Global crude distillation capacity will increase 10.6 million b/d during 2007-129.1 million b/d of new capacity and 1.5 million b/d of capacity creepaccording to a report from the International Energy Agency (IEA) entitled “Medium-Term Oil Market Report.” The expansion in refining capacity will be in response to an increase in oil demand of 9.6 million b/d by 2012.
IEA feels that investment in sophisticated refinery capacity is continuing and it foresees significant improvement in refinery flexibility despite project inflation and slippage similar to that seen in the upstream sector.
Current refinery investment should increase refiners’ ability to process heavy, sour OPEC spare capacity that was of little interest to them during the past few years, IEA feels. Refiners will be able to upgrade more fuel oil into lighter transportation fuels, which should improve their ability to meet demand growth in gasoline and diesel. But this will affect prices and price differentials.
If refiners can more easily meet gasoline and diesel demand, then the high differentials to crude oil are likely to decrease, the report said. Similarly, refiners’ ability to upgrade the heavy end of the barrel means that large discounts needed to clear surplus fuel oil production will disappear. Differentials between light, sweet and heavy, sour crude should narrow, IEA said.
The potential for distillate markets to ease during the next 5 years would be insignificant compared to marine bunker fuels switching from fuel oil to distillate. This change would necessitate additional investment in upgrading capacity of more than that currently forecast in the study.
IEA believes that recent imbalances in product markets had a significant effect on oil market volatility and outright prices. An easing of these imbalances should therefore reduce one of the price pressures that have existed for the past few years. But it may be short-lived.
IEA’s product supply forecast depends on the assumption that many large refining projects in the US will be approved in the short term and that high-cost projects slated to start up closer to 2012 are not delayed. If refining margins dip, projects with lead times of 18 months to 3 years could be delayed. These market dynamics suggest that it is unlikely that the refining industry will return to a long-term era of low refinery margins, according to IEA.
Global oil product demand will increase 1.9 million b/d/year or 2.2%/year on average, reaching 95.8 million b/d by 2012, according to IEA. Growth is due to stronger demand growth in non-Organization for Economic Co-operation and Development (OECD) countries, particularly in Asia and the Middle East, where demand will grow more than three times faster than OECD countries.
IEA expects OECD oil product demand to increase 1.0%/year on average (Fig. 1a) rising to 52.1 million b/d in 2012 from 49.6 million b/d in 2007 due to transportation fuel demand growth in North America, where consumption will grow twice as fast as in Europe or the Pacific. North America will grow at 1.3%/year on average vs. 0.7%/year for Europe and 0.6%/year for the Pacific. Consumption growth will have different regional trends (gasoline in North America, diesel in Europe, and the Pacific more evenly balanced).
North America will represent 52.7% of total OECD demand in 2012, and 67.8% of the OECD’s average volumetric annual increase. OECD North America will account for 28.7% of global oil product demand, which is modestly lower compared with 2007 (29.9%), according to IEA. By 2012, transportation fuels should account for about 65.3% of total regional demand, increasing an average of 1.4%/year.
Europe will account for 30.6% of total OECD demand in 2012, and for 21.6% of the OECD’s annual average volume increase. The share of OECD Europe will lower slightly to 16.6% of global product demand in 2012, compared with 17.9% in 2007, according to IEA.
The Pacific will account for 16.7% of total OECD demand in 2012, and for 10.6% of the OECD’s average annual volumetric increase. By 2012, OECD Pacific demand will correspond to 9.1% of the world’s total, almost one percentage point down from 2007.
IEA expects non-OECD oil product demand to increase by an average of 1.4 million b/d/year (Fig. 1b) to 43.7 million b/d from 36.6 million b/d, or 3.6%/year during 2007-12. It will nearly surpass total oil consumption in the OECD.
Data uncertainties pose upside risks to the forecast, particularly for China, India, and the FSU. Within non-OECD countries, two regions will be major consumers in the forecast period: Asia, which will represent about half of average non-OECD incremental demand growth, and the Middle East, accounting for almost a quarter, according to IEA.
Average growth will be particularly strong in China (+5.6%/year) and the Middle East (+4.6%/year), with other non-OECD countries growing between 2%/year and 3%/year on average.
Transportation fuels will account for the bulk of demand growth worldwide, IEA reports. These fuels will represent roughly 67% of the increase in OECD consumption to 2012, and about 60% of the rise in non-OECD demand.
Refining, product supply
IEA expects global crude distillation capacity to increase 10.6 million b/d during 2007-12, which includes 9.1 million b/d of new capacity and 1.5 million b/d of capacity creep.
Fig. 2 shows IEA forecasts for additions of crude distillation capacity by region. The Middle East and Asia accounts for 6.7 million b/d of the expansions; refining capacity growth in these regions will exceed regional product demand. The additional capacity increases the flexibility of refiners to process existing and future crude slates, particularly the tranche of heavy, sour crude spare capacity OPEC currently holds.
IEA’s projections for refining are subject to uncertainties for projects due for completion near the end of the forecast period3.3 million b/d from a handful of large projects during 2011-12. These could experience additional delays if refinery economics deteriorate or contractor-related bottlenecks increase, or if investors believe all the biofuels targets will be achieved.
If these investments go ahead, IEA believes that the ability of refiners to expand gasoline supplies should improve significantly during the next few years, and that the potential to both process heavy sour crudes and convert fuel oil into lighter products will increase. With fuel oil discounts of $15-30/bbl relative to crude in the past few years, IEA believes there is the potential for upgrading capacity additions to tighten fuel oil and ease gasoline differentials to benchmark crudes.
The Middle East and Asia will account for 6.7 million b/d of new crude distillation capacity, according to IEA. This exceeds expected regional demand growth, and India and Saudi Arabia will develop significant export-orientated refining capacity. The Middle East will supply the marginal barrel of product to importing regions as well as the marginal barrel of crude, according to IEA.
New refineries and upgrading capacity additions (Fig. 3) will boost product supply flexibility in the medium term. IEA predicts a substantial increase in refining complexity during the next 5 years. Refiners will therefore be better positioned to meet transportation fuel demand growth, although at the expense of fuel oil.
Gasoline market tightness should ease, possibly by 2008, followed by gas oil and diesel in 2010. Jet fuel market tightness is likely to persist until 2010 unless further unwinding in the other transportation fuel appears. Fuel oil markets could tighten significantly, unless there is a shift in behavior by consumers or refiners, according to IEA.
Refinery expansion plans
IEA forecasts global crude distillation capacity to increase 10.6 million b/d by 2012, of which (Fig. 2):
- 4.0 million b/d is due to the expansion of existing refineries, mainly in Asia-Pacific and North America.
- 5.1 million b/d of growth comes from newbuild distillation capacity, largely in the Middle East, China, and other Asia (primarily India).
- 1.5 million b/d comes from capacity creep at existing refineries in OECD North America, Europe, and Asia-Pacific.
IEA’s report excluded projects accounting for 6.3 million b/d of crude distillation capacity that are unlikely to materialize by 2012. Where appropriate, IEA factored in some delays to those projects in which it saw a risk of contracts being re-tendered. IEA is also concerned about the solidity of 2.4 million b/d of distillation capacity that is currently forecast to commence operations in 2012.
Large-scale upgrading capacity additions include 7.2 million b/d during the next 5 years (including coking, catalytic cracking, hydrocracking, and visbreaking). Refiners are also continuing to invest heavily in hydrotreating capacity to remove sulfur from refined products. IEA expects hydrotreating capacity to increase 8.1 million b/d through 2012. More than half of this total is to meet global lower-sulfur specifications in diesel.
IEA also expects atmospheric residue (fuel oil) hydrotreating to experience a similarly strong increase, although around 40% of the growth comes from Kuwait’s al Zour project, which is slated to start up in 2012.
In OECD regions, IEA expects no new refineries, although several of the larger planned expansions are equivalent to world-class refineries. Investment aims at improving product quality, either through upgrading or hydrotreating additions, or adapting operations to handle an increasingly heavy, sour crude slate.
North American refineries constitute most of the forecast 1.8 million b/d increase in OECD crude distillation capacity and also most of the upgrading capacity (Fig. 4). Most of the expansions are in Northern US to process increasing amounts of heavy, sour Canadian crude.
In Europe, investment will focus on improving middle distillate production through the installation of upgrading capacity to convert atmospheric residue into middle distillates. Pacific growth similarly aims at improving light product yields.
IEA’s forecasts show that 51% of world refining capacity will lie in non-OECD regions by 2012, up from 48% currently. Product trade should increase, and a growing proportion of that trade will likely come from OPEC member states, particularly in the Middle East, which will leave the region to supply not only the marginal crude barrel but also the marginal product barrel.
IEA expects that the next 5 years will see a further significant tightening of product specifications in many regions. Europe will enforce 10-ppm sulfur, from the current limit of 50 ppm, in gasoline and diesel in 2009. Further tightening of the distillate market may result from the adoption of 10-ppm sulfur limit in 2010 for off-road diesel, a reduction of 99% from the 1,000-ppm limit that is in effect starting this year.
In North America, the US aims to limit benzene in gasoline to 0.6% by 2011, from 1% currently. In addition, there is a federally mandated ethanol blend for gasoline. The distillate market is adjusting to the recent introduction of a 500-ppm sulfur limit in off-road diesel, including locomotive and marine use. Further tightening of distillate-quality specifications are planned with the adoption of ultralow-sulfur diesel (ULSD) for all on-road (up from 80% currently) and off-road diesel in 2010 and locomotive and marine sectors in 2012.
Fuel oil, which has high sulfur levels (1.0-3.5% sulfur), will also face tighter specifications as a result of the International Maritime Organization’s Sulfur Emission Control Area taking effect in the English Channel and North Sea in 2007. IEA feels that there is the possibility of their introduction to the Mediterranean and US West Coast, possibly as early as 2010. Overall, the proposed fuel-quality changes will necessitate further refinery investment.
Despite the removal of some forecast capacity additions, North America remains a significant source of capacity growth. IEA forecasts that refiners will add 1.3 million b/d of crude distillation capacity through new projects during 2007-12. This forecast includes many large-scale expansion projects that IEA assumes will be approved in the next year.
The most notable expansion is the Motiva Enterprises LLC (a Shell-Saudi Aramco joint venture) 325,000 b/d expansion of its Port Arthur, Tex., refinery. IEA did not include Chevron Corp.’s 200,000 b/d expansion of its Pascagoula, La., refinery because a final investment decision has not been made, suggesting it may not start operations before 2013.
US crude distillation capacity will grow 1.1 million b/d between 2007 and 2012, according to IEA. The four largest projects, all due to start up in 2010-12, contribute 700,000 b/d. Of these projects IEA was only able to confirm that Marathon Oil Corp.’s 180,000 b/d Garyville, Ind., expansion received final investment approval, which indicates that the remaining 500,000 b/d of capacity may be delayed. Rising project costs have forced several refiners to defer, or scale back, expansion plans to meet capital budgets.
IEA is also forecasting substantial investment in North American upgrading capacity (Fig. 4), mostly in new coking and hydrocracking units. North American refiners will continue to invest in substantial amounts of diesel, gasoline, and kerosine hydrotreating capacity through 2012. IEA expects more than 500,000 b/d of new coking capacity centered on refineries in Northern US states and Canada.
European refinery investment plans focus on improving distillate and reducing fuel-oil production due to regional production-demand imbalances. IEA forecasts net crude capacity additions of 300,000 b/d, as well as new upgrading capacity, particularly for coking and hydrocracking. Due to slow demand growth, IEA feels that large-scale expansion of European crude distillation capacity is unlikely in the medium term.
Hydrocracking investment in Europe will increase capacity by 360,000 b/d through 2012, with a further 60,000 b/d of residue hydrocracking. Most capacity additions are in the Mediterranean post-2009.
Similarly, the addition of 200,000 b/d of coking capacity is largely due to projects in Spain, plus the planned expansion of MOL Group’s Szazhalombatta, Hungary, refinery and the upgrade to Hellenic Petroleum’s Elefsis, Greece, refinery. IEA also included the likely installation of a coker at ConocoPhillips’ Wilhelmshaven, Germany, refinery in 2012.
IEA is forecasting crude capacity to increase 284,000 b/d through 2012. The balance of the increase is in Japan, with 124,000 b/d of additional distillation capacity, of which 94,000 b/d is from new condensate splitters. The rest of the growth comes from expansion of the New Zealand Refining Co.’s Marsden Point Refinery by 35,000 b/d, and a 50,000 b/d condensate splitter in Australia, both due to commence operations in 2010.
China contributes more than any other country to refinery growth. IEA predicts that grassroots refineries and the expansion of existing plants will contribute 2.3 million b/d of additional crude capacity before yearend 2012 (Fig. 5).
Sinopec dominates growth with 1.3 million b/d capacity in new projects, including up to 360,000 b/d in joint ventures, according to IEA. Chinese refineries, which already boast some of the highest upgrading-to-distillation ratios in the world, will continue to invest in coking and hydrocracking capacity, adding more than 500,000 b/d of both, as they seek to maximize distillate production for transportation and naphtha for petrochemical feedstock.
IEA similarly expects hydrotreating capacity to increase by more than 2 million b/d, 60% of which is aimed at diesel production, ahead of tighter product specifications coming into effect in 2008 and 2010.
In 2008, refining capacity growth will increase, with Sinopec’s new 200,000 b/d Quindao and China National Offshore Oil Corp.’s 240,000 b/d Huizhou refineries starting up. Additionally, expansions at five other refineries will add 260,000 b/d of complex refining capacity.
Growth in 2009 will result from:
- Petrochina Co. Ltd.’s 200,000-b/d Quinzhou refinery in the Guangxi region.
- The 130,000-b/d expansion of Sinopec’s Maoming refinery.
- The 160,000-b/d expansion of the Fujian refinery for Sinopec, ExxonMobil Corp., and Saudi Aramco.
- The 46,000-b/d expansion of Petrochina’s Fushun refinery.
IEA expects that growth will slow to 150,000 b/d in 2010, with the expansion of Sinopec’s 100,000 b/d Tianjin refinery. In 2011-12, China will have 740,000 b/d of new refining capacity, in four or five additional projects, but actual capacity additions will depend on China’s demand growth in the intervening period and its consequential product supply requirements. Any slowdown in demand growth will likely result in lower capacity additions than forecast.
IEA predicts that other Asian countries will contribute about 1.6 million b/d of new crude distillation capacity by 2012. Indian projects account for 1.4 million b/d of new crude distillation of the region’s capacity increase.
Malaysia, Thailand, and Vietnam will start up 270,000 b/d of new crude capacity by 2012.
Reliance Petroleum Ltd.’s 580,000-b/d Jamnagar refinery is the largest addition in the region and will commence operations in 2008. IEA consequently included it in forecasts from 2009. The reported size of upgrading capacity suggests this refinery will run heavy, sour crude, and IEA expects the refinery to be capable of making 10-ppm sulfur diesel and gasoline for markets in Europe and North America. Additional projects in India will add another 800,000 b/d of crude capacity during 2007-12.
IEA included Bharat Petroleum’s 120,000 b/d Bina refinery in 2010, and new crude distillation due to upgrading capacity expansions at Indian Oil Corp.’s Haldia, Mumbai, and Chennai refineries. Oil and Natural Gas Corp.’s Mangalore refinery expansion to 300,000 b/d in 2009 and the second phase of Essar’s Vadinar expansion in late 2008 are included in IEA’s forecast.
The Middle East first appears to be the largest single region of refining capacity growth, according to IEA. The forecast, however, now relies on a significant portion of the region’s capacity coming on stream in 2012.
The majority of the 2.0 million b/d of capacity will come on stream in 2012. Any further delays could result in a significant shortfall, even on a global basis, of newbuild refinery capacity before 2012.
IEA expects Saudi Arabian refinery additions of 975,000 b/d through 2012. Of this total, IEA expects 800,000 b/d to start up in 2012. This includes Total’s 400,000 b/d Jubail refinery and the 400,000 b/d ConocoPhillips Ras Tanura refinery, which is more likely to start in 2013 than 2012.
For Iran, IEA expects the phased expansion of 360,000 b/d of condensate splitters to start up between summer 2010 and summer 2011. Furthermore, IEA expects 190,000 b/d of expansions at the Arak, Lavan, and Isfahan refineries, tied into significant increases in refinery complexity, during 2009-12.
IEA expects Kuwait’s 615,000-b/d refinery at al-Zour to start up in fourth-quarter 2012. The report also expects a delayed start-up of the planned expansion of the Mina Abdullah refinery, to 2013, because it is a more complex and time-consuming undertaking.
The study sees crude distillation expansions of 313,000 b/d in Africa, largely from projects in the northern and eastern countries. Investment in upgrading capacity remains limited and new hydrotreating capacity is similarly sparse. IEA says that South African refiners have recently completed some investments, but prospects of more stringent national quality specifications early next decade may generate more investment projects.
The expansion of existing Russian refineries dominates the region’s growth. Planned investments will increase light product yields and improve product quality. Significant additions to catalytic cracking and hydrocracking capacity, plus more limited investment in coking and visbreaking capacity should reduce fuel-oil production and boost gasoline and distillate production through to 2012, according to IEA.
Tatneft’s $4.8 billion plan for a new 140,000 b/d full-conversion refinery at Nizhnehamsk in 2010-11 represents the only grassroots investment. Rosneft’s 140,000-b/d expansion of the Tuapse refinery is the only large-scale refinery expansion project included in IEA’s forecasts.
Petrobras is planning to upgrade seven of its refineries, which will increase the ability to handle its domestic heavy, sour crude production. Some incremental crude distillation is expected to accompany the addition of 130,000 b/d of new coking capacity through 2012. Despite the progress evident at many of Petrobras’s projects, IEA remains skeptical that the planned 200,000-b/d Abreu e Lima refinery in Pernambuco state, a joint venture with PDVSA, will be completed before 2012, with some reports suggesting a 2014 start date.
New refineries starting up in the next 5 years are more complex than existing refineries, on average, according to the study. They will therefore produce a higher percentage of light products and less fuel oil. Significant upgrading capacity additions will increase demand for heavy, sour crudes that are currently priced at a significant discount to light, sweet crudes.
IEA expects the recently tight gasoline market to start to ease soon, with increased flexibility to expand supplies (including ethanol) increasing during 2007-12. The increased supply potential is most significant in the Atlantic Basin, where the structural surplus in European gasoline supply will persist; improving the region’s potential to meet US import requirements through 2009. By 2012, US refiners will start to close some of the gap in domestic supplies.
IEA expects the Middle East to remain a net importer of gasoline until 2012. In the meantime, much depends on the outcome of Iran’s plans to invest in FCC and condensate splitting capacity while implementing demand restraint measures. Saudi Arabia and Kuwait’s capacity expansions in 2012 will rebalance regional gasoline production to demand.
In Latin America, Brazilian refining investments in upgrading capacity will increase capacity for heavy domestic Marlim crude. The net impact of these coking additions to the gasoline pool is limited because the refining of heavier crude will cut naphtha yields from crude distillation, but boost supplies of FCC and coker naphtha, according to IEA.
Other Asian countries will become significant exporters of gasoline, mainly due to India’s planned refining additions. The increase in potential supplies will possibly increase exports to North America, the Middle East, or Africa, given that IEA expects the OECD Pacific to also become more balanced by 2012.
Gas oil, diesel
The gas oil-diesel market should remain tight in the short-term due to strong demand growth, but could ease from 2009 as higher global crude distillation capacity and investment in hydrocracking capacity come on line, according to the report. Some regions, however, particularly Europe, will remain importers.
The European refining system is, according to IEA’s analysis, maximizing diesel and gas oil production from distillation and upgrading units to meet transport and heating oil demand. Consequently, IEA forecasts diesel production to increase due to additional hydrocracking and coking capacity, but a more significant increase in production will not be achieved unless crude runs rise significantly.
North American demand growth will accelerate during 2007-12 and, despite recent improvements in distillate yields, the region will likely become a net importer of gas oil and diesel if yields do not improve. There is some flexibility within the US refining system, however, to bolster distillate supplies at the expense of gasoline (particularly given the growth in ethanol supplies), implying that price differentials between gasoline and diesel will be closely linked, according to IEA.
Overall, hydrocracking additions and increased runs will cover the growth in gas oil and diesel demand, but tightening sulfur limits and increasing cetane requirements in diesel could further fragment the distillate market, reducing potential trade and supporting product cracks if insufficient desulfurization capacity additions occur.
The impact of marine bunker fuels switching from fuel oil to distillate dwarf the potential for distillate markets to ease until 2012, according to the study.