ASIA-PACIFIC DEMAND GROWTH TESTS REFINERS

John L. Kennedy
Editor

Petroleum product demand in the Asia-Pacific region will grow faster than in any other area during the 1990s.

To cope with this growth, countries in the region are expanding refining capacity, boosting the ability to make high-quality fuels, deregulating prices, and inviting foreign investment.

Demand growth rates will average 4-6%/year for the entire region, and in some countries-at least in the early part of the decade-annual increases in product demand will nudge 10%.

Higher than expected crude prices may dampen this growth temporarily. But relative to other markets, the Asia-Pacific region will still set the growth pace as industrial output expands and living standards improve.

Both basic refining capacity and the conversion capacity needed to produce high-quality fuels are far from adequate to meet this expected demand.

The gap between demand and capacity offers opportunity. Refiners and petrochemical manufacturers have already begun to invest heavily in the area.

Further refining and petrochemical investments are likely, according to regional observers. And Iraq's invasion of Kuwait caused several project ideas to shift from Middle East sites to the Far East.

Topping most lists of capital destinations are Taiwan, Korea, Singapore, and Thailand.

There are obstacles. Environmentalist pressures have delayed and changed refinery construction plans in Taiwan; financing is difficult for projects in China.

But the huge capital investment needed to meet robust demand growth in the 1990s has begun.

REFINERY PLANS

Kiyoshi Takahashi, president of Showa Shell Sekiyu Kaihatsu KK, Tokyo, told the recent Asia-Pacific Petroleum Conference in Singapore that incremental refining capacity planned during 1988-95 equals 1.8 million b/d.

He estimates oil demand for the entire Asia-Pacific region will reach 15.8 million b/d in 1995, up 3.6 million b/d from 1988. That represents average growth of 3.7%/year.

Takahashi's forecast covers seven subregions in the area, including the western coasts of the U.S. and Canada.

Environmental issues are making it difficult to build refineries in Japan, Australia, New Zealand, and the U.S. and Canadian coasts, said Takahashi.

Another estimate of world refining capacity additions made in early fall counted 7.4 million b/d of announced projects around the world, 44% of the new investment to be located in the Far East.

Of the total, 3.6 million b/d was classified as "probable," and 3.8 million b/d as "possible."

That study indicated 67% of the planned investment has state company involvement, and 9% of the new investment is owned by major oil companies.

The "whitening" of the product barrel under way in Asia-Pacific countries emphasizes upgrading, according to Takahashi. To produce more motor gasoline and middle distillates, many expansion plans include reformers, FCCs, hydrocrackers, and alkylation units.

THE SUBREGIONS

Takahashi sees the Asia-Pacific subregions like this:

In China and the Far East-excluding Japan-basic capacity is sufficient, and secondary unit capacity is not.
In Japan, raising the utilization rate of existing capacity will offset demand growth. But secondary units will continue to be insufficient to meet increasing demand for middle distillates.
In South Asia (India, Sri Lanka, Pakistan, Bangladesh, Viet Nam, and Myanmar), basic capacity and secondary units will continue to be in shortage.
Southeast Asia's topper capacity will be more than adequate, but secondary unit capacity will be substantially short. This subregion includes the Philippines, Indonesia, Thailand, Malaysia, Brunei, and the Pacific Islands.
Singapore will continue to have adequate capacity, but secondary capacity will remain relatively short.
Just the reverse is expected in Australia and New Zealand, where topper capacity will be "a little short" and secondary units will be sufficient.

Comparing 1995 with 1988, Takahashi expects an additional flow of 2.8 million b/d of crude and products into the region from outside, and intraregional crude and product flows are expected to increase by 1.1 million b/d.

WHAT'S PLANNED

In Singapore, the region's "swing refiner," upgrading and expansion projects have recently been put on stream. More investment is planned.

With almost 1 million b/d of refining capacity, the Singapore refining industry is operating at more than 90% of capacity. About one third of the throughput is crude processed for third parties.

Individual plants are typically operating at close to 100% of nameplate capacity, according to reports, and have been for more than a year.

Elsewhere, two planned plants are considered firm in Malaysia, where basic refining capacity is short. One would handle sweet Malaysian crude, the other sour crudes from the Middle East. Completion is due in 1992-93.

Indonesia's 125,000 b/d refinery on Java is set for completion in 1993, and another refinery is planned, primarily to handle Duri crude. Indonesia's current capacity is about 714,000 b/cd.

Expansions of existing refineries in Thailand are scheduled for completion in 1993, but the country will still be short of capacity. A fourth refinery is scheduled to be on stream in 1994. In early fall, the Thai government said it was preparing to invite investors to build a plant by 1995.

Korea's basic capacity is barely adequate now, but the government hopes to increase it by almost 50% by 1992. And 120,000 b/d of desulfurization capacity is planned by 1993 under the proposed plan.

Oil demand is expected to grow from 787,000 b/d in 1989 to 1.9 million b/d by 2010.

A refinery will be built in Taiwan near Jiaeyi. Environmentalist resistance forced cancellation of plans to add units at the Kaohsiung plant, and the capacity those units would have provided will be incorporated in the new plant.

Taiwanese demand for motor gasoline is expected to grow 6%/year until 1996, according to Wenent Pan, Chinese Petroleum Corp., Taipei. Diesel demand will grow at 5%/year.

China, too, remains a huge market with high growth prospects, but financing is difficult. For now, product supply is adequate. But if petrochemical projects come on stream, feedstock demand will grow.

Australia's refining capacity is fully utilized, and additional capacity will be needed to meet expected product demand growth. Also, officials of Northern Territory continue to promote a refining center on the northern coast because of its proximity to Southeast Asian markets.

THAI CHANGES

Thailand demonstrates the magnitude of Asia-Pacific demand growth expected in the coming decade and the steps being taken to meet that growth.

The country's energy imports currently represent about 60% of consumption; most of that imported energy is oil. Oil has a 66% market share and gas 18%.

Growth in energy consumption will be near 10%/year in the first half of the 1990s and 7%/year during the last half (OGJ, Oct. 22, p. 21). That growth will bring total consumption close to 1 million b/d of oil equivalent by 1995 and 1.4 million by 2000, said Korn Dabbaransi, minister to the office of the prime minister.

Petroleum will still account for two thirds of the market.

A key to meeting future demand is price deregulation.

"The Thai government has targeted to deregulate oil prices in the next decade, i possibly within the first half," Korn told the Appec conference in Singapore. "Oil prices will be determined only by market forces."

But it will not happen at once. The first of several steps in the process has been taken, according to Korn. As of August, oil prices have been set by a group of senior civil servants armed with a new formula that will partially deregulate oil prices, adjusting them "in line with world market movement."

Trading barriers will also be relaxed or lifted, allowing international marketers more access.

Expansion of the retail network will also be needed. At mid-1990, 188 districts out of 730 in the country had no retail gasoline outlet. Relaxed rules on filling station size and location are aimed at helping expand the distribution system.

Though an ambitious expansion of natural gas gathering and distribution networks is part of the effort to increase gas use and reduce oil dependency, new refining capacity will also be needed, said Korn.

Petroleum product consumption is now about 400,000 bid and is expected to be 900,000 b/d by the end of the decade. Capacities of three existing refineries will expand to 370,000 b/d from 230,000 b/d by 1993. A fourth refinery is scheduled to be on stream in 1994 at Map Ta Phut with a capacity of 134,000 b/d.

The government will invite investment in yet another refinery with a capacity of at least 100,000 b/d to be on stream by 1995. It will be located "where the investors desire."

These plans would bring Thai refining capacity to 600,000 b/d by the mid-1990S.

OUTLOOK ELSEWHERE

Australia's "fully utilized" refining capacity totals about 640,000 b/d, notes Fleming Wich of British Petroleum Co. plc. The BP refinery at Westernport and the Ampol plant at Matraville were closed in recent years, and Caltex mothballed a crude distillation unit at Kurnell.

New capacity will be needed to meet an expected growth in gasoline demand of 1-2%/year and growth in diesel demand of 3-4%/year. About 70% of Australia's product demand is for transportation fuels.

Investments will also be needed to improve product quality.

The government still regulates downstream operations-including prices--tightly. It will have to "allow a more attractive level of profitability if it expects to attract investment in manufacturing capacity," Wich told the Appec conference.

Taiwan plans to liberalize and privatize its petroleum industry, and Chinese Petroleum Corp. will emphasize internationalization. According to a spokesman, CPC is exploring 13 prospects in 10 countries, studying the possibility of a joint venture overseas refinery, and becoming more involved in trading and marketing.

In China, efforts continue to increase refining capacity. Reports indicate that plans include a refinery with a capacity of 5-6 million metric tons/year in which a Royal Dutch/Shell Group unit would have the majority interest. China National Offshore Oil Corp. and the provincial government would be equity partners. The complex would also include a 400,000 ton/year ethylene plant.

A feasibility study of the project is expected to be submitted to the government during first quarter 1991.

LOW LEAD, LOW SULFUR

Delivering increasing volumes of petroleum products isn't the only challenge facing Asia-Pacific refiners. As they are elsewhere, high-quality fuels will represent a growing share of the transportation market.

The move to unleaded gasoline and low sulfur diesel is well under way. The market share of unleaded gasoline varies from country to country; nowhere in the region does it approach levels in the U.S. or leading European countries.

And it's unlikely that the next step-significantly "reformulating" gasoline-will be taken in the region, at least during this decade.

One refiner, however, says there may be some discussion about benzene levels. "It's not California," he says, "but public awareness ... is growing all the time."

Emphasis will be on completing the shift to a market consisting primarily of unleaded gasoline and low sulfur diesel fuel. There is talk of accelerating schedules set by governments to reduce lead and sulfur levels.

Unleaded gasoline is for sale in several Asia-Pacific countries.

The Australian market is currently about 80% leaded, 20% unleaded. But BP's Wich expects that ratio to be reversed by the end of the decade.

Since 1986, new vehicles have had to be built to run on unleaded gasoline.

Thailand will follow the lead-free gasoline trend. But "it is unlikely that unleaded gasoline ... will dominate the local market within the next decade," Korn said.

Last September, the government lowered maximum lead content in gasoline to 0.4 g/l. from 0.45 g/l.; it will cut the lead level again by September 1993 to 0.15 g/l.

This schedule may need to be accelerated. Korn said imports of low lead gasoline "should be allowed as soon as possible."

Earlier this year, Malaysia reduced the maximum allowable lead content of gasoline to 0.15 g/l. from 0.4 g/l. Officials hope to eliminate lead in gasoline in about 3 years.

Petronas, the national oil corporation, and Shell have begun selling unleaded gasoline in Malaysia. The government is also encouraging the use of compressed natural gas in vehicles by setting CNG prices at one half the price of premium motor gasoline.

Taiwan's gasoline market is about 80% leaded; officials expect that to drop to 20% by 1996. Average lead content now is 0.12 g/l.

Maximum allowable sulfur content in diesel sold in Taiwan is being lowered, too. The limit now is 0.5%; phaseout calls for 0.3% beginning in 1993 and 0.05% starting in 1997.

KEY PROJECTS

Singapore refiners are busy preparing for changes in the petroleum product market.

In the past, Singapore refineries have grown in capacity but not in the sophistication found in other parts of the world. The reason was that more than half the petroleum products market in Singapore is for bunker fuel.

But demand for high quality transportation fuels is growing. Within the past year, Shell started up a long residue cracker, Esso dedicated a visbreaker, and Mobil put its new hydrocracker on stream.

Esso Singapore's 50,000 b/d visbreaker came on stream in April 1990.

Mobil Oil Singapore's new $117 million hydrocracker complex at its Jurong refinery was officially opened in early September. It includes a medium pressure hydrocracker and Mobil isomerization dewaxer (MIDW) to boost Mobil's capacity to produce jet fuel, diesel, and gasoline.

The MIDW is the first commercial plant of its kind. Developed by Mobil Research & Development Corp., it uses a proprietary catalyst to produce premium grade distillates from resid at a cost lower than that of conventional hydrocracking, according to Mobil. Mobil also plans a continuous catalytic reformer (CCR). Engineering should be done by the end of this year. If all goes well it could be on stream in the second half of 1993.

Singapore Petroleum Corp. is considering a residue cracker; it might be on stream by 1995. Instrumentation and other systems are also being modernized. The company has a reinstrumentation project under way to be complete in the next 2 years. SPC also is expanding storage.

Other upgrading projects are being studied by Singapore refiners, as well as modest debottlenecking work. Debottlenecking of a crude distillation unit added 10% to capacity at one refinery.

In Malaysia, preliminary design has been completed for a 100,000 b/d refinery owned 100% by Petronas that would run Malaysia sweet crude. Another plant to run sour Middle East crudes would be owned 45% by Petronas.

PETROCHEMICALS

Petrochemical manufacturing is also attracting investment in the Asia-Pacific region.

In Singapore, where a petrochemical complex has been operating since the early 1980s, the emphasis in the 1990s will be on adding value by moving further downstream to polymers and engineering plastics, rather than adding more ethylene capacity, according to Gong Wee Lik, deputy director for industry development at Singapore's Economic Development Board. This would complement growth by providing materials for other expanding industries in the region--electronics, for example.

Though Singapore Petrochemical Co.'s ethylene plant is currently operating well above its 300,000 ton/year nameplate capacity, Gong says some still fear capacity overbuild. And Singapore capacity is primarily for import substitution.

Greater integration of refining and petrochemical manufacturing is also a goal in the early 1990s, said Gong.

Several plants for Singapore have been announced recently for completion in the next 2-4 years. Examples include DuPont's $400 million (Singapore) adipic acid plant, due to start up in 1993; an engineering polymers plant to be built by GE Plastics with the first 100,000 ton/year phase on stream in 1992 and capacity rising to 150,000 tons/year by 1995.

Earlier this year, Shell opened a $330 million complex on Pulau Ular, a reclaimed island linked by bridge to the company's Pulau Bukom refinery.

The secondary processing and petrochemical complex includes a long residue catalytic cracking complex including an alkylation unit and an isopropyl alcohol plant.

Mobil is studying a 600,000 ton/year aromatics plant that would be sited next to its refinery and fed by the planned CCR.

Elsewhere in Southeast Asia, petrochemical building is booming. In Malaysia, a dozen projects are planned or under way (OGJ, Oct. 15, p. 73). Ethylene and propylene-and MTBE-are the main products. Thailand has almost that many plants planned for completion between now and 1993, including intermediates and finished products capacity.

In Indonesia, Pertamina plans big complexes at Arun in North Sumatra and Cilicap on Java. A number of other projects are under way or planned.

Elsewhere in the region, Korea's list of planned petrochemical projects is long, but a number of these are considered tentative (OGJ, Oct. 15, p. 73).

COSTS, INFRASTRUCTURE

The Asia/Pacific region is one of the most active markets for engineering/construction firms. Contractors from Japan, Korea, U.S., and Europe are all hustling for a share.

Construction costs are rising in Southeast Asia, according to a spokesman for one refiner. He estimates costs are now 20-30% higher than for a comparable U.S. Gulf Coast project.

Another estimate puts construction cost indexes in Malaysia at 1.03 and in Singapore at 1.07, compared to 1 for the U.S. Gulf Coast.

Capacity could become critical, too, though in many regions the extensive use of local labor will help avoid a shortage. It is taking longer to complete projects, according to a refinery spokesman, because equipment lead times are getting longer and big projects take large blocks of available manpower.

In Korea, for example, local contractors are reportedly working at full capacity.