Global Refining Industry On Verge Of Rebound

Leo Aalund
Managing Editor-Technology

The global oil refining industry is on the verge of a major rebound after about 15 years in economic doldrums.

Capacity closures and rationalizations have driven utilization rates up near the maximum, while planned capacity expansions won't keep up with rising demand.

As a result, the U.S., where gasoline demand is growing, must markedly increase its imports of gasoline. Much of this will come from Europe, where gasoline demand is stagnant.

Another characteristic of this new era in refining is the appearance of a new breed of refiner, who is driven by downstream markets rather than by crude oil. Concurrently, some international majors are seeking to cut their stake in refining.

This is the assessment of Keith Hamm, general manager of London consultants Petroleum Economics Ltd.

He spoke last month to refiners at a New Orelans symposium on the future of oil refining.

The symposium was organized and sponsored by consultants KBC Advanced Technologies Inc., which focuses on refining operations worldwide.

The biggest driver for refined products demand and refinery utilization rates, according to Hamm's macro-analysis, will come from the Asia-Pacific region, where China is the leading consumer.

Refining

In the late 1970s, many in the oil industry believed crude oil and product demand would climb to stratospheric levels.

Refiners invested accordingly. By the early 1980s, with utilization rates at only about 60%, it became evident, says Hamm, that there were on a global basis nearly two refineries for every one required.

A painful process of closures took place during the next 15 years until the structural surplus had been eliminated. Hamm said the utilization rate hit 86% in 1995 and 93% in 1996. This year it will be even higher and probably hit the maximum sustainable rate, which is considered to be about 95%.

There is a lot of investment in new capacity, particularly in the Asia-Pacific region, but it is not enough, Hamm contends. The industry can no longer just "tack on" capacity; it will have to make major investments, he said.

He said worldwide demand for refined products will grow by 2 million b/d/year during 1995-2000 for an incremental increase of 10 million b/d. But only 5 million b/d of distillation capacity will come on stream during that period.

Much of this will be for strategic reasons, as state-owned oil producers try to cement deals in consuming countries. Current evidence, however, indicates there won't be sufficient investment to meet the deficit, he says. The U.S. is already running at maximum and is therefore already a significant exporter.

European refiners, he said, have been "pushing their gasoline into holes," happy to make sales in places like Lebanon or Latvia. Now the product is being "pulled" out of Europe by the U.S.

Margins

Nevertheless, global refining margins remain poor.

They are to a degree a victim of poor conversion capacity utilization. European refiners invested in cracking only to see gasoline demand go stagnant. Now the governments want diesel.

Another complicating factor has been a recent bulge in light crude production, when the refining industry anticipated a glut of heavy crude and built for it.

Hamm noted that new oil production from major fields in the Atlantic basin and in Africa and Colombia is light. This has helped narrow the spread between light and heavy crudes, causing heavy crude processing capability to be run uneconomically, if at all.

But the cycle may be turning, with heavy crude expected from West of Shetland finds and heavier crudes from deep waters off Louisiana.

In the U.S., gasoline demand surged by 700,000 b/d during 1990-95, but 300,000 b/d of this demand was met with oxygenates, which took nearly half the growth out of the refinery's traditional upgrading and cracking complexes. This was another blow to margins.

Another factor in this has been the Asia-Pacific cycle.

When a major new refinery starts up in places like Thailand or South Korea, the region goes from short to long rather rapidly.

But Hamm says that there has been an improvement in distillation margins, and this basic process is now breaking even. Cracking margins will start to improve.

New players

Among the interesting aspects of this impending refining industry turnaround are the new players.

A number of majors don't like their returns in refining and are trying to cut their participation and seek refuge upstream.

However, big independent refiners, such as Tosco Refining Co., Ultramar Diamond Shamrock Corp., and Valero Energy Corp., with their roots and motivation in product marketing, are acquiring refining capacity.

A striking example of this, Hamm noted, is India's Tata Group, whose Reliance Industries Ltd. subsidiary is building a world-scale refinery in India (see Industry Briefs, p. 32). Making shirts and saris for India's huge apparel market is one of Tata's primary interests. It is building the refinery mainly to get a supply of basic feedstocks to make synthetic fibers for the textiles.

Hamm predicts that in 6-7 years worldwide refining will be a growth industry again.