Uncertain times for global refinery margins
LET us forget the woes of the current oil market and look to the future where in previous columns, Opec's World Oil Outlook 2015 was discussed. Here we look at the downstream developments as seen by the report, where demand is forecast at 110 million barrels a day (mbd) by 2040, up from about 94 mbd now. The "growth in oil demand comes mainly from the road transportation, petrochemicals and aviation sectors". It foresees an "increase in every sector except electricity generation", which is a continuation of a trend that has been with us for a long time. While product demand is expected to decline - except for petrochemicals and aviation in the OECD region - this is more than compensated by growth in other regions, and especially in the developing countries. Their demand for oil up to 2040 in road transportation is expected to increase by 12.6 mvd, while in the OECD it is expected to fall by 6.7 mbd. The OECD region is mature and its passenger car population may increase only by 125 million against the 1 billion increase in the developing countries. At the same time commercial vehicles are expected to increase by 47 million and 229 million in the OECD and developing countries, respectively.
They will require a lot of gasoline and diesel, but we have to remember that the efficiency of the vehicles and the overall fleet is increasing through regulations and better engine design aimed at reduced fuel consumption. The Opec report does not expect the penetration of other fuels to do much to change the fortunes of petroleum products. Electric vehicles, while being encouraged by many governments, are not likely to gain a large share "without a technology breakthrough" in battery technology and cost. People are still concerned about the range limitation and the battery performance during severe weather. Similarly, the cost factor and lack of infrastructure is likely to discourage the penetration of hydrogen fuelled vehicles. Only natural gas-fuelled vehicles are likely to have a better chance though the question of a refuelling network may still be a concern. Given all the above, the report says that "only 6 per cent of the passenger car stock and 5.3 per cent of commercial vehicles will be running on non-oil fuels" by 2040.
Residual fuel oil is for all practical purposes a product in decline, especially if the International Maritime Organisation goes ahead with implementing the use of 0.5 per cent sulphur against the current 3.5. A decision by the end of 2016 is expected to set the date at either 2020 or 2025, and whether flue gas scrubbers on ships will serve instead of low sulphur fuel oil. The possibility that ships may switch to other fuels such as LNG remains a possibility. The forecast for petroleum products will undoubtedly reflect on the fortunes of the refining industry. Based on current projects, the global distillation capacity is expected to increase by 7.1 mbd by 2020 in addition to 1.2 mbd due to 'capacity creep' and the vast increase is expected in the Middle East and Asia. The additional distillation capacity increase up to 2040 is expected to be 12.7 mbd. The fall in oil prices in the last 18 months and the long road to recovery may alter these expectations, especially after 2020. Refinery closures especially in Europe have been going on for some time and the situation is now in the balance with growth in demand at least for the next two years. After that, surpluses are likely to appear which calls for further closure of old and small capacity refineries. Almost 7 mbd may need to be closed up to 2040 to avoid severe competition and deterioration of profit margins. Future refineries are expected to be complex with minimum heavy fuel oil production, and the Opec report estimates projects leading up to 2020 and conversion capacities forecast to be added, after 2020, are of the order of 5.5 mbd in hydrocracking, 4 mbd in fluid catalytic cracking (FCC) and 3 mbd in cocking facilities. Increasing the hydrodesulphurization of distillates or fuel oil will be a given to meet future requirements of marine bunkers.