April 17 (Bloomberg) -- Saudi Aramco, the world's largest state oil company, said a shortage of refining capacity to process so-called heavy-sour crudes will persist because of rising construction costs.

Rising prices of steel and other construction materials have prompted companies and governments to delay or cancel projects, said Ibrahim Mishari, Saudi Aramco's vice president of marketing and supply planning.

Costs to build new refining units have risen at least 70 percent in the past three years, London-based Merrill analysts Hootan Yazhari, Alastair Syme, Mark Iannotti and Philippe Ziegler said in an April 13 report. Heavy-sour oil contains more sulfur than sweet crudes and requires more processing than light grades to extract the same amount of gasoline.

``Many of these refineries may not materialize,'' Aramco's Mishari said at the Middle East Petroleum and Gas conference in Dubai. ``The downstream bottleneck could remain.''

Total SA and ConocoPhillips last year won the rights to invest in two new joint venture refineries with Saudi Aramco to be built in Jubail and Yanbu.

``The Saudi refineries are carefully being studied,'' he said while talking to reporters yesterday.

Saudi Aramco is negotiating with China Petrochemical Corp., Asia's biggest refiner, to buy a 25 percent stake in its Qingdao refinery, Mishari said.

Sinopec Group, as the Beijing-based company is known, plans to expand the 10-million-metric-ton-a-year Qingdao refinery.

``The key to investment is economics,'' Mishari said.

China, the world's second biggest energy consumer, is increasing refining capacity to meet rising demand for fuel and chemicals to run factories and automobiles. China's economy expanded 10.7 percent in 2006, the fastest pace in 11 years.

Dhahran, Saudi Arabia-based Saudi Aramco was China's top supplier last year. Saudi Arabia exports about 60 percent of its crude oil to Asia.

Saudi Aramco has a venture with Exxon Mobil, the world's largest publicly traded energy company, and China Petroleum & Chemical Corp., Asia's biggest refiner, on a $3.5 billion unit that will process 240,000 barrels a day. The facility, located in the coastal Fujian province, will be operational by 2008.

To contact the reporter on this story: Nesa Subrahmaniyan in Dubai at nesas@bloomberg.net.

Last Updated: April 17, 2007 00:14 EDT