CERA: Refiners face change in liquids supply composition

Sam Fletcher
Senior Writer

HOUSTON, Feb. 14 -- The refining industry faces new reconfiguration and investment challenges to avoid shortages of diesel, heating oil, and jet fuel while minimizing the risk of a decline in refining capacity utilization, said officials of the Cambridge Energy Research Associates in Houston Feb. 13.

Growth in liquids supply capacity will be "more than sufficient" to match the volumetric increase in demand, but the "cocktail" of hydrocarbons in the liquids supply will change, with light liquids accounting for 32% of the total supply in 2020, up from 19% in 2007, CERA said.

"While refined product demand growth becomes increasingly concentrated in the middle of the barrel, particularly for diesel and jet fuel, CERA believes that light liquids, including natural gas liquids, condensates, and—to a lesser degree—biofuels, gas-to-liquids, and coal-to-liquids will dominate supply growth between now and 2020," said Peter Jackson, global oil senior director at CERA. Light liquids yield no fuel oil and only modest volumes of distillates. While some components of the crude oil supply, such as extra-heavy oil, will increase, the overall crude supply, excluding condensate spiked into crude oil, is projected to flatten after 2010.

Because refineries are designed for optimized yield based on a specific mix of feedstocks, changes in supply composition will have implications for utilization rates and yields. Contrary to conventional wisdom, CERA officials said, new supplies of heavy and sour crudes from the Middle East, Latin America, and Canada's oil sands will be balanced by light crude streams from Eurasia and Africa, medium-to-light deepwater oil, and a good portion of Canadian heavy oil upgraded and marketed as light syncrudes. As condensates separated from wet gas at the wellhead rise to 12% of total liquids capacity volume by 2020 and are partly spiked into the crude, the overall feedstock density should not decrease, CERA reported.

At best, total refinery feedstock would grow by only 0.6%/year during 2010-20, much lower than the expected overall demand growth of 1.6%/year. "Therefore, if refiners continue to build crude processing capacity on the 1.6% rate, refining utilization rates and margins would fall," CERA said.

"Rising demand for gasoline and diesel in recent years has led refiners to plan additions of as much as 11 million b/d of capacity to convert residual fuel oil into light products. However, CERA estimates there may be only 6 million b/d of residual fuel oil available for that new conversion capacity," the analysts reported.

Middle distillate products (diesel, heating oil, jet fuel, and kerosine) are projected to account for more than half of world oil demand growth during 2007-20. However, light liquids—the largest additional component of liquids supply—yields only an average of 20% middle distillates, resulting in a middle distillates deficit of about 3 million b/d and gasoline supply 3 million b/d higher than demand. "The global refining system has the challenge to adapt its configuration to cope with this significant mismatch," said CERA officials.

"As we move beyond 2010, the key challenge for the refining industry will be adding the appropriate type of conversion capacity—particularly hydrocracking—and not necessarily adding more volumes of simple crude distillation capacity," said Olivier Abadie, CERA's downstream director. "In the dynamic oil industry, investment responds to market signals. The degree to which refiners invest in adequate conversion capacity will be critical in successfully addressing this significant change in the composition of global liquids supply."

Contact Sam Fletcher at samf@ogjonline.com

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