Saudi Arabian Oil Co., the world's largest oil company by production, remains committed to building an estimated $12 billion crude oil refinery with ConocoPhillips (COP) in Saudi Arabia despite rising costs, the company said Thursday.

Saudi Aramco in May 2006 signed a memorandum of understanding with Houston-based ConocoPhillips to develop the 400,000 barrel a day refinery at the Red Sea city of Yanbu, which will supply markets including the U.S. with refined products, at an estimated cost of $6 billion.

Industry estimates both in and outside Saudi Arabia now put the project's cost at up to twice that amount due to rises in raw material costs.

According to an Aramco spokesman, both companies continue to work on the project although a final investment decision, or FID, is only expected to be made once early engineering is finalized next year.

"Saudi Aramco is committed to the front-end engineering and design, or FEED, process for the proposed Yanbu export refinery project that will determine the costs, configuration and other details," a company spokesman told Zawya Dow Jones in an email Thursday. "The investment decision will follow later."

The refinery FEED - being carried out by KBR Inc. (KBR) - is set to be completed in the second quarter 2008, the spokesman said.

According to a ConocoPhillips official, the second-largest U.S. refiner remains committed to the project, with company employees continuing to work on site with Aramco.

Escalating costs recently led ConocoPhillips to drop out of an export refinery project in Fujairah in the United Arab Emirates to be developed with Abu Dhabi's International Petroleum Investment Co.

Investments in refineries in the Middle East have increased in the past three years as demand for refined products that meet increasingly tight environmental specifications is rapidly rising, both in the region and internationally.

However, the expansion plans come at a time of soaring project cost in the Middle East as governments are spending record oil revenues on building and expanding industries and infrastructure, leading to a shortage of contractors, raw materials, equipment and qualified labor, which in turn has driven up prices.

The refinery at Yanbu, some 350 kilometers north of Jeddah, wouldn't be the first project in the region to be shelved or delayed due to rising project cost. Kuwait earlier this year decided to retender and raise the budget for its 650,000 barrel a day Al Zour refinery project after bids submitted last December came in at more than double the planned cost of $6.3 billion.

Copyright (c) 2007 Dow Jones & Company, Inc.