The global refining and marketing industry will continue to see pockets of earnings growth over the next year, but flat conditions overall, with product demand expected to increase modestly this year by 1.2 million b/d, according to a recent report from Moody’s. That demand increase will be roughly in line with net global capacity additions, Moody’s said.
The outlook reflects Moody’s expectations for the fundamental business conditions in the industry over the next 12-18 months, during which time it expects the R&M sector’s earnings before interest, taxes, depreciation, and amortization (EBITDA) to remain volatile but to rise by about 8% through mid- to late-2015.
North American companies, particularly Gulf Coast refiners, have the most favorable positions, Moody’s said, but capacity additions in China and elsewhere in the world will water down earnings growth for the overall sector.
North American refiners will retain their advantage over competitors elsewhere, with cheaper feedstock and natural gas prices, and lower costs for renewable identification number contributing to 10% or higher EBITDA growth through mid- to late-2015.
Shifting crude discount advantages to the Gulf Coast from the Midcontinent, plus strong export opportunities to Latin America and Europe, give an edge to refiners with big Gulf Coast operations, including Phillips 66, Marathon Petroleum Corp., and Valero Energy Corp., Moody’s said.
These three refiners also will continue expanding their logistics and midstream operations. Companies in the Midcontinent, such as HollyFrontier Corp. and CVR Refining, lack this export advantage. Refiners with a big presence in California, including Valero Corp. and Tesoro Corp., face a crucial year in 2015, when environmental rules become stricter (OGJ Online, Sept. 19, 2013).
China will be the biggest source of new refining capacity worldwide in 2014-15, and significant Middle East capacity additions will likely go into service in 2015 but are less predictable. Moody’s expects 2% EBITDA growth this year for the Asian R&M sector overall.
In China, the world’s largest source of demand growth for refined products, capacity additions of more than 1.2 million b/d through 2015 will outpace demand growth for refined products. Moody’s anticipates about 1 million b/d of additional capacity for the Middle East, but notes that accurately projecting projects in certain countries can be difficult, since a national oil company’s plans are not always visible.
India’s demand for refined products will increase at a far-slower pace of 1% through mid- to late-2015, due to declining gross domestic product growth and government price increases on both gasoline and middle distillates.
Latin American growth for refined products will remain strong through mid- to late-2015, with few capacity additions, but the region’s reliance on costly refined product imports will hold back EBITDA growth to no more than 2%. Most of the region’s big projects for boosting refining capacity have either been delayed or called off. Moody’s doesn’t expect Mexico’s Petroleos Mexicanos (Pemex) or Brazil’s Petroleo Brasileiro SA (Petrobras) to pursue additional new refineries, but Colombia’s Ecopetrol SA’s modest capacity expansions will come onstream in 2015.
Growth for European refining operations will stay roughly flat through mid- to late-2015. Economic improvements in Germany, France, and elsewhere in the Euro-zone will modestly lift the region’s demand for refined products, but Europe will need meaningful capacity rationalization to prevent margin erosion in 2015 and beyond.
Europe’s older, less efficient, lower-complexity refineries, which rely on high-cost feedstocks, cannot compete easily with the new, high-complexity facilities of the Middle East. A number of integrated oil companies intend to reduce their European footprints, but political sensitivities in Europe can also stall or prevent widespread capacity curtailments (OGJ, Dec. 2, 2013, p. 34).
Rather than shut down capacity, operators such as Murphy Oil Corp. often try to sell off unwanted capacity, even as they continue to generate losses. Italy’s Eni SPA plans to cut its refining capacity by 22% by 2017, thereby reducing its total capacity by one-third since 2012.
Moody’s notes that it would change its outlook to negative if net refining capacity additions worldwide begin to outpace growth in demand for refined products, particularly with China’s growth slowing through 2015 alongside further capacity additions in China and the Middle East. Conversely, Moody’s would change its outlook to positive if worldwide demand overwhelmed capacity additions, and if the US and Chinese economies began surging simultaneously.