ASIA-PACIFIC REGION'S OIL DEMAND GROWTH STRAINS REFINING CAPACITY

The rapidly industrializing Asia-Pacific region has become a standalone economic force and the world's growth market for oil.

Japan remains the region's premier economic powerhouse but no longer its only one. And Asia-Pacific economic fortunes have decoupled from the more-mature economies of Europe and the U.S.

During the latest recession in the industrialized West, the Asia-Pacific region showed that it can grow on its own. While Europe and the U.S. slumped, points out Patrick J. Ward, chairman and chief executive officer of Caltex Petroleum Corp., the major oil consuming countries east of Suez expanded their economies by 56%/year--more than 1-1/2 times average growth worldwide.

"Japan and the rest of Asia have become centers of world economic growth with their own momentum," Ward told the Middle East Petroleum and Gas Conference last January in Dubai.

"They've become less dependent upon--and less influenced by--the economic problems of the U.S. and other industrialized nations."

Along with that economic vitality comes a growing appetite for oil.

Fereidun Fesharaki and Kang Wu of the East-West Center, Honolulu, in January projected Asia-Pacific average oil demand growth of 3.6%/year through 1999, nearly double what most economists expect for oil demand growth worldwide.

The analysts say a moderation in regional oil use that had been expected last year didn't occur. Demand reached 14.3 million b/d in 1992, up 862,000 b/d from 1991.

Although oil's share of the Asia-Pacific energy mix is declining, the East-West Center analysts expect more strong gains in oil consumption (Fig. 1). They project demand of 16.4 million b/d in 1995 and 19.1 million b/d by 2000 (Fig. 2).

Not all analysts expect such rapid growth for the region. Edward N. Krapels, president of Energy Security Analysis Inc., Washington, D.C., told a seminar conducted by his company in Houston during March that demand in Southeast Asia will grow at an average of 500,000 b/d/year.

That's half the growth rate predicted by some analysts, Krapels noted. The main difference between his outlook and others: Krapels has greater doubts about oil consumption in China.

ECONOMIC STRENGTH

In his presentation in Dubai, Ward of Caltex pointed to strong movements of trade and capital into the east of Suez area, which includes the Middle East as well as Asia-Pacific.

Joint ventures between oil producing countries and oil marketers are boosting the flow of investment into the oil consuming sector, said Ward, whose company works exclusively in the region.

Malaysia, Thailand, Indonesia, Singapore, and other countries in Southeast and South Asia have received large amounts of capital from the flow of trade into Japan and the newly industrialized countries of the area. High domestic savings rates further help capital formation.

The growth stimulates oil demand throughout the region, even in Japan, where energy use efficiency gains and fuel switching cut oil use in the early 1980s. Since 1987, Japanese oil demand has risen at the rate of 3%/year, adding 900,000 b/d to the country's requirements. Oil accounts for 53-60% of total energy supply in Japan, which now is in a recession.

Korea's economy recently has grown at the rate of 8%/year, oil demand at 20%/year. Ward expects Korean oil demand growth to steady at about 7%/year during the next 3 years.

Vehicle registrations have increased 22%/year during the last 5 years in Korea, he said. Gasoline demand rose in the period at the rate of 29%/year.

Thailand's economy is growing the fastest in the east of Suez region, averaging more than 10%/year since 1986.

"Thailand has created a very favorable climate for foreign investment, and the capital influx has been driving economic growth at a very high rate," Ward said. The Caltex chairman expects a new Thai government to maintain the high-growth policies of its predecessor.

Thai oil consumption has risen at the rate of 14%/year since 1987, gasoline use more than 10%/year. Lack of highways and roads is a major constraint in Thailand, but the government is expanding the transportation system.

REGIONAL DEMAND

Overall, Ward said, oil demand in the east of Suez region increased at nearly 6%/year from 1985 to 1990, accounting for about half of world demand growth.

He projected growth in demand for refined products to more than 19.5 million b/d by 2000 from slightly more than 14.5 million b/d in 1992.

Transportation fuels will account for most of the consumption gain, rising to 12 million b/d in 2000 from almost 8 million b/d in 1991. Motor vehicle ownership will grow at an average rate of 4%/year.

"If China could expand auto ownership to match the U.S.," Ward said, "nearly 700 million vehicles would be added--equal to the number in Europe, Japan, and the U.S. combined.

"We know that's not going to happen, but it does illustrate the potential for continued growth in Asia and the impact on transportation fuel demand."

Air travel is growing rapidly east of Suez, as well. In the consuming countries of the region, international air passenger traffic grew by 12%/year during 1970-90 and is expected to increase by 8.5%/year through 2000--twice the rate of growth of the rest of the world. Air traffic in the region's oil producing countries will increase at an average rate of slightly less than 5%/year.

Last year in just the Asia-Pacific region, product demand increased by an estimated 6.3%, according to East-West Center's Fesharaki and Wu. Diesel fuel demand increased by 7.6% and naphtha by 13.6%, the latter due to a 44% jump in South Korea.

Product demand in 1992 increased by 28% in Viet Nam, 21% in the Philippines, 20% in South Korea, 11% in Thailand, and 9.3% in China.

"Despite a 20% increase in the price of oil products instituted in 1991 in Indonesia," the East-West Center analysts said, "the country's oil demand still grew by 8.9% in 1991 and 6.2% in 1992."

The oil demand growth they see through 1999 for Asia-Pacific will average 4.4%/year during 1993-95 and slow to 3.1%/year through the rest of the decade. Diesel fuel demand will rise the fastest at 5.3%/year during 1993-99, with gasoline second fastest at 4.6%/year. Demand for fuel oil, mostly low sulfur, will increase at only 0.5%/year.

PRESSURE ON REFINING

Strong oil demand growth will overwhelm" supplies of products refined in the consuming countries east of Suez, said Ward of Caltex.

"By the year 2000 we could see a deficit of some 2.7 million b/d," he told the conference in Dubai. "And this could happen despite an expected addition of almost 5.5 million b/d of new refining capacity in this area."

Growing product supplies from Japan and Korea, as well as imports from outside the region, have kept pace with rising demand, But Japan and Korea are approaching capacity, and Ward expects economics to deteriorate for imports from distant sources.

The result will be rising prices of the products in highest demand--transportation fuels--which will improve refining margins enough to stimulate refinery investment. Already, Ward said, companies are debottlenecking plants and adding distillation and upgrading capacity in Japan, Korea, Singapore, Philippines, and Australia.

In the east of Suez producing countries, product supply exceeded demand by almost 2 million b/d during 1990, and major refinery modernization projects are under study. The work could boost the producing region's product surplus to 2.3 million b/d by 2000, Ward said.

Refiners in the consuming countries east of Suez face a challenge in addition to that of keeping up with rising product demand. Ward said environmental regulations are reducing allowable sulfur levels of diesel and fuel oil and lead content of gasoline.

Japan will phase down diesel sulfur content from 0.5% to 0.05% in 1997. Ward said many countries in the region now have unleaded gasoline, and several plan to ban lead altogether by the mid-1990s.

SHORTFALL SEEN

In just the Asia-Pacific countries, crude production last year averaged 6.8 million b/d, of which 2.2 million b/d left the region, according to East-West Center.

Fesharaki and Wu expect Asia-Pacific crude output to rise to 7 million b/d by 1995 and to remain at that level through 2000 on the strength of new production from Widuri, Duri, and Belida fields in Indonesia and Dulang field in Malaysia.

With regional demand rising, Asia-Pacific exports will drop to 1.8 million b/d in 1995 and 632,000 b/d by 2000 (Fig. 3). China and Indonesia will be net oil importers by 2000, the East-West Center analysts said. Exporters at that time will include Malaysia, Brunei, and Papua New Guinea.

Prospective loss of Indonesia's ability to produce more oil than it needs has scuttled plans by the government to build several export refineries.

Exports from the Asia-Pacific region of low sulfur, waxy crudes will decline. Among Asia-Pacific crudes, light sweet crude supply will lose ground to heavy sweet crude.

"The changing crude availability will have a major impact in the refining investments geared toward lower sulfur fuel oil production to meet environmental requirements," Fesharaki and Wu said.

Asia-Pacific's dependence on imported oil will increase to 57% by 1995 and 64% by 2000 from 50% in 1992, they said.

In line with Ward's projection of a growing surplus in the producing countries east of Suez, the East-West Center analysts see much of Asia-Pacific's growing imports coming from Persian Gulf producers.

By 2000, more than 90% of what the Asia-Pacific countries import from outside the region will come from the Persian Gulf, compared with about 70% at present.

"In terms of security of supply, the Asia-Pacific region is in a more precarious situation than the U.S. or Europe," Fesharaki and Wu said.

ANOTHER VIEW

To Krapels of Energy Security Analysis, the question is not whether refining capacity expansions will cover the lower rate of demand growth that he expects but whether product yields will match consumption patterns.

During 1993-97, distillation capacity in Southeast Asia will increase at the rate of about 600,000 b/d/year, more than enough to cover the 500,000 b/d/year demand growth that he expects (Fig. 4).

"Viewed with North Asia and the Middle East," he said, "capacity expansion is more than adequate."

Distillate demand in his projection for Southeast Asia will increase at the rate of 250,000 b/d/year, gasoline at 125,000 b/d/year, and fuel oil and feedstocks at 100,000 b/d/year.

Refiners in Southeast Asia during 1993-97 will add about 290,000 b/d of fluid catalytic cracking capacity, 40,000 b/d of hydrocracking capacity, 30,000 b/d of thermal capacity, and 180,000 b/d of reforming capacity (Fig. 5).

The upgrading capacity additions will enable refiners in the region to meet demand for gasoline but not for distillate, Krapels said.

CONSTRUCTION ACTIVITY

In line with its development as a growth market for oil, Asia-Pacific has become a center of refining construction activity.

Singapore is in the midst of a construction push, much of it focused on refinery upgrading capacity.

Singapore Refining Co. Pte. Ltd., for example, recently announced an $840 million upgrade of its 220,000 b/d Pulau Marlimau Island refinery. It will enable the company, a joint venture of British Petroleum plc, Singapore Petroleum Coi., and Caltex (Asia) Ltd. to produce more transportation fuel and less fuel oil (OGJ, Apr. 5, p. 28).

All the other big refiners in Singapore have construction projects under way, most involving upgrading capacity and some adding to distillation capacity (OGJ, July 20, 1992, p. 23).

In Japan, construction centers on upgrading capacity, some distillation capacity expansion, and significant new methyl tertiary butyl ether capacity.

Along with upgrading and modernization work planned or in progress elsewhere in the Asia-Pacific region are several grassroots projects, highlighted in Oil & Gas Journal's recent Worldwide Construction Report (OGJ, Apr. 12, p. 55; for construction in China, see accompanying article).

Construction is booming in Thailand. Rayong Refinery Co., a joint venture of Shell International Petroleum Mij. By and Petroleum Authority of Thailand (PTT), plans a 145,000 b/d grassroots refinery in Mab Ta Phud, Rayong Province, on the Thai eastern seaboard.

Nearby, Star Petroleum, a joint venture of Caltex and PTT, plans a 130,000 grasroots facility with a 37,000 b/d residual fluid catalytic cracker. Also in Rayong Province, Esso Standard Thailand Ltd. is adding 82,000 b/d of distillation capacity to its 75,000 b/d refinery at Sri Racha.

In Malaysia, BHP Petroleum Pty., in a joint venture with Chinese Petroleum Corp. and state owned Petroliam Nasional Bhd., plans a 150,000 b/d refinery at Bintulu, Sarawak. Petronas plans a 100,000 sweet crude refinery at Malacca as part of an integrated complex that eventually is to have 100,000-130,000 b/d of sour crude capacity as well.

At least two new refineries are in prospect in Indonesia.

BP Asia Pacific, in a joint venture with C. Itoh, plans a 120,000 b/d facility on Bintan Island.

Also, state-owned Pertamina has plans for a 125,000 b/d refinery in Balongan, West Java.

Pilipinas Shell Petroleum Corp. plans to build a 110,000 b/d refinery at Tobangao, Philippines, next to a 65,800 b/d refinery it operates there. Caltex (Philippines) Inc. is adding 11,400 b/d of crude capacity to its 65,400 b/d refinery at Batangas and upgrading and expanding downstream processing capacity as well.

In Taiwan, Chinese Petroleum Corp. is adding crude distillation and downstream processing capacity at its Kaohsiung and Tao-yuan refineries.

Viet Nam's state owned Petrovietnam wants to build its first modem grassroots refinery at Vung Tau with distillation capacity of 130,000 b/d. Chinese Petroleum Corp. of Taiwan apparently will have an interest in the project, along with private partners (OGJ, March 8, Newsletter).