UOP: Refining industry will eventually recover from low margins

David Nakamura
Refining/Petrochemical Editor

Houston, Jan. 28 -- The refining industry may have to wait until 2005 for a significant improvement in margins, according to Carlos Cabrera, UOP LLC senior vice-president, refining and petrochemicals. Cabrera gave one of three keynote presentations at the Daratech Plant 2003 conference here Monday.

The oil industry has suffered from low oil demand growth for the past few years, a trend that continued in 2002. "China accounted for 80% of 2002 growth," Cabrera said. Excluding this demand increase in China, the fact that the rest of the world accounted for only 20% of oil demand growth is very low by historical standards, he noted.

Oil demand growth rates should return to historical trend levels in 2003-04, but it is "contingent on the resumption of economic growth," Cabrera noted. During the past 50 years, worldwide economic growth has averaged about 3.5%/year, despite problems and crises similar to what occurred in 2001. Cabrera said that this economic growth will continue to drive energy and oil consumption.

There are threats to a global economic recovery, Cabrera noted. The "loss of consumer confidence due to continuing imbalances in the US economy" and a "prolonged oil price spike as a result of Iraq military action," Cabrera said, are the risks to global economic growth returning to historical trends.

However, the "global economic recovery will continue, despite prospects of disruptive conflicts," Cabrera said.

Refining margins
Refining margins were poor in all main trading centers throughout 2002 after an increase in 2000. Cabrera indicated declining cracking margins for Brent (Northwest Europe), Urals (Mediterranean), West Texas Intermediate (US Gulf Coast), and Dubai (Singapore) crudes. Cracking margins did pick up near the end of 2002, but Cabrera attributed this to extensive maintenance outages.

Margins in most areas of the world have been below the required return-on-capital investment threshold since the early 1990s. Cabrera said he sees "no signals of changing fundamentals going forward into 2003-04."

In 2002, global refinery utilization dropped slightly. This was because capacity creep exceeded demand increases, according to Cabrera.

The decreasing utilization rate will reduce the impetus for investments in new capacity, Cabrera said. And if no grassroots capacity comes online, the global utilization rate should begin to tighten in early 2004. Cabrera predicts a refinery utilization rate of around 92% in 2004, assuming no new capacity. The 2002 level was less than 90%.

"[Capacity] creep, low-cost revamps, and catalyst changeouts will meet capacity needs for the next few years," Cabrera noted. "Technology will focus on maximizing use of existing assets."

However, "new refineries will be required in the 2006-10 time frame," he concluded.

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