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The right balance: part three

Hydrocarbon Engineering,

Read part two of this article here.

Regional balance and changes in exports

From country to country in the Middle East, the past decade has brought significant growth in demand for gasoline and diesel. For the nine Middle Eastern refining countries analysed in this article, its estimated that gasoline and diesel demand will both grow at average annual rates exceeding 4%/y during the 2010 - 2015 period. Only a handful of these countries, however, have had refinery expansion projects come onstream recently that significantly boosted fuel production. Overall, therefore, the region has become a significant importer of gasoline, and the exportable surplus of diesel has begun to dwindle. The year 2015 should show a relaxation of the balance because of new capacity, but regional demand is expected to catch up with the new output. In 2003, regional gasoline demand was around 920 000 bpd, and output was 720 000 bpd, resulting in a net import need of 200 000 bpd. By 2014, demand had grown to 1.44 million bpd while output had risen to 1.17 million bpd, leaving a supply deficit of 270 000 bpd.

Diesel has been a high value export commodity, but demand has grown more swiftly than production. In 2003, Middle Eastern diesel demand was approximately 1.12 million bpd, versus output of 1.57 million bpd. Exports were roughly 450 000 bpd. By 2014, demand had grown to 2.08 million bpd, while output was 1.73 million bpd. Net exports had been reduced to approximately 350 000 bpd.

Refinery margins and pricing

There are several key refinery projects recently commissioned or underway that will expand fuel production in the 2016 - 2018 period. Yet with such vast oil resources and such quickly growing domestic markets, one might wonder why there has been such a lag in refinery investment both for domestic and export markets. Has a type of complacency overcome the Middle Eastern refining sector? If one examines developments in other world regions, however, many developments that have made new refinery construction in the Middle East much less economic can be found. Demand growth has slowed in the developed world, and even in Asia. The shale revolution in the US has provided such a wealth of inexpensive crude feedstocks that US refineries are running flat out, and product exports have soared. Europe's refineries have been confronted with overcapacity and weak demand, and many of the less efficient refineries ultimately have been closed.

The ones remaining are more competitive in their local markets. According to BP, Europe and Eurasia have shut down nearly 8.2 million bpd of refinery capacity since 1980, including over 1 million bpd in the past decade. To place this in perspective, the amount of nameplate capacity shut down in Europe and Eurasia since 1980 is larger than the current total capacity of the nine key Middle Eastern refining countries examined in this article.

Moreover, since 1980, BP lists refinery additions in the Asia Pacific region at 20.1 million bpd. The demand boom in Asia was one of the prime motivations behind the expansion of export oriented refineries in the Middle East. However the Asian refinery construction boom, including some Asian refineries that were export oriented as well, swiftly followed the Asian demand increase. Asian refinery output today is vastly greater than it once was and product quality has been improved as well.

Naturally, there are specific cases where Middle Eastern refinery projects lost impetus for specific reasons, such as internal strife, international sanctions, and inability to raise capital. On the whole, the decision to delay or shelve certain Middle Eastern refinery investments becomes clearer when viewing approximate refinery utilisation rates.

In the 1980s, Middle Eastern refinery utilisation rates were among the highest of the four regions shown here. This was the time of global overcapacity, and utilisation rates were often below 80%. As capacity was rationalised, utilisation rates began to rise. Driven by strong demand, Asia Pacific refinery utilisation rates rose to the 80 - 85% range by the late 1980s, and they remained in this range until just recently, when they subsided below 80%. North American rates soared to the 90 - 95% range. Although they fell below 85% after the 2008 oil price shock and the economic recession, they have surged once again and are now the highest in the world. Europe and Eurasia had some of the poorest refinery utilisation rates, often below 80%, but the past decade has shown improvement to the 80 - 85% range.

Middle Eastern utilisation rates rose above 90% by the mid 1990s. Yet they began to slump thereafter, falling to the 80 - 85% range, and then falling below 80% after the oil price shock of 2008 and the recession. In 2014, Middle Eastern refinery utilisation was 71%, the lowest of these four regions. Such low utilisation rates place a chill on the motivation to expand refining.

For Middle Eastern export refiners, it is difficult to overstate the importance of the Asia Pacific market. According to OPEC data, product exports from Persian Gulf OPEC members to the Western Hemisphere are negligible. Exports to other Middle Eastern countries were 215 000 bpd in 2014. Exports to Africa were 148 000 bpd. Exports to Europe increased to 484 000 bpd in 2014, up from 336 000 bpd in 2013. Exports to the Asia Pacific market were 2.61 million bpd, amounting to 75% of total product exports. This, however, was slightly below the year 2013 level of 2.68 million bpd. The expansion of Asian capacity, its higher utilisation rates, and the easing of demand growth reduced the need for imports from the Middle East, and added a note of caution to refinery construction plans.

At present, OPEC's market strategy continues to be one designed to recapture crude market share by generous pumping, well in excess of its older output target of 30 million bpd. When, in late 2014, Saudi Arabia announced that it was no longer willing to shut in its own production to defend prices, the market reacted immediately, and prices have remained low since that time. This is affecting higher cost producing areas, such as light tight oils (LTOs) from US shale plays, offshore developments, and other unconventional oils. At the time of writing, OPEC was planning another meeting in Vienna in December 2015, and it is expected that OPEC members will continue to market crude aggressively. It is also expected that Iran will be able to boost its production by approximately 500 000 bpd, adding further to the glut in supply.

The low crude prices have been a boon to Asian refiners, and it is expected that their utilisation rates will remain high. The economics are favourable even for refining naphtha, typically a low value product imported in vast quantities from the Middle East. Already, this is having an impact on product exports to Asia. In this regard, Middle Eastern downstream plans are receiving lower priority than upstream plans.

Read part four of this article here.

Written by Contributing Editor, Nancy D. Yamaguchi. This is an abridged article taken from Hydrocarbon Engineering’s January 2016 issue.

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