Un­cer­tain times for global re­fin­ery mar­gins

The Pak Banker - - OPINION - Saadal­lah Al Fathi

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.

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