Tim W. Martin
Stone & Webster Engineering Corp.
Houston
About 2.1 million b/sd of crude distillation capacity is now under construction or considered likely to be built, more than 80% of which is concentrated in Asia and the Middle East.
An overview of global refining centers will illustrate technological trends and the emergence of developing economies, particularly those in the Asia/Pacific region. (Note: all costs are given in $U.S.)
REFINING PICTURE
The global distribution of refineries, by region, is:
- U.S.-173 refineries
- Asia/Pacific-137 refineries
- Western Europe-115 refineries
- Eastern Europe/F.S.U-88 refineries
- South America/Caribbean-76 refineries
- Africa-5 refineries
- Middle East-42 refineries
- Canada-25 refineries.
About 50% of the refineries in the U.S. and Western Europe have capacities greater than 200,000 b/d. Fig. 1 (57436 bytes) lists the capacities and relative conversion capabilities of the world refining centers.
World crude capacity has been relatively flat the past 2 years, concurrent with increasing conversion capability, measured as the sum of fluid catalytic cracking (FCC), hydrocracking, catalytic reforming, and alkylation capacities.1 2
Fig. 2 (66061 bytes) shows regional refining sophistication in terms of conversion capacity.
CONVERSION
With crude supply becoming heavier and higher in sulfur, the bottom of the barrel, which is deficient in hydrogen, contains increasing amounts of contaminants such as carbon, sulfur, metals, and nitrogen. There are three upgrading routes available for bottoms materials:
- Hydrogen addition (hydrotreating, hydrorefining, hydrocracking)
- Carbon rejection (coking, visbreaking, solvent deasphalting, FCC)
- Gasification (addition of oxygen for burning in power-generation facilities), with value-added production of hydrogen and fuel gas.
These options are necessary for deep-conversion refineries, planned or existing. But no single optimal configuration exists for the refinery of the future.
A technological "edge" is necessary to continue to operate in the high-cost refining business, where product quality specifications are driven by environmental regulations. Catalyst performance is being scrutinized as refiners require longer run lengths and lower gas makes, and process heavier feedstocks.
Refinery configurations are driven by regional market demands. For example, in the U.S., FCC units and cokers often are the refinery centerpiece because of heavier crude slates, high gasoline demand, and low residual fuel oil demand.
In Europe, because of available fuel oil outlets, thermal cracking often is substituted for coking. The residual fuel oil market in Europe is shrinking, however, as is that in the Asia/Pacific region.
Refinery upgrade schemes are evolving in these areas as well. In Japan, hydrodesulfurization capacity for long (atmospheric) residuum is substantial because of the low-sulfur fuel oil market there (primarily for power generation). But this market also is changing, as utilities are projected to burn less crude and low-sulfur fuel oil (LSFO) in the future.
Table 1 (34860 bytes) lists possible refinery upgrade options.
REGULATIONS
Increased regulatory control is a global issue faced by all refiners. Such controls include lead removal, emissions regulations, and "U.S.style" gasoline quality (oxygenates, vapor pressure, octane, distillation, olefins, benzene, aromatics, sulfur, etc.).
Diesel quality (sulfur, aromatics, cetane) and fuel oil quality parameters (sulfur, metals) also are being addressed by refiners around the world.
Other challenges facing the global refining industry include:
- Changes in the marketplace
- Developed and emerging markets
- Strong demand for transportation fuels
- Increasing heavy and sour crude supply
- Bottom-of-the-barrel upgrade decisions
- Technology evaluation
- Capital constraints
- Value-added product slate emphasizing minimal fuel oil production
- Hydrogen and sulfur balances
- Integration issues
- Power generation
- Petrochemical interface.
INVESTMENT
Worldwide refinery investment is projected to be about $125 billion between 1993 and 2010, largely for compliance with new environmental regulations and to build additional capacity to meet demand.3
In general, grassroots refineries require huge capital outlays, almost half of which are spent on infrastructure, which offers no return to the investor. New, sophisticated refining capacity costs about $10,000-12,000/b/sd. But such projects often are risky and require long lead times; and the heavy investment burden is shrouded by low, volatile rates of return.
As a result, no new refineries are anticipated for the U.S., Canada, or Western Europe, with the exception of Germany, largely because of environmental permitting difficulties.
GRASSROOTS PLANS
In his speech at the 1994 World Petroleum Congress in Stavanger, former Royal Dutch/Shell CEO Peter Holmes estimated that one or two world-scale refineries must be added each year to meet surging product demand. Some of the typical characteristics of planned grassroots refineries are:
- Activity concentrated primarily in the Asia/Pacific region
- Design feedstock basis of Arabian Mix
- Flexibility
- Value-added transportation fuels
- International-type product specifications
- Residuum destruction/conversion technology
- Emphasis on power generation and petrochemical integration (for example, ethylene or aromatics)
- Joint venture financing
- Phased investment approach.
Refinery investment early in the next century has been estimated to be as much as $200 billion/year, which is double the $100 billion/year spent in the 1990s.
Utilization rates for crude distillation capacity currently are 100% in Singapore, 90% in the U.S., and 85% in Western Europe, but refinery margins are dismal.
Table 2 (12400 bytes) shows refinery utilization in leading economic nations, excluding Canada. The utilization rates shown in Table 2 (12400 bytes) for Japan and Italy take into account period abnormalities (a water shortage in Japan and an assumed capacity base in Italy that takes idled capacity into account).
U.S.
U.S. refineries are the technology leaders worldwide. These facilities are safe, modern, and efficient. Environmental, health, and safety regulations, however, are rapidly increasing the cost of refining in the U.S.
In 1993, the National Petroleum Council projected that U.S. refiners would spend some $36 billion to comply with these regulations over the next 10 years. This amount is more than the aggregate book value of U.S. refineries ($31 billion).
The National Petroleum Council projects the U.S. refining industry will. need to spend $151 billion by, 2010 to upgrade its refineries. But environmental regulation has already begun to take a toll.
By the first decade of the next century, it is projected that 47% of refining capital will be spent for pollution abatement, which could give non-U.S. refiners an advantage.
According to OGJ, between late 1993 and yearend 1994, 13 U.S. refineries shut down, totaling 243,000 b/cd of crude capacity. And 35 more are considered potential casualties, according to a report by Wright-Killen & Co., Houston.
Recent studies indicate some 30% of U.S. capacity could be lost within a decade. Environmental laws are projected to shut down 500,0001.5 million b/cd of capacity in the coming years.
But despite shutdowns to date, the remaining refineries have maintained U.S. crude capacity and increased utilization factors. In fact, refinery utilization is fluctuating between 90 and 95%, and crude runs are about 14 million b/d.
During the past decade, U.S. refiners have increasingly processed heavier, higher-sulfur crudes. API gravity has decreased 0.17/Year in the past decade, while sulfur content has increased by 0.03 wt %/Year.4 The increasing dependence of U.S. refiners on non-U.S. crudes will ensure that this trend continues.
The average U.S. Gulf Coast cracking refinery processes a typical 34 API crude slate, whereas the more complex, deep-conversion refinery on the Gulf Coast processes 28 API crude.
A number of Gulf Coast refiners have begun projects to enable them to process more heavy, sour crudes. Included in these projects are those of Amoco Corp., Conoco Inc., Lyondell-Citgo Refining Co. (a joint venture with Petroleos de Venezuela S.A.), and Shell Oil Co. (with backing from Petroleos Mexicanos).
Cracking margins in the U.S. are at a 2-year low. The 22 largest U.S.-based integrated oil companies reported, on average, a 23.5% decline in net profits for first-half 1994, compared to first-half 1993. Corresponding revenue decreases were 3.7%. Fifteen of these companies even reported losses for the time frame.
Low margins were attributed primarily to steadily increasing feedstock costs relative to weaker product revenues. Restructuring charges also influenced earnings.
But, as Table 3 (21636 bytes) shows, the earnings picture worldwide is not any more encouraging. (It should be noted that international oil companies usually are able to cushion losses on the downstream side with gains in crude pricing on the upstream side and with petrochemical profits.)
WESTERN EUROPE
Between now and 2000, refiners in Western Europe will have to make considerable investments to meet environmental requirements. It is estimated that refineries in Northwest and Southern Europe will spend $50-100 billion during the period to increase operating efficiency, meet increased product demand, and shift to a lighter product slate.' This demanding environment caused two Italian refineries, totaling 161,000 b/d capacity, to shut down in 1993.
The crude slate in Western Europe averages about 1 Wt % sulfur and typically comprises Arabian Light/Brent/Forcados. European refiners are facing challenges similar to those in the U.S., however, with more incremental Middle East sour crude being used in place of sweet North Sea Brent.
Crude distillation capacity in Western Europe is 14.2 million b/d. Italy and Germany refine the most crude-about 2.3 million b/d each. Germany, Finland, Norway, and the U.K. have the most sophisticated refineries in the region, with upgrading-to-distillation ratios about 5% greater than the other Western European countries, and about 22% greater than refineries in Eastern Europe.
Demand for diesel, compared to gasoline, is increasing in Western Europe, largely because of improved diesel car technology and tax policies. Furthermore, reduced fuel oil demand means less middle distillate will be used as cutter stock and, conversely, more diesel base stock will be available.
The gasoline processing configuration in this region typically includes: atmospheric and vacuum distillation, isomerization, catalytic reforming, hydrotreating, FCC, C4 alkylation, and methyl tertiary butyl ether (MTBE) synthesis. Some European refiners are opting to supply reformulated gasoline to the U.S., particularly Northeastern states.
In the European Union, sulfur content in gasoline is projected to decrease from 0.2 wt % to 0.05 wt % by Fall of 1996. Additional capacity will be needed for hydrotreating, hydrogen production, and sulfur recovery.
Lead phase-down in gasoline will emphasize several processes, including naphtha isomerization, catalytic reforming, alkylation, and etherification. The present tax policy favors unleaded gasoline grades, including Euro Grade (95/85 RON/MON) and Super Unleaded Grade (98/88 RON/MON). Current wisdom regarding octane favors Euro Grade.
In general, European gasoline is richer in aromatics and leaner in olefins compared to U.S. gasoline. Unleaded gasoline, as a percent of the total gasoline pool in the region, is now 55%.
The European Union is planning sulfur reductions in other fuels, namely heavy and bunker fuel oils. And the nickel content of heavy fuel oil is under scrutiny, with Germany taking a leading role.
It has been projected that, by 2010, Northwest and Southern Europe will have adopted 80-90% of U.S. clean-fuel regulations. The Middle East, Pacific Rim, and Latin America are projected to adopt, respectively, 6080%, 50-80%, and 50-70% of the U.S. requirements.
European refining margins are close to their lowest level in nearly 4 years. Refiners are performing scheduled maintenance as product prices continue to lag crude prices.
Under the present scenario, however, it is not advantageous to process heavier, higher-sulfur crudes. But with planned maintenance schedules in the U.S. and Northwest Europe margins should improve.
EASTERN EUROPE/FSU
The refineries in Eastern Europe depend on imports of crudes from Russia and the Middle East. Romania has the largest refining industry in this region-10 refineries with 681,000 b/d of crude capacity.
The refiners of the former Eastern Block countries require capital infusion to modernize their facilities after years of technological and environmental neglect. As the region progresses with a market-based economy, a phased capital investment will be necessary.
More than 90% of FSU refining capacity is concentrated in Russia, Belarus, Ukraine, and Lithuania. Refining in the FSU, therefore, is very much a European business, as only five Russian refineries are located in Asia. Grassroots refineries, however, are being planned in the Asian sector of the FSU.
Much foreign investment is needed in this region - about $20 billion just to stabilize the refining business. Already there is a total of 10 grassroots refineries planned, and a number of modernization projects.
Most of the region's refining capacity - about 80% - requires radical overhaul to increase production of fuels. And only half of Russia's refineries are connected to product pipelines. Logistically, this is a distribution nightmare.
With a decline in Russian oil production of about 50% in the last 6 years and reduced demand because of a contracting economy, less oil is available within the region. The incentive, rather, is to export crude and products for hard currency.
The new refineries on the drawing board in the Asia/Pacific region will be scrutinizing the potential availability of FSU crudes in order to supplement dwindling local and stretched Middle East supplies. And the development of the Transcaucas and central Asia refining sectors depends heavily on Russia's -willingness to cooperate regarding transportation and logistic issues.
MIDDLE EAST
Middle Eastern countries are moving methodically to close the gap between production and refining capacity. Some countries-including Kuwait, Saudi Arabia, U.A.E., and Oman-are moving downstream by acquiring refining assets through outright purchases or joint ventures. The region's oil industry remains mostly unintegrated, however, accounting for two thirds of global reserves, yet less than 10% of refining capacity.
It is unlikely that new refining capacity will be built in the U.S. or Europe because of environmental legislation. And although several Arab producing companies have built refining capacity in consuming countries, it is a common belief that, in the future, capacity will be built where the reserves are located.
Arab countries are expected to spend about $100 billion through 2000 to increase upstream and downstream capacities at home.' And about $22 billion will be required to boost refinery and primary petrochemical capacity.
According to the Organization of Arab Petroleum Exporting Countries, 19 Arab states increased their combined oil refining capacity by 8.1 % in 1993, from 5.3 million b/d to 5.73 million b/d. In fact, it is the only region other than the Pacific Rim showing an appreciable increase in crude capacity.
In the Middle East, the processing choice for upgrading vacuum gas oil typically has been hydrocracking or FCC. Residuum conversion is being added in the region in a phased approach, based on regional demand and individual project profitability. The visbreaking and residuum hydrocracking processes also are beginning to emerge in the region.
Organization of Petroleum Exporting Country (OPEC) members' equity ownership in refineries in consuming countries is 1.8 million b/cd. Such ownership is increasing, however, with existing supply agreements for almost 2.5 million b/d.
Middle East downstream activities in consuming countries are listed in Table 4 (18199 bytes).
ASIA/PACIFIC
Of the projects under consideration worldwide-a total of 6 million b/d of capacity-more than two thirds are planned for Asia, with China dominating the new capacity scene. Table 5 (21825 bytes) summarizes global plans for capacity additions.
Crude capacity has increased most in this region during the past 2 years. But refining capacity will continue to be tight, with a noticeable deficit in diesel.
Table 6 (163190 bytes) illustrates refining trends in the region. Roughly 75% of the region's refining capacity is concentrated in five countries: Japan, China, India, South Korea, and Singapore. In fact, China and Japan hold half the regional capacity.
Singapore refined-product prices continue to set the Asia/Pacific market price. Although there are other large refining centers in the region (Japan and China), Singapore is the only center that refines chiefly for export.
Singapore also is a free market, with no import duties, subsidies, or taxation. It has the most sophisticated, efficient, and well-financed refinery complex in the region, but space is limited in Singapore.
Table 7 (12764 bytes) shows key refining countries in the region and their capacities.
The best growth opportunity for the global refining industry is in this region. Industrialization is having a great effect. Demand for transportation fuels, power generation, heating and cooling needs, and increased energy use is propelled by the quest for higher living standards.
Asia's surging oil demand represents nearly 70% of total worldwide growth. To meet surging demand, Asian countries will have to spend as much as $140 billion building new refining capacity by 2010. The required financing is so large that Middle East oil suppliers are likely to become co-owners of Asia's downstream facilities.
An estimated 32 grassroots refineries are under construction or in the planning stages in the region, according to OGJ.6 Another study counts 60 such projects.
Total crude capacity of these projects is about 3.5 million b/d (Table 8 (21357 bytes)). Of this total, 1.3 million b/d are considered firm. Another 1.3 million b/d of expansion capacity is expected to be built.
As Japan continues to upgrade its refineries, it will require greater crude imports, primarily from the Middle East, and less product imports. (Japan imported about 4.58 million b/d in first-half 1994, mostly from the Middle East.)
As far as product specifications are concerned, lead phase-down in gasoline is under way in Australia, Malaysia, New Zealand, Singapore, South Korea, Taiwan, and Thailand. And Japan already is operating in lead-free mode. Regarding gas oil, legislative bodies in Singapore, South Korea, Taiwan, and Thailand are expected to follow Japan's lead in reducing sulfur levels to 0.05 wt %.
SOUTH AMERICA/CARIBBEAN
This region is slightly larger than the Middle East, in terms of crude distillation capacity (5.8 million b/d vs. 5.3 million b/d in the Middle East). But South American refineries have significantly more catalytic cracking capacity (1.0 million b/d vs. 300,000 b/d in the Middle East).
This difference emphasizes the importance of gasoline production in the region. It should be noted that refiners in Brazil and Venezuela are actively involved in the movement of gasoline into the U.S. marketplace, for which they need good processing ability.
This area is home to three of the top ten global refiners (the Venezuelan, Mexican, and Brazilian state oil companies) .2 Like many refiners in the area, these companies are in the process of upgrading many of their refineries (Table 5 (21825 bytes)).
FUTURE
The global refining industry is adjusting to the challenges of the 21st century. Growth will be concentrated in three regions: Asia/Pacific, with its rapid economic development and rising demand; the Middle East, with its huge oil reserves and capital availability; and the FSU, with its unique opportunities.
The Middle East will retain its status as incremental oil supplier for importing nations, such as the U.S. and Japan, and may develop a major, sophisticated refining industry in the next decade or two.
Activity in the FSU is brisk and will require capital infusion for modernization and grassroots projects, and to revive its rapidly decaying production facilities and infrastructure.
REFERENCES:
1. Rhodes, Anne K., and Bell, Laura,
"Worldwide Refining," OGJ, Dec. 20,1993, pp. 37-86,
2. Rhodes, Anne K., and Williamson, Michelle, "Worldwide refining," OGJ, Dec. 19,1994, pp. 45-103.
3. Ali, M.S.S., "Need for refining capacity creates opportunities for Middle East producers,." OGJ, July 11, 1994, p. 37.
4. Swain, Edward J., "U.S. crude slate continues to get heavier, higher in sulfur," OGJ, Jan. 9, 1994, p. 37.
5. Knott, David, "Europe's big refiners face spending spree," OGJ, July 11, 1994, p. 26.
6. Williamson, Michelle, "Worldwide Construction Update," OGJ, Oct. 17,1994, p. 71.
7. "Refinery Throughputs: Heavy Autumn Turnarounds in US," Petroleum Argus, Aug. 22, 1994, p. 2.
8. Dosher, John, and Carney, Jack T., "Sulfur increase seen mostly in heavy fractions of lower-quality crudes," OGJ, May 23, 1994, p. 43.
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