Gulf News reported that the recently issued World Oil Outlook report by OPEC comes at a time when the oil refining industry is passing through many changes around the world.
While the refinery distillation capacity is stagnant in the US, it is faced with sale or closure of in Europe but more than compensated by an enormous expansion in Asia and the Middle East.
Oil demand in the US is down or stagnant at best while a reduction in oil demand is already a fact in Europe. Therefore, between 2008 and 2011 2 million barrels a day of refining capacity is closed for good and only in 2011 and so far in 2012, 1.7 million barrels a day is closed in Europe alone. The relatively low capacity refineries and those without adequate conversion capacity are those destined for closure as their economy becomes untenable and to allow other refineries to operate at higher utilization rates to improve their profit margin.
Refinery closure will not stop here and up to 2016, perhaps further 4 million barrels a day of distillation capacity will be closed too. The global refinery spare capacity, which was 1 million barrels a day in 2005 was one of the reasons for the rise in crude oil prices which encouraged building new refineries in Asia and the Middle East to make the refinery spare capacity close to 5.5 million barrels a day by 2016.
The shifting of refinery capacity from the traditional industrial world to Asia and the Middle East is because the greater oil demand expansion has been and is expected to be in these markets. But even in China small capacity refineries are doomed for closure such that by the end of 2013, no refinery smaller than 40,000 barrels a day will be allowed to operate.
The future is therefore for high capacity refineries to capture the economy of scale and for high conversion refineries in order to get rid of surplus fuel oil and convert it to the more demanded light fractions of gasoline, diesel and naphtha.
OPEC said that it is estimated that around 7.2 million barrels a day of new crude distillation capacity will be added to the global refining system in the period to 2016. The greater portion of this expansion will be in the above mentioned markets especially in China, India, Saudi Arabia and the United Arab Emirates. But distillation capacity is a burden if not coupled with adequate conversion capacity and Opec estimates that 4.7 million barrels a day of this will be added. At the same time and because of tighter product specification 6.3 million barrels a day of sulphur removing units will be added in addition to 1.6 million barrels a day of octane improving capacity.
Further down the line and considering the expected additional refinery closures and demand expansion to 2035, OPEC estimates the additional crude distillation capacity to grow by further 7.7 million barrels a day conversion capacity by further 6.9 million barrels a day sulphur removal by 15.7 million barrels a day and octane improving by 3.8 million barrels a day making the future refineries far more complex that what they are now.
The majority of demand growth is for transportation fuels of gasoline and especially diesel and OPEC said that the importance of the transportation sector is reflected in the fact that out of 19.5 million barrels a day of additional demand by 2035 compared to 2011 around 60% is for middle distillates gasoil per diesel and jet per kerosene and another 38% is for gasoline and naphtha which explains the high expansion of sulphur removing hydro treating capacity.
These products are destined in most countries to the lowest possible sulphur limit of 10 parts per million. Even the shipping industry is gradually moving into low sulphur fuel to meet the requirement of Emission Control Areas regulated in ports of the industrial countries. Even liquid natural gas is being considered for ships due to its excellent quality from an environmental view and its low price compared to oil now. However, the lack of expensive infrastructure for LNG in ports will make such transformation slow.
The investment required in the oil refining sector is estimated by OPEC to be USD 230 billion to 2016 and further USD 300 billion to 2035. These numbers are very high compared to what customary 10 years ago was reflecting the sharp rise in engineering projects cost. To this one must add the cost of maintenance and replacement of aging existing capacity which OPEC estimates at USD 750 billion. Still to be added is the costs outside the refinery fence for pipelines, storage, ports and marketing facilities estimated at one trillion dollars. All this may be half of what is required in the upstream to increase and maintain crude oil production capacity.
The refining industry is burdened by low profit margins making investment decisions hard and often taking a long time. But considering the time between decision to build and the plant coming on stream, governments and companies must do everything to reduce costs and expedite realization of the obvious projects that are most needed in our region.
