US-based oil giant ConocoPhillips is set to exit a joint venture to build an oil refinery in the Saudi city of Yanbu, which it previously entered into with local firm with Saudi Aramco. The collaboration between the two majors was to build a new 400,000 barrel per day (bpd) facility in the Red Sea port city.
The move by the US firm comes as part of its wider withdrawal from downstream projects worldwide. Conoco is working to cut its refining capacity by up to 26% by 2012. However, while one door closes for one firm it opens for another and Conoco's exit from the project will provide a significant opportunity for another oil company to get involved. The likes of India's London-listed Essar Oil and Sinopec of China have shown interest in taking over from ConocoPhillips.
Conoco's move to exit the Yanbu project, and furthermore its entire downstream strategy, is focused on the need to reduce overexposure in mature oil markets In such markets margins are continually shrinking and they often have very little upside potential. Instead, the firm intends to focus potential more profitable upstream projects.
Interestingly, Conoco is far from unique in adopting this policy - it has been followed by a string of international oil majors.
The firm is reported to have submitted a formal written notice of its withdrawal from the Saudi Arabian project. Conoco said that its move to depart the venture has been made more complicated by the reduced capital costs from the Yanbu project's recent rebidding process. The firm added that its involvement in the refinery project was not in fitting with its present global strategy of cutting back its refining capacity.
Last month, the US major said that it would be reducing its worldwide refining capacity to between 2.0 to 2.2 million bpd by 2012, down from the present level of 2.7 million bpd. In the long-term Conoco plans to reduce production levels ever further, to around 1.8 to 2.0 million bpd.
As things stand, the firm has 18 refineries in its portfolio, of which 13 are US-based. In North America alone Conoco has an aggregate refining capacity of around 2 million bpd - which is equivalent to around 11% of total US production.