ASIA-PACIFIC AREA SHOWS BIG GAINS IN PROCESSING

Roger Vielvoye
International Editor

The Asia-Pacific region's buoyant refining and petrochemical industries are reacting to lessons from the Persian Gulf war.

First-and least palatable-is the knowledge there is no alternative to oil from the Middle East to fuel headlong economic growth.

Iraq's Aug. 2, 1990, invasion of Kuwait, resulting in the loss of crude oil from both countries and the flow of products from Kuwait's sophisticated refining complexes, hammered home another valuable lesson.

In a crisis, the petroleum industry-oil exporting countries in particular-will in the short term find it easier to make substitute crude supplies available than to conjure up products from alternative processing capacity.

The Japanese, as might be expected, are implementing new policies to take account of this lesson. Japan's tightly controlled refining sector has been told it can expand capacity for the first time in 18 years.

And, with the blessing of the Japanese government, a group of companies led by Nippon Oil has agreed to a joint venture with Saudi Arabian Oil Co. that will lead to new refining capacity in Japan and a new export refinery in Saudi Arabia that is likely to be dedicated to the Japanese market.

Less organized economies in the region may take a little longer to reach the same conclusion. That should give another boost to ambitious refining and petrochemical construction plans that were in place before the outbreak of the Persian Gulf war.

Refining and petrochemical spending will center on Singapore, Malaysia, Thailand, South Korea, and Taiwan-the "tiger" economies. Refining will see spending for new distillation capacity to meet increases in overall demand and for refinery upgrading to meet growing requirements for lighter products.

Expanding economies, notably Thailand and Malaysia, have triggered deregulation in downstream markets, and foreign companies are gaining access to areas of business that were once the exclusive preserve of state companies.

GAS ROLE

Gas is an expanding commodity in the Asia-Pacific region.

But it won't enable high growth economies to ease the grip of Middle East oil on their energy mix.

Indonesia, Malaysia, and Australia want to boost exports of liquefied natural gas to the tiger economies. But LNG cannot hope to make a heavy inroad on oil's role in fueling economic growth in the 1990s.

In addition to supplies from Asia-Pacific exporters, Japan also imports LNG from the Persian Gulf and in the immediate aftermath of the war agreed to purchase LNG from Qatar.

In the longer term, the Middle East is destined to become a more significant gas exporter to Asia-Pacific countries, adding to economic dependence on that volatile area.

Grandiose plans for a gas grid linking suppliers and consumers from Indonesia and Malaysia through Singapore, Philippines, and Thailand are still on the drawing board but lack the financial backing to turn them into a definite project.

Growing environmental awareness in the Asia-Pacific region is working against greater market penetration by nuclear power and coal, ensuring that the future lies firmly with oil.

OIL, PETROCHEMICALS

Forecasts by the Royal Dutch/Shell Group show that Asia-Pacific oil demand will increase from 13 million b/d in 1990 to 15 million b/d in 1995. Only marginal growth is expected in Europe and North America during the same period.

In 1988, Asia-Pacific oil demand lagged the European Community's consumption of a little less than 12 million b/d. Within 2 years Asia-Pacific demand had shot up to almost 13 million b/d while the EC recorded a little more than 12 million b/d. By 1995, Asia-Pacific demand of 15 million b/d will compare with about 12.5 million b/d in Europe.

Major companies admit they are still astounded at the ability of Asia-Pacific markets to expand. After South Korea recorded product demand increases of 20-30%/year during 1988-90, the ability to sustain this growth was questioned. But, says Shell, growth has continued and in the first quarter of this year product demand jumped a further 20%.

Petrochemical growth will be equally dramatic and again leave Europe and the U.S. standing. Increases in Asia-Pacific demand for ethylene and propylene are forecast by Shell at 6% and 9%/year, respectively.

Short term, Asia-Pacific petrochemicals face a tough ride as new Korean plants put the supply-demand balance into surplus up to 1995. Shell is convinced the ethylene surplus won't last long.

Six new ethylene plants are expected on stream in South Korea this year, boosting capacity to 3.2 million tons/year from 1 million tons/year. The plants will turn Korea from a net importer of about 400,000 tons/year of ethylene into a major exporter, mainly to other Asia-Pacific countries.

PERSIAN GULF DOMINATION

Persian Gulf exporters easily dominate the Asia-Pacific oil market. Asia-Pacific oil production is about 6.3 million b/d. Only Indonesia, China, Malaysia, and Brunei are net exporters of crude.

By the end of the century declining reserves and sharply rising domestic consumption may have eliminated Indonesia, China, and possibly Malaysia from the list.

New exporters will emerge. Papua New Guinea looks certain to have surplus crude throughout the 1990s and, depending on the success of current exploration programs,

Viet Nam and Myanmar could join this category.

But newcomers can hope only to replace part of the export volumes lost from today's regional exporters. As the decade advances the trend will be toward a steady buildup in the domination of Middle East oil suppliers.

Last year Middle East producers commanded more than 70% of the Asia-Pacific oil market. Singapore, the third largest refining center in the world and the hub of processing activity in the region, provides a good example of the Asia-Pacific dependence on the Middle East.

All crude feedstock for Singapore's 1 million b/d of refining is imported-75% from the Middle East. By the end of the century the world's most dynamic growth area could rely on Persian Gulf countries for as much as 90% of its crude oil requirements.

ECONOMIC INDICATORS

Asia-Pacific economic indicators show why oil and petrochemical companies can't afford to miss out on investments in future growth of the area.

In 1990, economic growth in many parts of the region had dropped below the double digit expansion seen in the late 1980s. Singapore, Thailand, and Malaysia saw gross national product growth of 8-10%. Indonesia had 7%. The only U.S.-European style performers were Philippines 2.5% and Brunei 3%.

However, Brunei, with a per capita income of more than $17,000, has only 200,000 people and is, in Asia-Pacific terms, a mature economy. The same applies to Japan, where growth is down to 4%.

Asia-Pacific also is a region with notable numbers of countries with no external debt. Brunei, Singapore, Hong Kong, Thailand, and Japan are in this category.

Around Japan and the tiger economies, there are various degrees of economic growth. China, India, and Pakistan have respectable growth rates of 4-5%, containable inflation, but huge populations. At the other end of the scale, Bangladesh, Viet Nam, Laos, and Cambodia suffer from low growth, high inflation, and growing external debt.

TRANSPORTATION FUELS

As the decade progresses, rapid Asia-Pacific economic growth will translate into greater individual ownership of automobiles.

Shell expects continued increases in demand for transportation fuels in the region, mainly because the incidence in car ownership is still very low.

In Indonesia and Philippines, the average ownership is 5-10 vehicles/1,000 population. More thriving economies like those in Thailand and South Korea have only 10-20/1,000. In vehicle ownership per capita only Australia comes close to levels seen in North America and Europe, and even Japan lags those levels.

Rising demand for transportation fuels will run alongside increasing environmental awareness. That has translated into earlier than expected introduction of unleaded motor fuels in Thailand and Malaysia.

Japan set the pace of change to unleaded gasoline. Unleaded also is widely available in Australia and more recently in Singapore.

Shell sees no problem in meeting increasing demand for unleaded gasoline throughout the Asia-Pacific region. A relatively high level of catalytic cracking in upgrading projects has ensured there will be no real pressure on the octane pool.

So far there are no loud demands for U.S.-style controls on gasoline quality. As with unleaded gasoline, Japan tends to take the lead in environmental matters and is just getting into a study on the desirability of new aromatic and oxygenate controls. Refiners do not expect changes before 2000.

Environmental pressure is more likely for lower sulfur content in middle distillates. And with the imported crude slate from the Middle East likely to include more high sulfur oils as the decade advances, meeting new requirements could force refiners into added spending.

REFINING PLANS

While refiners may have no problems in meeting demand from the growing unleaded market, rising levels of demand for middle distillates will call for investments in upgrading.

Currently, Asia-Pacific refineries produce about 70% light products. By 1995 the average will need to be nearer 80%. A Shell survey of upgrading facilities in the region and likely plans for expansion during the next 5 years shows major investments are getting under way.

Malaysia's upgrading of 20% of its refining capacity will rise to 35% by 1996, and the 15% in Taiwan is scheduled to increase to 24%.

Expansionist minded South Korea will see a big rise in primary distillation and at the same time will increase upgrading to 20% from 15%.

At the upper end of the scale, Australia with 53% upgrading will see only a marginal increase to 54%. New Zealand will remain unchanged at 54%.

Japanese plans to increase distillation capacity will see the percentage of upgrading drop to 31 % from 32%.

While Asia-Pacific crude distillation capacity is set to rise by 20%, Shell expects hydrocracking to increase by 58%, catalytic cracking by 38%, and reforming by 21%.

Shell estimates 2-2.5 million b/d of products are traded in the region to balance the overall shortfall in processing capacity and meet surpluses and deficits in individual countries.

A net inflow into the area of 800,000-1 million b/d, mainly from the Middle East accounts for a large share of that volume. The rest is met by 700,000 b/d of exports from the Singapore refining center and by intraregional movements, notably gasoline from Japan and Indonesia and gas oil from Malaysia.

Looking at the next 5 years, Shell sees firm plans for an additional 2 million b/d of capacity with a further 500,000 b/d that is less certain. Allied to these plans is a steady increase in upgrading capacity.

Shell's views on the overall shortfall in refining capacity in the region by 1995 coincide with forecasts from Japan's Ministry of International Trade and Industry (MITI).

The expected 1.95 million b/d shortage in processing capacity, combined with lessons from the Persian Gulf war, were behind MITI's decision to allow the first increase in Japanese primary distillation capacity in almost 2 decades.

Planned deregulation of the Japanese market, set for 1992, also figured in the internal debate that led to the decision to allow more distillation and upgrading of Japan's refining capacity.

The last time MITI intervened in the refining market, in 1982, primary distillation capacity was cut from 5.94 million b/d to the 4.55 million b/d that has remained in force until this year.

MITI expects primary capacity to increase by about 200,000 b/d. First plans to demothball idle capacity have been put forward.

The biggest change on the Japanese refining scene undoubtedly will come from the proposed joint venture by Saudi Aramco with a group lead by Nippon Oil.

The Saudis will take a 50% share in a joint venture with Nippon Oil, Nippon Mining, Caltex, and Arabian Oil Co. to build a 300,000 b/d export refinery at Jubail on the coast of Saudi Arabia's Eastern Province. Most of the products will be sold into the Japanese market.

The same venture also will upgrade and add about 150,000 b/d of distillation capacity at Nippon Oil's mothballed 42,000 b/d refinery at Kudamatsu in Yamaguchi Prefecture.

The changing atmosphere in the Japanese refining industry has triggered a return to third party processing in mainland refineries following a period of prohibition during the Persian Gulf war. Japanese companies are competing for processing deals alongside competitors from Korea, Taiwan, and China.

With renewed interest in refining at home, Japan's runs could top 4 million b/d this winter, boosting crude imports and bringing a decline in product imports that could touch 10%.

As often happens, MITI's decision to allow more refining capacity is loaded with conditions. Expansion projects will be restricted to refiners who have operated at 80% or more of capacity during 1990. And companies that qualify may be allowed to invest in new expansion projects without seeking further official approval provided the new capacity is run at 80% for 3 years.

MALAYSIA EXPANDS

One of the biggest percentage increases in refining capacity will occur in Malaysia.

This year domestic demand will run at 270,000 b/d, requiring substantial imports of products to compensate for a deficit on the 215,000 b/d of local refining capacity and an imbalance between processing configuration and local demand.

By 1995-96, capacity could rise to 460,000 b/d while demand will rise to about 310,000 b/d. State owned Petroliam Nasional Bhd. (Petronas) will provide most of the new capacity with two projects at Malacca. The rest will come from a small expansion at Esso Malaysia's Port Dickson refinery. In addition, Shell plans a major upgrade of its Port Dickson refinery.

One of the Petronas projects at Malacca appears to be in trouble because of rising construction costs, a problem that is not confined to Malaysia. Caltex has withdrawn from a 100,000 b/d project because the expected surge in construction from rebuilding in Kuwait has raised projected costs around the world and has made it impossible to accurately evaluate the economics of a project.

By the end of the century Malaysia could have more than 730,000 b/d of refining capacity. Shell, Esso, and Petronas could begin expansion projects, while various sites around the country are proving popular with foreign groups looking to build export refineries.

Bintulu, Malaysia, has been widely reported as the site for a proposed 100,000 b/d joint venture between BHP Petroleum Pacific Resources of Hawaii and Chinese Petroleum Co. (CPC) of Taiwan. However, this project is still in very preliminary stages and could still find a home elsewhere in the region.

Shell has also chosen Malaysia for the first commercial application of its Shell Middle Distillates Synthesis technology. A plant to produce 12,000 b/d of middle distillates from natural gas is under construction in Bintulu and scheduled to go on stream in 1993.

If operating economics prove attractive, similar plants, based on remote gas sources, could be pushing middle distillates into the region's oil products and petrochemical markets by the end of the century.

THAILAND, OTHERS

Thailand is typical of the tiger economies. About 62% of its 407,000 b/d of oil consumption goes to transportation.

Refining capacity is only 238,000 b/d, making Thailand a major customer for product exporters. Thai Oil, the state company, PTT, and Esso plan projects at three refineries that will boost capacity to 397,000 b/d by 1995.

The biggest single increase will come from a grassroots project by Shell Co. of Thailand, which has outline approval to build a 145,000 b/d refinery at Map Ta Phut in Rayong Province.

The company is negotiating final terms for the unit with the Thai government and expects to have the $1.5 billion plant on stream by 1996.

Caltex also is considering a new unit in Thailand, which, along with further investment in existing processing, could hike the country's capacity to nearly 670,000 b/d by the turn of the century.

South Korean capacity jumped to about 1.2 million b/d this year when Yukon Ltd. brought an additional 200,000 b/d on stream at its Ulsan plant. A further 100,000 b/d is under construction at Kukdong Oil's 60,000 b/d Daesan unit for start-up next year.

Some of this capacity originally was designated for the export trade, but rampant domestic growth in products demand has overtaken the export aspirations of South Korean refiners. By 1995 capacity will be about 1.5 million b/d.

South Korea's astonishing growth rates have attracted the Saudis. The South Korean government has approved a deal in which Saudi Aramco will invest $470 million to acquire a 35% interest in Ssangyong Oil Refining Co. That will lead to construction of as much as 175,000 b/d of distillation capacity on a site adjoining a 90,000 b/d refinery. There also will be 85,000 b/d of cracking and desulfurization.

Outside Japan, Taiwan probably is the most environmental conscious nation in the Asia-Pacific region. Regulations make refining capacity almost impossible to build. CPC, which controls 542,000 b/d of Taiwan's refining capacity, is forced into foreign processing deals. Domestic construction difficulties were also behind CPC's decision to seek a joint venture with Pacific Resources to build a refinery outside Taiwan.

In China, two foreign companies, Royal Dutch/Shell and Total, are involved in separate refining projects.

Total has agreed to take a 20% interest in a 100,000 b/d refinery at Dalian, Liaoning Province, in partnership with a group of Chinese companies. The unit is due on stream in 1994.

Shell will conduct a feasibility study on a $2.5 billion project to build a 100,000 b/d refinery and a 450,000 ton/year ethylene cracker in Guandong in a 50-50 venture with a local group.

Singapore refineries are running flat out, and that's bad news for companies that use the island's capacity for third party processing deals. Fees are up because refiners can use capacity that comes free from any third party customers that decline the new rates.

Malaysia's Petronas remains a major patron, but the Chinese reportedly are unhappy at the higher fees and have reduced their activity level. There are reports the Japanese also may reduce their commitment to Singapore in favor of more processing at home.