Revival for refining
It seems news of new refining investments occur daily. At the end of January 2006, approximately 500 refinery projects, including 66 new-build refineries, had been announced, with many more likely being considered in-house. Only a few years ago, refiners were struggling to rationalize overcapacity. Refiners then were lucky to make a $1/barrel margin on sweet crude in Europe or Asia, according to Aileen Jamieson, managing consultant for Wood Mackenzie.

"If all 66 new refineries came onstream in the next 10 years as announced, we'd be seeing an additional 12 million barrels/ day (MMbpd) crude distillation capacity on top of over 70 expansion plans," says Ms. Jamieson. "All in all, it is an increase of 18 MMbpd." This is substantially more than the 15.7 MMbpd oil demand growth her company's analysts have forecast for the next 10 years.

Of course, not every declared refining investment actually comes to fruition. For example, governments in developing economies may announce new-build refineries that are simply not economic, but are touted for political reasons. Assessing investment plans against key project fundamentals, e.g., alignment with projected regional supply/ demand balances and access to financing, analysts expect fewer than half of the announced projects to be constructed.

"Regional dynamics show that strong growth in demand across the barrel in Asia-Pacific will soak up the extra capacity coming onstream. Indeed, significant additional crude capacity may be required to keep pace with demand." In the US, the changing shape of the barrel is as important as the growth in total demand, therefore investment will be required in both upgrading and additional crude capacity. "Fears that over-capacity build – as a result of the 66 announced new-build refineries – could result in a crash period of low returns for the industry are therefore unfounded," says Ms. Jamieson. HP