WORLD REFINING OUTLOOK SEEN POSITIVE

Long range world refining prospects are positive, with plant expansions, slowly growing petroleum demand, and ample oil supplies combining to curb oil price increases and encourage economic development.

So concludes energy consulting company Purvin & Gertz Inc. (P&G), Houston, in a two volume, 991 page study of the refining industry through 2010.

But while refiners can count on plentiful, moderately priced crude supplies and growing products markets, the world industry still faces many challenges, said Tom Manning, vice-president of P&G and one of the study's main authors.

Among the challenges likely to affect refiners' profits are:

• Balancing the costs of expanding capacity to meet demand with the risk of overbuilding, while implementing expected environmental and social programs.

• Integrating eastern Europe into global refining markets and rebuilding the refining industry in the former Soviet Union.

• Finding enough investment capital for Far East/Asian refiners to increase capacity to serve that region's fast growing markets.

• Escalating products quality requirements.

• Adapting to evolving quality, availability, and international trading patterns of crude oil feedstocks and refined products.

  P&G said sustained economic growth will be essential for implementing the needed refining changes.

STUDY METHODOLOGY

To analyze world refining trends through 2010, P&G projected products demand and quality and crude oil to be processed in each country included in the study. The company combined data gathered from public sources into geographic regions to study international oil and products trading patterns.

World crude oil supply outlook was forecast on the basis of country by country production forecasts, with particular attention paid to heavy crude and the effects of production economics. Crude oil was allocated by type-light sweet, light sour, and heavy sour-to regional refining centers based on P&G's knowledge of refinery structural and design parameters, products specifications, and logistical factors.

P&G determined the types and capacities of process units likely to be needed during the study period by developing composite regional refining models incorporating all major processes and blending components. The regional models were calibrated on the basis of 1990 crude runs, refinery configurations, products qualities, and plants' outputs, then applied to circumstances expected to prevail in 1995, 2000, 2005, and 2010.

Regional feedstock and products balances were prepared based on requirements of regional refinery models and supply projections, along with consideration of things such as economic and physical variables and policies of governments and companies.

Because of the growing importance of methyl tertiary butyl ether as an octane booster and as a component of cleaner burning fuels, P&G prepared a global supply/demand balance specifically for MTBE.

P&G used regional supply/demand balances to develop crude oil and refined products price forecasts. Those took into account costs associated with replacing various grades of crude reserves and expected refinery operating and capital investment costs. Demand forecasts were prepared for each major refined product-gasoline, naphtha, kerosine/jet fuel, gas oil/diesel, and residual fuel-in each country studied.

ENVIRONMENTAL EFFECTS

With environmental rules getting tougher worldwide, billions of dollars will be needed to reduce emissions and upgrade refined products quality. Money will be in tight supply, although likely more available than many observers fear, P&G's study found.

Because of its complexity and flexibility-and despite sharp downsizing in the 1980s-the U.S. refining industry still is best positioned to cope with change.

P&G concluded that prices of refined products-especially more environment friendly products-can be expected to increase relative to crude oil.

Severe environmental restrictions in California are expected to prompt some gasoline components trade, but large volumes of conforming fuels imports are not likely. MTBE supplies are expected to be adequate to meet U.S. demand from 1993-95, but oxygenate imports will increase later in the study period.

P&G forecasts U.S. federal Phase I reformulated gasoline during 1995-99 will sell for about 3cts/gal more than standard gasoline. The premium commanded by federal Phase II gasoline after 2000 is estimated at about 10cts/gal.

U.S. refining capacity should be more than adequate to produce enough 0.05 wt % sulfur diesel fuel to meet demand. Low sulfur diesel could receive a premium of 2.5cts/gal over standard diesel fuel.

Diesel fuel sulfur content in western Europe after 1995 is expected to be lowered to 0.05 wt %. Upon introduction, P&G expects Europe's low sulfur diesel premium to be $10-15/ton, shrinking to $5-10/ton as western European refiners add capacity.

REFINING MARGINS

P&G said environmental requirements could help refining margins by keeping capacity tighter than might otherwise be the case.

In addition, engineering innovations, modified catalysts, and improvements of process technology over time likely will reduce the costs of producing reformulated gasoline and low sulfur diesel fuel.

U.S. refinery operating rates are forecast at 85-90% during the study period, high enough to allow moderate conversion, light crude cracking refineries to earn a sufficient rate of return to stay in business, P&G said.

Profits of deep conversion refineries are expected to support moderate additions of conversion capacity. P&G forecasts incremental cracking/coking capital recovery for a light, sour crude cracking refinery in the U.S. to average about 30%.

In western Europe, refinery operating rates are expected to continue rising, leading to continuing improvement of hydroskimming margins through the end of the century.

Strong product demand in the Far East/Asia region will keep operating rates high until a significant amount of new refining capacity goes on stream in about 1995. Hydroskimming margins in Singapore after 1995 through the end of the forecast period are expected to increase yearly.

GLOBAL SUPPLY/DEMAND

P&G said world crude oil demand will grow about 1.4%/year during the forecast period. Downward pressure on oil prices is expected through the mid-1990s as Kuwait and Iraq return to full production.

Declining crude demand and production in the Commonwealth of Independent States are expected to reverse, given an adequate infusion of western capital and technology. As a result, net trade with the C.I.S. likely will decline short term but begin increasing by the mid-1990s as economies in the region reorganize and stabilize.

Reduced supply of C.I.S. crude will boost demand for oil produced by members of the Organization of Petroleum Exporting Countries. As the call on OPEC oil increases, the world crude slate gradually will become heavier and higher in sulfur content.

Meanwhile, sweet crude oil supplies are increasing everywhere but in the U.S. and eastern Europe. After 2000, as North Sea crude flow begins declining and European environmental rules get more strict, the U.S. and western Europe are expected to compete increasingly for sweet supplies.

P&G expects light, sweet crude to command a premium over light, sour crude on a marginal cracking value basis but not a differential large enough to justify converting light, sweet refineries to run light, sour feedstocks. Heavy crude prices will be led by U.S. Gulf Coast cracking refineries, with excess heavy supplies and resulting differentials between heavy and light feeds justifying new upgrading facilities.

The surplus of Alaskan North Slope (ANS) crude oil on the U.S. West Coast-and the resulting small discount of ANS to foreign supplies should last through 2000. After the end of the century, ANS prices will move into parity with non-U.S. supplies, bringing U.S. West Coast and Gulf Coast pricing closer together.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.