Opec re­finer­ies out­look is ex­pen­sive

The Pak Banker - - Front Page - Saadal­lah Al Fathi

THE re­cently is­sued World Oil Out­look report by Opec comes at a time when the oil re­fin­ing in­dus­try is pass­ing through many changes around the world. While the re­fin­ery dis­til­la­tion ca­pac­ity is stag­nant in the US, it is faced with sale or clo­sure of in Europe but more than com­pen­sated by an enor­mous ex­pan­sion in Asia and the Mid­dle East.

Oil de­mand in the US is down or stag­nant at best while a re­duc­tion in oil de­mand is al­ready a fact in Europe. There­fore, be­tween 2008 and 2011 two mil­lion bar­rels a day (mbd) of re­fin­ing ca­pac­ity is closed for good and only in 2011 and so far in 2012, 1.7mbd is closed in Europe alone. The rel­a­tively low ca­pac­ity re­finer­ies and those with­out ad­e­quate con­ver­sion ca­pac­ity are those des­tined for clo­sure as their econ­omy be­comes un­ten­able and to al­low other re­finer­ies to op­er­ate at higher util­i­sa­tion rates to im­prove their profit mar­gin.

Re­fin­ery clo­sure will not stop here and up to 2016, per­haps fur­ther 4mbd of dis­til­la­tion ca­pac­ity will be closed too. The global re­fin­ery spare ca­pac­ity, which was one mbd in 2005 was one of the rea­sons for the rise in crude oil prices which en­cour­aged build­ing new re­finer­ies in Asia and the Mid­dle East to make the re­fin­ery spare ca­pac­ity close to 5.5mbd by 2016. The shift­ing of re­fin­ery ca­pac­ity from the tra­di­tional in­dus­trial world to Asia and the Mid­dle East is be­cause the greater oil de­mand ex­pan­sion has been and is ex­pected to be in th­ese mar­kets. But even in China small ca­pac­ity re­finer­ies are doomed for clo­sure such that by the end of 2013, no re­fin­ery smaller than 40 thou- sand bar­rels a day will be al­lowed to op­er­ate. The fu­ture is there­fore for high ca­pac­ity re­finer­ies to cap­ture the econ­omy of scale and for high con­ver­sion re­finer­ies in or­der to get rid of sur­plus fuel oil and con­vert it to the more de­manded light frac­tions of gaso­line, diesel and naph­tha.

Opec says that "it is es­ti­mated that around 7.2 mbd of new crude dis­til­la­tion ca­pac­ity will be added to the global re­fin­ing sys­tem in the pe­riod to 2016." The greater por­tion of this ex­pan­sion will be in the above- men­tioned mar­kets es­pe­cially in China, In­dia, Saudi Arabia and the United Arab Emi­rates. But dis­til­la­tion ca­pac­ity is a bur­den if not cou­pled with ad­e­quate con­ver­sion ca­pac­ity and Opec es­ti­mates that 4.7mbd of this will be added. At the same time and be­cause of tighter prod­uct spec­i­fi­ca­tion 6.3mbd of sul­phur re­mov­ing units will be added in ad­di­tion to 1.6mbd of oc­tane im­prov­ing ca­pac­ity. Fur­ther down the line and con­sid­er­ing the ex­pected ad­di­tional re­fin­ery clo­sures and de­mand ex­pan­sion to 2035, Opec es­ti­mates the ad­di­tional crude dis­til­la­tion ca­pac­ity to grow by fur­ther 7.7mbd, con­ver­sion ca­pac­ity by fur­ther 6.9mbd, sul­phur re­moval by 15.7mbd and oc­tane im­prov­ing by 3.8mbd mak­ing the fu­ture re­finer­ies far more com­plex that what they are now.

The ma­jor­ity of de­mand growth is for trans­porta­tion fu­els of gaso­line and es­pe­cially diesel and Opec says "the im­por­tance of the trans­porta­tion sec­tor is re­flected in the fact that out of 19.5 mb/d of ad­di­tional de­mand by 2035, com­pared to 2011, around 60 per cent is for mid­dle dis­til­lates - gasoil/diesel and jet/kerosene - and an­other 38 per cent is for gaso­line and naph­tha", which ex­plains the high ex­pan­sion of sul­phur re­mov­ing hy­dro-treat­ing ca­pac­ity. Th­ese prod­ucts are des­tined in most coun­tries to the low­est pos­si­ble sul­phur limit of 10 parts per mil­lion (ppm). Even the ship­ping in­dus­try is grad­u­ally mov­ing into low sul­phur fuel to meet the re­quire­ment of Emis­sion Con­trol Ar­eas (ECA) reg­u­lated in ports of the in­dus­trial coun­tries. Even liq­uid nat­u­ral gas (LNG) is be­ing con­sid­ered for ships due to its ex­cel­lent qual­ity from an en­vi­ron­men­tal view and its low price com­pared to oil now. How­ever, the lack of ex­pen­sive in­fra­struc­ture for LNG in ports will make such trans­for­ma­tion slow.

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