality however doesn’t need to pay for growing it. The factor about fossil fuels is that they run out. So there must be sustained funding in fossil fuels and as demand shall be right here for many years it can want sustained funding. When you curtail that funding by way of the deployment of western capital into growing nations then naturally hydrocarbon funding goes to circulation by way of different areas that may self-finance: and the Center East is a kind of areas. Africa just isn’t. I believe that’s actually unfair, nevertheless it’s a actuality.
You see a few of these charts the place by 2050, Opec’s share of crude oil provide will go from lower than 40% to greater than 60%. I believe Europe ought to have realized its lesson about focus of geopolitical danger once they put all their vitality provide within the Russian basket. Now they’re going to focus extra of their vitality provide within the Opec basket: an attention-grabbing consequence.
I believe the Center East has a incredible position to play in guaranteeing that the world continues to see dependable, inexpensive, high-quality fossil fuels as a result of it could self-finance it. It’s taking over an elevated share of the burden in that, nevertheless it has the capability and functionality to take action.
*Interview performed by Gulf Analyst James Marriott in Muscat on 26 June.
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