Refiners of heavy, high-sulfur crude face prosperous year

Feb. 28, 2005
Refiners face several prosperous years, especially those able to convert heavy, high-sulfur crude to light products, industry representatives said at a conference in London.

Refiners face several prosperous years, especially those able to convert heavy, high-sulfur crude to light products, industry representatives said at a conference in London.

Population growth and an increase in per-capital energy consumption in rapidly developing China and India will keep demand strong, said Tom O'Malley, chairman of US independent refiner Premcor Inc.

Other speakers at a Wood Mackenzie refining seminar held in conjunction with the Energy Institute's International Petroleum Week assessed refining prospects in specific regions.

"The biggest winners in the refining industry will be those companies that can deal with very heavy and high-sulfur crude oil," O'Malley said, adding that his company's high-conversion refineries make twice to three times as much money running heavy crude than it does with higher quality feedstock.

Worldwide, he noted, "We have very little light crude oil coming on stream."

He expects 2005-07 to be "extraordinary years for refining" but warned: "$100[/bbl] crude oil will derail it."

He pointed to a "countertrade" developing in the Atlantic Basin, with the US exporting diesel to Europe and Europe exporting gasoline to the US.

Refining capacity needs to grow, but construction faces resistance in the US and Europe. "We went from 'not in my neighborhood' in terms of construction to 'not anywhere in my country' in terms of construction," O'Malley said. Construction, he said, is likely in China and India, while expansion of existing plants is all that will occur in the US and Europe.

Asked about energy policy and the likelihood of an ethanol mandate for gasoline sold in the US, O'Malley said President George W. Bush "has enough power now to push it through." And he added, "Ethanol is truly one of the dumb things to do."

Regional views

Agreeing with O'Malley that prospects are good for refiners for at least several years, David Waring, head of European energy for Deutsche Bank, said a "buyer's market for refineries" has developed in Europe because the wide refining margins of 2003-04 reawakened investor interest.

Waring said as many as 18 refineries might change ownership during the next 18-24 months through initial public offering spin-offs, planned sales, and disposals by companies considering European facilities to be noncore assets. Europe, he noted, has a surplus of gasoline and needs middle distillate because of strong growth in demand for diesel.

Ferenc Horvat, refining and marketing managing director of Hungary's MOL Group, said prospects for demand growth in Central Asia are "excellent" because of economic growth, accession of some of the countries into the European Union, and growing ownership of automobiles.

Refiners in the northern Central Asian countries are generally well along in privatization and have invested to meet EU product specifications. In the region's southern countries, refinery utilization rates are low, and companies face the need to make heavy investments to raise product quality while plagued by poor refining economics and low working capital.

In the vital Asia-Pacific region, said Satvinder Roopra, vice-president, downstream oil, for Wood Mackenzie, oil demand will rise by more than 50% by 2015, with China and India accounting for 64% of the growth.

Roopra said the crude slate in Asia-Pacific will change from 55% sour-45% sweet at present to 68% sour-32% sweet in 2015, requiring major upgrading and construction. He projected that product supply from regional refineries will increase by 300 million tonnes/year during the period from a combination of increased utilization rates, capacity creep from modernization and upgrades, and planned capacity additions accounting for about half of the increase.

Also during the period, he said, "significant deficits of all products [will] emerge," especially gas oil and diesel.