* Pulls out of plans to build 400,000 bpd plant
* Cites strategy to reduce downstream operations
* Conoco shares down almost 1 percent
* Aramco talking to other potential partners-sources (Recasts, adds background, bylines)
By Anna Driver and Simon Webb
HOUSTON/DUBAI, April 21 (Reuters) - ConocoPhillips (COP.N), the third-largest U.S. oil company, said on Wednesday it canceled plans to build a new plant with Saudi Aramco in the Middle East, citing its strategy to reduce its refinery operations.
The refinery was to be built by the two oil companies in Yanbu Industrial City, Saudi Arabia, and have a processing capacity of 400,000 barrels per day. Yanbu accounts for just under a quarter of Saudi plans to add around 1.7 million barrels per day of refining capacity.
Conoco, like other major oil refiners, has seen profits shrink at its plants that turn crude oil into gasoline and diesel fuel as the global economic slowdown eroded demand.
“We ultimately decided this project was not consistent with our current strategy to reduce our downstream footprint,” Willie Chiang, senior vice president for refining, marketing and transportation, said in a statement.
Aramco indicated it would go ahead with the plant despite Conoco’s withdrawal. [nLDE63K1Q7]
“We anticipate that the Yanbu refinery will become one of the most competitive refineries in the world,” Khalid al-Buainain, senior vice president of refining and marketing, said in an Aramco statement.
Aramco is already talking to other potential partners to replace Conoco, and at least one Chinese firm is among those Aramco has approached, industry sources said. [ID:nLDE63K20V]
The complex Yanbu refinery is slated to process heavy crude from Saudi Arabia’s project to pump 900,000 barrels per day from the Moneefa oilfield, a sister project to another 400,000-bpd refinery that Aramco is building with France’s Total (TOTF.PA) at Jubail.
Last week, Conoco sold its stake in a Canadian oil sands project to China’s Sinopec (600028.SS) for $4.65 billion as part of its program to sell $10 billion in assets to help reduce its heavy debt burden and improve shareholder returns.
“Conoco is looking to make upstream 85 percent of their business, so it certainly makes sense that they would cancel this project,” said oil analyst Phil Weiss of Argus Research.
Conoco has yet to decide on its role in another giant development in the Gulf, a $10 billion project to pump and process sour gas from the Shah field in the United Arab Emirates.
That project may also be pulled, Weiss said, because it will not yield the type of returns Conoco is seeking as it invests more heavily to expand its exploration business.
Aramco’s plans to nearly double refining capacity at home have also been hit by the global economic downturn. A project to boost capacity by 400,000 bpd at Aramco’s Ras Tanura’s refinery may be shelved indefinitely after the company put the project on hold last year.
Industry sources told Reuters last week that Aramco and Conoco had planned to contract with South Korea’s SK Engineering [SKEC.UL] to build a crude unit, Daelim Industrial 00210.KS for a gasoline unit, and GS Engineering (006360.KS) to build a hydrocracker.
Yanbu is not the first refinery project that Conoco has pulled out of in the region.
The Houston company withdrew in 2007 from a partnership with Abu Dhabi’s government-run International Petroleum Investment Corp to build a refinery at the port of Fujairah in the United Arab Emirates as inflation throughout the industry drove costs higher.
Shares of Conoco fell 48 cents, or nearly 1 percent, to $56.92 in morning trading on the New York Stock Exchange. (Reporting by Reem Shamseddine in Khobar, Matt Daily in New York and Simon Webb in Dubai and Anna Driver in Houston, editing by Lisa Von Ahn and Derek Caney)