Asian oil refiners brace for turf wars as competition heats up
By ERIC YEP
SINGAPORE -- Asia's oil refining sector is getting too crowded for comfort.
Persian Gulf oil producers are building strings of big refineries both at home and across Asia challenging long-established Asian refiners in local and global fuel markets thanks to their guaranteed and relatively cheap crude-oil supplies and to geographical advantage.
Among the first of these new refining behemoths to start pumping out gasoline, diesel and other products will be a 400,000 barrel-a-day joint venture project at Jubail in Saudi Arabia owned by Saudi Arabian Oil Co., or Saudi Aramco, and Total. Output will start within three months.
Companies in the firing line include India's Reliance Industries, Taiwan's Formosa Petrochemical, South Korea's SK Innovation Co. and S-Oil Corp. and those in Singapore's oil refining and trading hub where ExxonMobil, Shell and Chevron have major investments.
"Intense competition is expected between India, Singapore, South Korea and Taiwan refiners to retain their existing markets and capture new ones," Sushant Gupta, Wood Mackenzie's senior downstream analyst, says.
Australia, Latin America and East Africa may absorb some of the surplus, and so can India, China and Southeast Asia if economic growth there accelerates further, but even so the risk of oversupply, and eroding margins, is very real for Asian refiners.
Three more supersized 400,000 bpd refineries are being readied in the Gulf region alone -- one at Ruwais in the United Arab Emirates by 2015, a Saudi Aramco-Sinopec Group joint venture one at Yanbu on the Red Sea by 2017, and another Aramco one at Jazan, also on the Red Sea.
"Countries in the Middle East now have a strategy to diversify from exporting only crude oil to exporting value-added oil products," said London-based Salar Moradi, oil market analyst at FGE. Saudi Arabia's imports of gasoline, diesel and fuel oil averaged around 315,000 bpd in 2012, worth $35 million-$40 million a day at current prices.
This key market will slip away from refiners like Reliance Industries, which operates the world's largest refining complex, at Jamnagar in northwest India.
Saudi Aramco, Kuwait Petroleum Corp., Qatar Petroleum International and Russia's Rosneft and Venezuela's PdVSA are all building new joint-venture refineries in China which will displace imports and allow greater volumes of exports. Kuwait Petroleum International, PetroVietnam and Idemitsu Kosan Co. have agreed to build a relatively modest 200,000-bpd unit in Vietnam, which will trim that country's needs for imports.
Further capacity will come from other refineries planned by Indonesia, India and China, among others, with many of these due to be producing only a few years out. China alone is expected to add around 750,000 bpd of refinery capacity both this year and next, JP Morgan said.
Asia's diesel exports to Africa, the Middle East and Latin America in 2011 totaled 308,000 bpd, while gasoline exports to Middle East alone amounted to 90,000 bpd, Wood Mackenzie's Mr. Gupta said, in a reference to possible lost sales and market share due to new Gulf and Asian refiners.
Reliance Industries, SK Energy, Formosa and other Asian companies have enjoyed strong refining margins -- the price difference between crude-oil and refined products -- as demand has exceeded supply for three consecutive years, but the outlook isn't rosy.
"Asian Singapore complex FCC margins are likely to drop from around $10/bbl currently to $8-$8.5/bbl by 2015," Mr. Gupta said.
A spokesman for SK Energy, South Korea's largest refiner by volume, agreed that margins will be pressured lower by new Middle East units, but he declined to elaborate.
Chevron's investments to improve reliability, efficiency and flexibility at its joint venture refineries in Korea, Thailand and Singapore will ensure that they "continue to remain competitive in the longer term," spokesman for the company said.
It is not alone in spending to head off competitors. Reliance Industries plans to trim operating costs to levels that can compete with the Middle East, and it is building to convert a refining byproduct to gas, which will boost margins by $2-$3/bbl, Macquarie Bank said in a research report.
Reliance, Formosa, and Shell and ExxonMobil didn't respond to questions about the implications of the refinery construction boom.
"Nervousness about Saudi Arabia's increased self-sufficiency has driven traditional supplying refineries in Asia to seek sanctuary in longer-term contracts," said Priya Narain Balchandani, an analyst at Standard Chartered. Asian refinery margins will hold up in the near- to medium-term but downside risks loom if refineries don't adjust their volumes, she said.
Dow Jones Newswires