Worried About the Wave; Refinery Remorse
Tidal Wave: We’re hearing that one of the most popular topics at this year’s meeting of uber-egotists in Many of the world's petro-states, such as Russia, Kuwait, Abu Dhabi and most recently Saudi Arabia, have formed such investment funds to hold their oil profits and turn them into diversified assets. According to Morgan Stanley, these funds, now totaling some $2.5 trillion in assets, stand to skyrocket in size over the next dozen or so years until they are at $28 trillion in 2022, or twice the size of the current U.S. economy.
All this cash in the hands of countries that perhaps have different agendas from the West's is behind a call from some quarters for an unspecified "code of conduct" among such funds. The implication is that, short of unspecified "transparency," recently even inserted as an issue into the presidential campaign by Hillary Clinton, Washington would put its foot down.How is Washington going to put its foot down when it's not the funds, but the likes of Morgan Stanley and CitiGroup that are pleading to be saved by these funds because good, solid Americans like Warren Buffett don't see the upside?
The truth is that control over global finance is shifting East, largely to these petro-states but also to other countries such as Singapore that manage their wealth better than the U.S. has. And the U.S. isn't going to have much control over it.
Refining backsliding: It's a sign of how far matters have deteriorated that $87 oil is regarded as a blessing. Could oil fall as low as $70 a barrel if there's a severe, prolonged recession such as Larry Summers has predicted for months over at the Financial Times? And would prices at the pump drop commensurately? Sure. But that's still a historically high number.
And one of the biggest reasons for expensive oil is a shortage of the right kind of refineries around the world. Meaning that there's plenty of really bad quality oil -- so-called heavy oil, laden with sulfur that must be removed. But there aren't enough refineries capable of rapidly processing it. So you get a backup of this surplus crude, and a runup in prices of the light, low-sulfur crude that the refineries can process.
In short, $87 oil is really the price of that much-demanded light, low-sulfur crude, not the heavier stuff. If there was a way to process the heavier stuff, the price of all crudes would drop.
The Saudis themselves have been among the chief gripers about this state of affairs.
The bad news is stated in an analysis in the venerable Middle East Economic Survey. There are huge delays in a planned near doubling of refinery capacity in the Saudi kingdom. The report was posted by Engineerlive.com.
The Saudis currently can refine about 2.1 million barrels of oil a day. And they have another 1.8 million barrels a day of new capacity on the drawing boards. Their partners in these refineries are ConocoPhillips and France's Total, both of which according to this report are getting cold feet about cost overruns. Will they come on line by late 2012 -- almost five years from now? -- perhaps.
Which brings me to India. Why is it that Mukesh Ambani's Reliance Petroleum can put up a completely new, world-class refinery capable of processing the worst crudes on the planet in just 18 months, and ConocoPhillips, Total and Aramco cannot?
Ambani is set to complete a near doubling of his 660,000 barrel-a-day refinery in Jamnagar, in southern India, by the end of December. That's a turbo-charged pace.
It's also more proof of why Big Oil is on the decline. It has trouble competing with the aspirations of people like Ambani.
Photo: thelastminute
Rights: Creative Commons
Labels: $100 oil, citigroup, hidden wealth, kuwait, morgan stanley, Russia, saudi arabia, sovereign wealth funds
2 Comments:
I must agree with Steve's assessment that control over global finance is shifting East. There are many in "the West" who worry about this and several conspiracy theorists out there are just putting oil on the fire. But, the truth is, there are many countries in the East that have learned western economics and have put those teachings to work successfully, thus are able to manage wealth just as well and even better than the US.
The balance of power between the American super-state and eastern nations should always be kept in check in order to move the world forward in a way that is not always mono-directional.
On another note, I'd like to give a big congratulations to Kazakhstan for receiving a nomination for Best Foreign Film from the American Academy Awards. Good luck on February 24th!
--Vincent
Yes, Big Oil is under threat from the growing project capabilities and aggressive acquisition strategies of state-controlled and emerging-market companies. But its competitive position is not quite as weak as the example of Reliance Petroleum suggests. Reliance's refinery at Jamnagar was announced in mid-2005, construction commenced 24 months ago and will not be completed for another 11 months, and moreover the project sits adjacent to an existing refinery with which it will share certain facilities. Reliance is currently building another refinery which it expects to finish by the end of 2012. It will be interesting to track the progress of this latest refinery since it is on roughly the same timeline as Big Oil's joint ventures in Saudi Arabia – meaning that costs, which in the world market have grown significantly in the last two years, may be more comparable.
Of course, as you point out, Big Oil's projects could be delayed indefinitely. Perhaps Total and Conoco's minority stakes are inadequate incentives to go ahead. But if that's the case (as I'm sure you'll agree), then more ambitious – or at least less cautious – competitors will step into the breach.
Ironically, a Western major may profit handsomely from success in India and failure in Saudi Arabia. Chevron in 2006 took a pass on the refinery-construction in Saudi Arabia due to concerns, but at around the same time purchased a small stake in Reliance and has the option to own 29% of the company.
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