Read part three of this article here.
Demand and pricing
Another challenge to building refineries in the Middle East has been poor profitability within the domestic market. The Middle Eastern refining industry has continually had to contend with artificially low domestic fuels prices. The governments run the oil industries, and the citizens expect that governments will keep fuel prices low. In 2014, UK gasoline pump prices averaged US$1.92/l. This price exceeded Middle Eastern prices by orders of magnitude. The highest price was only US$0.70/l, in Yemen. As noted in the section preceding on Yemen's gasoline balance, Yemen has very limited refinery capabilities, and it imports the majority of its gasoline and diesel. The prices range down from Yemeni prices, going from US$0.47/l in the UAE down to a bargain basement price of US$0.16/l in Saudi Arabia.
Saudi Arabia is also the lowest cost market for diesel, which was priced at a mere US$0.07/l in 2014. The average pump price in the UK was US$1.99, which was over 28 times higher than the Saudi price. Among the Middle Eastern countries, the Yemeni price of US$0.70 was once again the highest in the region. Historically, it was common to see the price subsidies given to diesel to be even more extravagant than those given to gasoline, because diesel is classified as an economically productive fuel, while gasoline is classified more as a consumer fuel. For example, the 2012 Bahraini diesel price was US$0.17/l and the gasoline price was US$0.27/l. But long years of this type of pricing policy led to demand patterns lopsided toward diesel, and diesel prices internationally were much stronger than gasoline prices. Diesel prices now are higher than gasoline prices in the UAE, Qatar, and Oman, though they remain lower in Saudi Arabia, Kuwait, Iran and Bahrain.
The artificially low prices have confounded many efforts to rationalise refinery operations. Iranian gasoline subsidies caused imports to balloon, and they tempted all manner of fuel smuggling as well. But the process of raising gasoline prices in Iran has been a politically dangerous one. Despite the fact that the 2014 price of US$0.374/l is very low in international terms, it represents a major increase from past years, and achieving these price hikes was not a simple matter. From 1998 through 2010, Iranian gasoline could be purchased for one US dime per litre, or even less, a mere nickel in the year 2000. The recent price hikes have been significant, and they have finally begun to have an impact on demand. But fuel price hikes have been accompanied by protests and rioting, so they are approached cautiously and slowly. Middle Eastern national oil companies in general must factor domestic fuel subsidies into their refinery investment plans.
The Middle East is facing increased competition in both crude and product markets. The past decade has brought an erosion of demand in many of the largest consumer markets, and demand growth slowed even in Asia. Although low crude prices are causing some resumption of demand growth, it is not clear how much 'pent up' demand remains. In some markets, oil demand is expected to decline even further, since natural gas is making inroads into the transport sector that has been so heavily reliant on liquid petroleum fuels.
In the Middle East, natural gas development is being encouraged to supplant oil use in many end uses, including petrochemicals, power generation, and the transport sector. There also are efforts to gradually raise Middle Eastern fuel prices by reducing the overly generous government subsidies, though these price increases are politically difficult. If they succeed, they may moderate rapid demand growth rates.
Middle Eastern refinery throughput has flattened, and it has fallen relative to the rest of the world in percentage terms as well. Refinery utilisation rates are below those seen in the US, Europe and Asia. The bulk of refined product exports are LPG and naphtha destined for Asia Pacific markets. The higher valued gasoline and diesel output is being channelled more and more to domestic markets. The Middle East has become a net importer of gasoline, and its exportable surplus of diesel is dwindling. Several newly completed and impending refinery expansions will expand refined product output, but proposals for new grassroots refineries face challenging economics, and they should not be expected in the near term.
The past year has been one of continued low crude prices. The coming year is likely to see a continuation of low prices, since OPEC is expected to continue its strategy of maintaining high levels of output to regain crude market share. Accordingly, the focus on the upstream sector is likely to trump the focus on the downstream sector in the coming year.
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/19012016/the-right-balance-part-four-2109/