Q: OQ8’s new refinery has long been in the works. What did it take to get here? What have been the key moments?
A: It’s no understatement to say this is a nation-building project. Oman had a lot of vision in Duqm, and the east coast of Oman generally, and there was a lot of strategic logic with locating it outside the Strait of Hormuz and the Red Sea (MEES, 4 December 2006).
The other element is that Duqm is facing growing markets. It is very close to the Indian subcontinent, but what I am very passionate about is the growth of Africa, and East Africa particularly. The next few decades will really be the decades of the Indian Ocean; the growth of the Indian subcontinent, the rest of Asia, and East Africa.
With those two key underpinning pillars of logic — geopolitical and growing markets — it just makes sense that Duqm is where you would expand your refining capacity.
And ultimately, as our full name Duqm Refinery and Petrochemical Industries Company shows, it’s not just the refinery – that was always intended as phase one – but also capturing more value from the further downstream processing into petchems (MEES, 6 January 2023).
The dates and statistics are readily available: taking FID in 2018, awarding the major EPC contracts across three consortiums during the challenges of Covid. We took mechanical completion in July 2023 and reached full capacity by the end of the year.
We then took care, custody, and control from the EPC contractor back in May, and that has enabled us to start our Lender Reliability Test, because we are debt financed. That initial debt financing has a significant shareholder obligation, so we have over $2bn on the books of both national oil companies [OQ & KPI], so arguably sovereign credit rating influences the outcome. We are under a lot of pressure to release that shareholder undertaking.
We have a very onerous 90-day Lender Reliability Test from 28 May. To have started this just ten months after mechanical completion for a major $9bn greenfield project in a remote part of the world is truly world class by any stretch.
Being at full capacity means we are per design on yields and efficiency, we are fully environmentally compliant, and we also have the associated ecosystem functioning; crude imports and supply agreements, finances, offtake agreements.
MERCHANT MODEL
Q: You mention this is one of the largest joint-ventures of its kind. How do you manage the big picture strategy decisions between Oman and Kuwaiti partners?
A: I think there were various models attempted for governance, but now the board and shareholders have aligned on this being an independent joint-venture with independent governance. Part of that independence means every decision I take and every decision the board takes will be in the interest of the joint venture. And we have the mandate to be a standalone, self-sufficient, competitive refinery.
We are the first merchant refinery in the Middle East. We don’t just process indigenous crude, we don’t just sit at the end of the pipeline. Certainly, part of the strategic intent from Kuwait was to be an outlet for their crude, and we realize that, but not at all costs. It is a very competitive crude for us, but we will be looking at crude flexibility after the Lender Reliability Test as well.
Obviously we are in Oman, so we have obligation to Oman, but we are very clear that we create Kuwaiti and Omani employment opportunities. Similarly, with in-country value through our contract and procurement we try and embrace capability in the region, like services and suppliers equally from Kuwait and Oman.
Again, both shareholders take 50% of the offtake, and this enables them to build their marketing and trading capability.
We are very proud of our 50:50 relationship and shareholding. So when we embrace our independence that is not at all at the detriment of the skill and capability of our two shareholders. It’s great, it’s a two-way dialogue, we almost get to be this petri dish of innovation, and hopefully there are things we can learn. But also, when we need help we have got incredible support to lean on.
Q: And does this include decisions around refinery yield and target markets?
A: Being a joint venture we are accountable for articulating the strategy of the company. I was very clear, when I joined, that I am not here to run a refinery I am here to grow a company. So yes, OQ8 has the accountability to present a growth strategy that is in the interest of the joint-venture.
Now the flip side of that is obviously, we have multiple shareholders, so they have to evaluate those growth options amongst their other portfolio of growth options, as they would. Capital is scarce, so we have just got to make sure that we present the growth options that are extremely compelling. We have to understand what are someone’s strategic intents, whether it be growth, whether it be energy transition, whether it be scarcity of capital.
Q: Are you planning to begin refining third-party crudes in the near future? What is necessary to make a decision on a particular crude?
A: Purely economics. If you look at our supply agreements that are already in place as part of our financing document, we have supply agreements with both shareholders. In there, we already have the ability for either of our shareholders to supply us with a third-party crude. It was always envisioned, it is not something new (MEES, 23 December 2022).
The ability to evaluate that will be purely on economics, but we hope to be a trading-led merchant refinery, capitalizing on opportunities as they present themselves, whether that be through dislocations of certain crude types. We will, as we get into more stable operations, evaluate our own supply strategy. Some of it will be term supply of indigenous crude or shareholder crude, some of it will be term supply of non-shareholder crude, and then we will create some buffer and we will need to evaluate what will be the relative weighting of more opportunistic crudes.
All this is no different to any other merchant refinery, these are tried and tested processes. But they are new to the region; creating a crude acceptance matrix, having that portfolio of both economically evaluated and technically evaluated crudes with test runs of new crudes.
I think this year is going to be interesting on how some of the crude dynamics play out. A couple of key interventions are the new refineries coming online. We can talk about what this means for product flows, but I think it is going to be equally, if not more important, for what it means for some of the crude flows.
When you look at Mexico and the new Olmeca [Dos Bocas] refinery, what is that going to mean now for consuming Mexico’s own heavy crude? So with that, plus the Venezuelan sanctions, there is less heavy crude going into the Gulf Coast of America. Plus, America is already overweight in light WTI crude. You are going to see the Trans Mountain pipeline that just started up from Canada, which is now flowing a ton of medium-heavy crude into the US West Coast and China, or East Asia, which typically takes Middle Eastern heavies. And then obviously you get some of the nest African crudes now that are going to be consumed by Nigeria’s [new] Dangote refinery. I think the crude mix is going to change quite fundamentally.
If you ask me, being a merchant refinery, we are oriented to heavier crude barrels, heavy sour, and we are right on the doorstep of a lot more local and regional crude that will become more available in-region because it will be having to compete. Some of its traditional markets are now becoming more competitive.
It’s particularly the Canadian pipeline that I will be watching to see what that means for Middle Eastern grades like Basrah Heavy, which have traditionally gone to the US West Coast or to China, but which might now get outcompeted by Canadian heavy crudes.
CHANGING MARKETS
Q: So you are definitely leaving a space to play in these changing markets?
A: Correct. Already in our basket of crudes that we are economically evaluating and hoping to do a few test runs in this calendar year, will be some of the Kuwaiti heavies, and let’s just say other regional heavy grades. I think it will be a long time before we ever look at a Brazilian crude or something like that, just given the dynamics that will flow in the next 12-24 months with these other refineries starting up and the Trans Mountain pipeline.
The global market is currently oversupplied with lighter crudes and I think it will put a lot of those other refineries that are traditionally more oriented to importing heavy crudes under pressure — I am talking here US Gulf Coast particularly — because they are not appropriately configured to take advantage of WTI. And what does it mean if there are less medium-heavy crudes? I think you are going to see refineries in these OECD countries under increasing pressure, which is good for us.
Q: Both OQ Trading and KPC have offtake agreements with OQ8. What are the offtake relationships exactly?
A: They are 50:50 offtake agreements on all offtake. At the moment we are learning as we go, we are a trading-led asset, so we are developing a deep intimacy and understanding of market opportunities given the refinery’s capability. We have forums of governance, what we call a coordination committee, which is just really trying to get that deep intimacy between the trading and the refinery team for export opportunities.
We are a full-export refinery, so our success will come from being able to capture market value as and when it arises. So flexibility is key, and flexibility comes from trust and intimacy. We are building up our commercial team and we have a quarterly steering committee between the two shareholders plus the two offtakers to continue to drive the behavior that builds trust.
Our survival will ultimately come from capturing opportunities. A great example of that is that as we got into operation, being a middle distillate-oriented refinery, our two likely markets are Europe and Asia: fairly binary. But actually, we are seeing 45% of our diesel ending up in East Africa. You could say with hindsight it is obvious, but it is what it is, and it is a fascinating opportunity for us to now be aware of and continue to capture (MEES, 15 September 2023).
Q: Speaking about export opportunities and flexibility, have you experienced any problems around the Red Sea disruptions?
A: Yes is the short answer, but not in any way that is unique to Duqm refinery. It has impacted global flows, it has impacted global freight rates, it has impacted global insurance, it has impacted fleet availability as now tankers are full for longer and have to do a longer route (MEES, 1 March). So absolutely it has impacted, but in no way unique to Duqm. And if the market arbitrage is open we still take it, even if it takes nine days longer to get there.
Now, is that the cause of our product ending up in East Africa? I would say unlikely. I think that is a consequence of our proximity, not a consequence of the Red Sea necessarily. With European refiners, we are probably equidistant to South Africa and yet we are still managing to be a competitive supplier, so that is independent of the Red Sea.
So no, I think it is more around our ability to keep the arbitrage open with the US Gulf Coast, in terms of targeting imports into Europe. Now the key difference there is European specifications. There are fewer and fewer older refineries that can compete in that, and we can. We can make German pipeline winter grade diesel. So whether it takes nine days longer to get there, there are very few suppliers that can meet that specification: we can. If the arb is open, we will be able to catch it.
And our offtakers, with the scale and capability of KPC and OQT, they have a global footprint and are able to capture the arb if and when its open. And I think it is only going to grow, because the North Atlantic refineries will be more under pressure.
Previously we talked about crude dynamics as a result of the new refineries, but both Dangote and Olmeca refineries will impact oil product supply in the Atlantic basin by reducing the opportunities for traditional European export refineries to now find those outlets. I think we will see another wave of closures in Europe because they have fewer outlets. It is not about whether we have competitors delivering into Europe, it’s the fact that the European import market will grow, and it is our opportunity as the youngest modern refinery in the world which has been designed to meet those specs.
GOLDEN OPPORTUNITY
Q: You mentioned Dangote earlier, do you see it providing any competition to some of the African markets Duqm supplies?
A: I don’t think we were ever targeting west Africa as a significant outlet. Obviously if opportunities arose, we would. So for me, Dangote is just a huge opportunity to put more pressure on smaller, older, simpler, export-orientated refineries in the north Atlantic because now a huge market has disappeared, or will disappear, which is Nigeria. It was a major importer of diesel and a huge outlet for those established refiners in the north Atlantic. So that is where Dangote will put that stress.
For me the golden age of refining is still to come (MEES, 13 October 2023). All price predictions have always had this sort of linear outlook, whereas we all know our industry is cyclical. And a lot of people focus on demand, you can have your view on electric vehicles and the future of fuels, but for me the majority of cycles in the past have been driven by supply reasons rather than demand reasons.
Our mission as the youngest, most automated, most data rich refinery in the world is to be the most competitive. And we have got that mandate. We haven’t traditionally seen that in some of the assets that have more national-oriented mandates for these companies, but ours is to be competitive. Only by being competitive can we grow, and only by growing can we create national benefits like permanent, highly-skilled, highly-paid jobs.
I believe in ten to fifteen years’ time people will look back on Duqm and it will be the Fujairah of Oman, a key industrial hub given its strategic location. Now you have a really successful anchor investment like a refinery which started up exceptionally well, on budget, and is now earning its right to grow.
And looking forward we also want to do work on understanding our the well-to-wheel carbon intensity of our product. The Middle East has low-carbon intensity extraction, we can then process this crude at the youngest and most efficient refinery — we took best available technology for heat integration right at the basis of design — and we are near markets as well for easy transportation. So the carbon intensity of our molecule should be very competitive versus somebody who has got to take very difficult to extract Canadian crude and transport it long distances, process it in an inefficient refinery only to transport it a greater distance to markets.
Right now there is no regulatory framework that will reward this. But I think it is coming and we will be prepared for that. Then having that will enable us to further understand if there is an ability to extract a premium for further lowering the carbon intensity of our product. Otherwise it is a compliance or a subsidy model, and so then it has got to be government or others who would support it.
Q: OQ8 has plans for an integrated petrochemical plant at Duqm refinery. Are there any updates on progress with this?
A: So the project was paused during Covid. And testimony to the successful nature of this joint venture between Oman and Kuwait, it has now attracted interest from other GCC countries. The petrochemical project has gone through full recycle with Sabic’s involvement alongside OQ and KPI. They have concluded their feasibility [study] and now that is being evaluated with shareholders. This will be fundamental to our success and should always be seen as the second phase of our investment.
For me, like I said, I am very bullish on refining. The golden age of refining is still to come. Demand is pragmatically recognized as being here for decades to come. I draw refence to Cop28 where energy efficiency and renewables are mentioned in the same place.
Whatever you think of demand, actually it’s irrelevant. Now you have a brand new energy-efficient refinery that should displace — and we should be celebrating that displacement — some of these older, less efficient, more carbon intensive refineries. Don’t see it as a growth, see it as an uplift of the energy efficiency of the global refining capacity, no matter what you think about it (MEES, 26 April).
I think petrochemicals is one of the areas where we do want to get more involved in the downstream, but I also see a very compelling case for further investment for increased capacity, and increased product diversification, in addition to just petchems. That could be lubricants, that could be bitumen, that could be gasoline, or other derivate products.
Q: How do you see the Middle East benefiting as an oil products exporting region?
A: I think there are two things. One of which is that it has got every right to maximize value extraction throughout the value chain. Any country that relies on primary industry alone is learning that is a disadvantage. That goes if you sell wheat as grain or sell wheat as bread and pasta. And the same is true whether you sell crude oil, or whether you sell oil products and petchems. They are realizing that they have the opportunity to capture more of the value of these more global trade flows.
Before, you would import the crude to a market, refine it and then distribute it locally. We are now seeing the bulk of product flows are much more global, so crude can be refined at source and the products are now global commodities and can be shipped to markets all over the world wherever in the world the market is. This is the case when it comes to both petchems and refined fuels.
Point number two is access to capital. I think Europe wants the energy but doesn’t want to pay for developing it. The thing about fossil fuels is they run out. So there needs to be sustained investment in fossil fuels and as demand will be here for decades it will need sustained investment. If you curtail that investment through the deployment of western capital into developing countries then naturally hydrocarbon investment is going to flow through other areas that can self-finance: and the Middle East is one of those areas. Africa is not. I think that is really unfair, but it’s a reality.
You see some of these charts where by 2050, Opec’s share of crude oil supply will go from less than 40% to more than 60%. I think Europe should have learned its lesson about concentration of geopolitical risk when they put all their energy supply in the Russian basket. Now they are going to concentrate more of their energy supply in the Opec basket: an interesting outcome.
I think the Middle East has a fantastic role to play in ensuring that the world continues to see reliable, affordable, high-quality fossil fuels because it can self-finance it. It is taking on an increased share of the burden in that, but it has the capacity and capability to do so.
*Interview conducted by Gulf Analyst James Marriott in Muscat on 26 June.
