Thai refineries integrate to pare costs

A planned integration of two of Thailand's refineries is expected to help insulate them from Asia's financial troubles by enhancing meager margins and ending negative cash flow.

The refineries concerned are the Rayong Refinery Co. (RRC) 145,000 b/d crude distillation capacity unit and the nearby Star Petroleum Refining Co. (SPRC) 130,000 b/d plant at Mab Ta Phut.

Joint operation of the two refineries is calculated to increase their refining margins by an average 50¢/bbl from the current level of about $2.50/bbl.

Meanwhile, Kuwait Petroleum Corp. (KPC) is looking to gain from the reduction in Southeast Asian asset values by purchasing a stake in a Thai refinery to support its expanding retail business in the kingdom.

Integration plan

Since their mutual inceptions 2 years ago, RRC and SPRC have faced financial problems. Last year, they began to encounter losses as refining margins dwindled below a viable level.

Current low margins reflect the general decline in the region's refining industry due to excess capacity. The average refining margin in Singapore during 1978-93 was about $4/bbl, dropping to about $2.60/bbl in 1994-97.

Niels Fabricius, outgoing executive director of RRC, said that, although the parent firms of RRC and SPRC-Royal Dutch/Shell Group and Caltex Petroleum Corp., respectively-are competing fiercely in marketing, there is nothing unusual about the integration of the refineries.

The RRC refinery cost more than $2 billion to build, while SPRC cost more than $1.7 billion. Integration is expected to provide an additional margin of $50 million/year for the two companies.

For RRC, Fabricius said the integration is hoped to raise the plant's refining margin to a "more acceptable $4-5/bbl, although we would like to go back to the $6/bbl mark."

This could be achieved chiefly by taking maximum advantage of the different processes of the two refineries, planning crude runs, and sharing common facilities.

The two refineries complement each other, said Tim Hake, who will succeed Fabricius as RRC refinery manager in March.

With its hydrocracker, the RRC refinery is designed to produce mainly diesel fuel, while SPRC is geared towards gasoline production. Both rely mostly on Middle Eastern crudes.

There will be no major modifications required to integrate the refineries, which will be linked by pipelines over a distance of about 3 km. Hake said integration will require only a few million dollars of investment for six or seven pipeline connections.

New operating firm

A joint operation company, tentatively known as Refinery Co. (Refco) is being set up, with representation from RRC and SPRC to take responsibility for crude buying and cost-saving measures.

The shareholder structures of RRC and SPRC remain unchanged. RRC is owned 64% by Shell and 36% by Petroleum Authority of Thailand (PTT). SPRC is owned 64% by Caltex and 36% by PTT.

Details of the Refco scope of work and organizational structure are being worked out. Both refiners have signed a memorandum of understanding for the joint operation, following approval of the combination by Shell and Caltex last month.

Marketing of petroleum products from RRC and SPRC will continue through existing outlets: Shell and PTT will market products from RRC, while Caltex and PTT take care of SPRC output.

Tie-in work at the refineries is scheduled to start in the next 2 months, when both refineries are due for regular maintenance shutdowns, according to Fabricius. Integration of the two refineries is slated for completion by yearend.

Both refineries are currently running flat-out to build inventories for the shutdown period.

RRC is also taking steps to improve its debt status, said Fabricius. Last year it refinanced a $1.5 billion loan to reduce high interest costs and help fend off liquidity problems caused by tight margins.

KPC's ambition

Gerrit Ruitinga, managing director of Kuwait Petroleum (Thailand) Ltd., the local unit of KPC, confirmed that the company aims to buy a stake in one of Thailand's six oil refineries.

Gerrit would not say which refinery KPC is targeting, but he indicated that KPC would like to have a controlling stake and the right to operate the refinery.

Gerrit said KPC has abandoned a plan to build a grassroots refinery in Thailand, as the company originally proposed when it entered the Thai oil market early in the 1990s. The company now sees no room for a new oil refinery in Thailand, as existing refining capacity matches local products demand.

Gerrit also revealed KPC's strategy to continue to expand its Q8 retail oil network in Thailand, despite the country's economic turmoil.

Over the next 5 years, Kuwait Petroleum intends to boost the number of service stations in this country from 100 at present to 300. The firm recently inaugurated its 100th Thai station, in Bangkok's Pattnakarn area.

The firm is spending about $50 million/year on the expansion of its Thai retail network. This year, about 25 Q8 service stations will come on stream.

With such outlet expansion, the company expects to boost its share in the Thai oil market to 5% from 2.6% over the next 5 years.

Gerrit said KPC's investment in Thailand now will prepare the company to take advantage of the market when the Thai economy rebounds in the next few years.