KBC Advanced Technologies recently published its refining outlook, a report that analyzes issues facing the global oil refining sector and discusses their impact on the crude-oil and refined-products markets. KBC foresees global refining margins continuing under pressure in the medium term as recovering global demand is met by a continuing wave of new refining capacity construction that will see global refining utilization rates remain around 85% of nameplate capacity at least through 2015.
The report highlights the key pressures that face refiners, including declining demand in mature economies; tightening global standards for marine fuel quality; increased taxation and regulation of carbon dioxide emissions; and competition from biofuels and natural gas liquids (NGLs) from export-oriented refining countries like India, Russia and, increasingly, Brazil.
In the Americas, major investment in a number of Latin American countries, coupled with increased distillate production capability in US Gulf Coast refineries, will see a rise in the export of finished products to Europe and Africa. Brazil alone is set to add over 1.2 million bpd of new refining capacity by 2020 as it aims to process most of its expanding crude-oil production domestically and to export the products.
In Asia, KBC sees both China and India continuing to add refining capacity. China is expected to build new capacity in line with its surging domestic demand for transport fuels and petrochemical feedstock, driving global demand for crude oil while still having only a limited impact on product markets. Indias refinersboth public sector and privatecontinue to advance plans that will keep the country in strong surplus, eagerly eyeing export markets in other Asian countries and further abroad.
Middle Eastern refiners are also expected to add refining capacity above their domestic requirements, with 1.6 million bpd of firm new capacity expected by 2016 in Saudi Arabia and the UAE, and more than 1 million further bpd of potential capacity to be built elsewhere on the Arabian Peninsula. Iran and Iraq both continue to plan significant new additions as well, though geopolitical realities suggest no clear timeline for these additions. Surplus output from Middle Eastern refineries will compete with Asian products for markets in Asia and Europe, making operational efficiency, freight costs and crude-oil pricing key parameters in a highly competitive market.
European refiners face rising clean-fuels import competition from the Americas, Asia and Russia. KBC anticipates a significant wave of Russian refining upgrading investment driven by recent reforms in Russias export tariff structure. These upgrades could see Russias exports swing from relatively low-quality intermediates, like vacuum gasoil and M-100 fuel oil, to higher-quality finished products that meet European standards. With declining export markets for surplus gasoline, a functioning carbon market from 2013 and a swing to distillate bunker fuels in the North Sea/Baltic corridor, Europes refiners face the greatest pressure in the global scenario, although unlike some more bearish analysts, KBC anticipates only limited future closures, instead anticipating a prolonged period of relatively low utilization rates.
With over 2 million bpd of refining capacity earmarked for closure and around 8 million bpd announced for sale, or sold, since 2009, the refining industry faces an anxious period of transition over the next five years, with new entrants attempting to profit where experienced operators have chosen to exit. KBC sounds a note of caution in this years annual refining outlookundoubtedly the refining market is better now than it was a year ago, but this is not necessarily an upward trend. Refining will remain a tough business over the next few years. HP