As the global oil market moves into what is likely to be another year of low crude prices in 2016, there is increased scrutiny on the Middle Eastern upstream sector. Will the Organization of Petroleum Exporting Countries (OPEC) members continue to pump crude at high rates and keep prices low? Will they be able to outlast competitors who succumb to low prices and shut in production? Will the easing of international sanctions on Iran bring even more crude to the market? And, in time, will sustained low prices discourage production from shale plays in the US, from oilsands in Canada, from offshore oilfields, and from other unconventional oil deposits?
Middle Eastern producers rely heavily on oil revenues, and, as such, they too feel the pressure of low oil prices. Across the Middle East, national oil companies are accustomed to subsidising fuel prices to their domestic markets. Demand growth rates and the patterns of demand have been shaped profoundly by these policies. With large and growing domestic markets, and a more demanding populace, the downstream sector has grown more crucial internally. Yet the focus today is more on the upstream sector than the downstream.
This article focuses on two key determinants of success in the Middle Eastern downstream sector: the ability to meet and exceed demand for gasoline and diesel, the two key consumer fuels.
Gasoline and diesel balances
Bahrain's gasoline output was in the range of 15 000 - 20 000 bpd from 2003 through 2011, but OAPEC reported that gasoline output fell below 15 000 bpd in 2012 and 2013. Gasoline demand has continued to grow, and the country is now a net importer of gasoline.
Bahrain's diesel output has also declined, falling below 80 000 bpd in 2013. The domestic market is quite small, however, with diesel demand at approximately 7000 bpd, so the country remains a significant exporter.
Bahrain has a single, complex refinery at Sitra with a crude capacity of 262 000 bpd. Downstream units include a 42 000 bpd catalytic cracker, a 60 000 bpd mild hydrocracker (which also can be run at 40 000 bpd in conventional hydrocracking mode) and a massive amount of desulfurisation capacity. An expansion of 100 000 bpd is planned. When running at full utilisation the refinery is capable of producing 100 000 bpd of ultra low sulfur diesel.
Iran is the most populous country in the Middle East, and it has a large and growing domestic oil market. Iran contended with rapidly growing gasoline demand and a lagging capability to build refineries. Gasoline imports soon became a major economic burden, particularly since government subsidisation of domestic fuel prices was promoting smuggling. Iran's gasoline imports were the largest in the region. In 2005, gasoline demand was approximately 400 000 bpd, roughly twice the level of gasoline production. Demand growth levelled off, partly in response to price reforms (discussed in a following section) and it was approximately 450 000 bpd in 2014. New refinery capacity additions brought output up to 450 000 bpd in 2013, though it fell to 350 000 bpd in 2014.
Iran has also been a net importer of diesel fuel, with a market size of approximately 480 000 bpd in 2005 and output of 400 000 bpd. The refinery expansions brought supply and demand into closer balance after 2008, and demand fell slightly below output in 2014.
Iran launched an ambitious refinery expansion programme, much of which was designed to eliminate fuel imports and utilise new production of condensate. High costs and international sanctions stymied some of these plans, though the national oil company NIOC managed a number of expansions on its own. With the easing of sanctions, capacity expansions are likely. If the government continues with its plans to control oil demand growth, Iran could become a significant exporter of refined product.
Iraq's refining industry is lagging in the domestic market. Gasoline production has been in the range of 60 000 - 80 000 bpd, while demand has ranged from approximately 80 000 - 130 000 bpd over the past decade.
Iraqi diesel production has ranged from approximately 50 000 - 130 000 bpd. Diesel demand has been in the range of 110 000 - 160 000 bpd, with a recent drop in both demand and production in 2014.
Long lasting war and a lack of security have hindered the restoration and full utilisation of existing refineries and energy infrastructure, such as pipelines, and slowed the progress in building new refineries as well. Iraq has three main refineries, which incorporate and/or manage most of the smaller topping units. The refineries are run by the state Oil Refineries Administration (ORA), with three main sub groupings: North Refineries Company (NRC), Midland Refineries Company (MRC) and South Refineries Company (SRC). The KAR Group opened the country’s first private sector refinery in 2009, a 20 000 bpd facility.
Kuwait's gasoline demand grew from approximately 45 000 bpd in 2003 to 70 000 bpd in 2014. Gasoline production, in contrast, hit a plateau of around 55 000 bpd, and it fell below 40 000 bpd in 2014. The industry should be capable of manufacturing more gasoline, but the economics have favoured middle distillates production.
Kuwait's refining industry is geared more toward jet fuel and diesel production than to gasoline production. Kuwait's diesel demand has levelled out at around 50 000 bpd, while production is typically 250 000 bpd, with the capability to ramp up to 350 000 bpd, as was seen in 2005, and 300 000 bpd, seen in 2009 following the diesel price spike.
Kuwait has three large, sophisticated facilities: Mina Al-Ahmadi, Mina Abdullah and Shuaiba. All three refineries were upgraded into cracking plants during the 1980s. Current crude capacity is 936 000 bpd. Mina Abdullah has a hydrocracking plus coking configuration, Mina Al-Ahmadi has a hydrocracking plus catalytic cracking configuration, and Shuaiba has a hydrocracker plus extensive desulfurisation capacity. The presence of hydrocracking units at each refinery increases middle distillate output and quality, and all of the refineries produce ultra low sulfur fuels.
Kuwait’s refining industry is managed by Kuwait National Petroleum Company (KNPC), which operates under the Kuwait Petroleum Company (KPC). Although oil prices are low and many companies are cautious about investing, Kuwait is building a massive new 615 000 bpd refinery in Al-Zour, scheduled for 2018. This refinery will allow Kuwait to process heavy sour crudes that are now under development. The country's leadership announced that its heavy crude developments would be competitive even under a continuation of low prices.
Read part two of this article here.
Written by Contributing Editor, Nancy D. Yamaguchi. This is an abridged article taken from Hydrocarbon Engineering’s January 2016 issue.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/11012016/the-right-balance-part-one-2105/