Refining in Asia Set for an Expansion Drive

Refining in Asia Set for an Expansion Drive
The pivot of the refining industry could shift further into Asia.

The recent upheavals in the global crude oil market have been a mixed blessing for many refining companies, particularly those based in Europe and North America. Cheaper crude oil has meant cheaper feedstocks for refiners, but many projects have been put on hold or dropped altogether as more mature projects near completion and volatile crude prices promote a more cautious approach toward new capital spending.  

Asian refining companies appear to be on a strong footing. With Europe in a relatively weak long-term position, Asian refiners stand ready to guzzle up increasing quantities of crude in years to come. Despite the recent churning and uncertainties in oil prices and demand, refiners in Asia seem to be relatively immune to all these developments. Though many of the plans for expansion and capacity augmentation have been modified, none has been shelved off entirely. Again with downward revisions in crude prices, many refiners have actually gained from these developments – short-term losses notwithstanding.  

In the short-term time frame, a drastic decrease in crude prices has yielded sizeable inventory losses for many refining majors in Asia. In India, refiners incurred losses of approximately $2.6 billion in the third quarter of fiscal 2014-15 owing to sharply lower oil prices. Likewise, Idemitsu Kosan – Japan’s second-largest refiner by sales – has revised its full-year earnings forecast to a loss because plunging oil prices forced it to book huge inventory losses. The revision marks the first time the company expects a net loss since going public in 2006.

On the positive side, the benchmark Singapore Gross Refining Margins (GRMs) have risen sharply on lower utilization levels in the United States and refining outages in other parts of the world. GRM refers to the difference between the total value of petroleum products coming out of an oil refinery and the price of the crude purchased by the refiner. In the March quarter, the benchmark Singapore GRMs improved to $8.7 a barrel from $6.3 a barrel in the December quarter.

Refiners in Asia plan to make the most of the changed scenario, especially those in the Middle East. West Asian crude giants have embarked on ambitious plans to be leading players in the downstream sector as well, in the face of continued challenges in the upstream arena from challengers such as the U.S. and Russia. This could prove to be a game-changer in the global oil and gas trade, with Saudi Arabia refining a record two million barrels of crude per day in 2014, marking a growth rate of 26 percent over the previous year. Saudi Arabia has scaled up its downstream ambition with the commissioning of the Yanbu-based Saudi Aramco-Sinopec JV refinery, in addition to the massive refinery which started operations in the final months of 2014. Similarly, the Abu Dhabi National Oil Co. has also commissioned the expanded wing of the Ruwais refinery in the United Arab Emirates. These projects are expected to process 1.2 million barrels of oil a day at full capacity during the latter part of the year, making up more than one percent of the total global oil-refining capacity. More importantly, these refineries could prove to be more competitive owing to newer technology, cheaper crude availability and proximity to the European and African markets. Overall, the Middle East itself is expected to ramp up its refining capacity by an additional output of 1.68 million barrels per day (bpd) by 2020, compared to 874,000-bpd in North America.

Though the refining sector has been feeling the heat of downward revisions in crude prices and increasing competition from global counterparts, China and India along with their neighbors in South East Asia have launched an extensive drive to augment their refining capacities – in line with increasing domestic demand. With its ever-increasing needs, China has been importing vast amounts of crude; import volumes should rise further as new refineries go on-stream. Close on the heels of becoming the first country in the world to sell 20 million vehicles, which required crude imports to the tune of 282 million tons in 2014, China has relaxed its regulations for smaller firms to import crude oil. The move is aimed to encourage private investments in the refining sector, which is currently dominated by state-owned refining majors.

Elsewhere, China plans to erect another refinery in Tajikistan, while state-owned Pertamina also plans to construct an $8 billion refinery to fulfill its growing domestic requirements in Indonesia. Likewise, the Indian refining sector is also on an expansion drive with the $5.6 billion Paradip refinery on the east coast expected to start operations shortly. Owing to continued upsurge in demand, a number of refineries are either being constructed or have been planned in Asian countries.  The International Energy Agency (IEA) projects refinery capacity will grow by 1.5 million barrels per day in China and by 1.2 million barrels per day in other non-OECD (Organisation for Economic Co-operation and Development) Asian countries. Furthermore, of the total increase of 6.4 million barrels per day (bpd) in global refining capacity, 70 percent is expected to be added in Asia and the Middle East, according to IEA data.

To conclude, while Asian refiners have booked some losses in the short term owing to fluctuations in oil prices, this scenario is unlikely to have an adverse impact on the planned expansion of existing refineries and capacity additions through greenfield projects.  This could mean that in the years to come, the pivot of the refining industry could shift further into Asia. This impending development along with lower crude prices could mean that the overall dynamics of the oil and gas industry could undergo a sea change in the times to come, with Asia as the nerve center.


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