Asia-Pacific market shifts are having global impacts

Changing oil-trade patterns in the Asia-Pacific region will influence strategy of the Organization of Petroleum Exporting Countries and the oil-price outlook worldwide. Top executives from two oil companies told the Middle East Petroleum & Gas Conference in Dubai that the outlook remains gloomy for Asia-Pacific refiners.

Bob Tippee
Oil & Gas Journal

DUBAI, Mar. 28�Changing oil-trade patterns in the Asia-Pacific region will influence strategy of the Organization of Petroleum Exporting Countries and, by association, the oil-price outlook worldwide.

Top executives from two oil companies active in the region told the Middle East Petroleum & Gas Conference in Dubai that the outlook remains gloomy for Asia-Pacific refiners.

Paul Skinner, group managing director and CEO, oil products, for Royal Dutch/Shell Group, described how regional market shifts have global effects.

The Asia-Pacific market share claimed by Middle Eastern exporters, he said, will increase to 70% of total supply in 2010 from 40% in 2000 as worldwide demand increases to 92 million b/d from 76 million b/d.

By contrast, the Middle East�s share of western markets, with volumes changing little, will decline to less than 10% as non-OPEC crude production rises by an average of 600-700,000 b/d per year. If companies raise price thresholds for investments to more than $20/bbl, non-OPEC flow might rise by 1 million b/d per year.

�How Middle East producers respond to a declining share of western markets will be a really key factor in the development of the oil market prices over the decade,� Skinner said. �The Middle East�s status as a major crude [exporter] to the US has been important and, I expect, will be conceded reluctantly.�

The other executive, Caltex Corp. Chairman and CEO Jock McKenzie, noted that economic and oil-demand forecasts are being trimmed and that Asia-Pacific refining capacity has continued to increase. His outlook: poor refining margins in the region until 2004-05 at the earliest.

Also in the second and final day of the meeting, Hussain Sultan, group chief executive of Emirates National Oil Co. Ltd., urged OPEC to take a balanced approach to the oil market.

�Robust oil revenues are good for our area, but only fair market prices will last, no matter what tactics are used,� he said.

Shell�s view
Skinner noted that increasing concern about supply security by major Asian importers is changing crude and product trade in the region.

Security as well as quality considerations, for example, will increase eastward flow of West Africa crudes as current suppliers of Far East export grades, including Viet Nam and Papua New Guinea, add refining capacity and reduce crude exports.

Asian countries also have announced plans to develop strategic crude storage, which has raised concern among exporters and traders. Another concern, Skinner said, is the need for a new marker crude as production of Dubai crude�the current marker for eastern trade�falls.

He pointed out that the major Middle East exporters are reluctant to allow their crudes to be traded or used as price benchmarks. �Nevertheless, we think it is inevitable that a high-volume eastern-destination crude will need to perform the market role, and dialogue between producers and buyers should be initiated to achieve this.�

Skinner said Middle Eastern refiners, which exported more than 2.1 million b/d of product in 1999, increased processing rates that year in spite of low refining margins and continue to add capacity through grassroots construction, condensate splitters, and new conversion units at existing plants.

The main Middle East trade flows include naphtha to Japan and South Korea, fuel oil to Pakistan, and middle distillates to India. Product exports to western markets were 250,000 b/d in 1999.

In contrast to what Shell saw as uneconomic processing in the Middle East, throughputs in the Singapore refining system steadily declined in response to the weak refining margins, which weren�t the only cause for distress.

In another manifestation of security concern, countries�India prominent among them�have brought new refineries on stream in pursuit of product self-sufficiency and protected them with tariffs on imports.

�India has exchanged product import dependence from the Middle East for crude import dependence from the Middle East,� Skinner said.

�India is the latest and largest country to change from a net product importing country to an exporting country. It will likely not be the last.�

Additions of refining capacity have reversed product movements, Skinner noted. Before 1998, fuel oil flowed westward through the Suez Canal, while product went eastward. The opposite is now the case.

As a result, Singapore light product prices are �structurally� below Rotterdam prices.

�We expect that eastern crude prices will remain at a premium to western crude prices, and eastern refining margins [will] remain under pressure,� Skinner said.

�Middle East refineries will turn increasingly to western product importers and probably invest to meet US and European quality expectations.�

Caltex view
McKenzie of Caltex also singled out India as a government straining for product self-sufficiency, calling it �an egregious example� of the trend.

Also overhanging the Asia-Pacific market, he said, is great potential for refining-capacity additions through debottlenecking.

An overlooked problem for the region, he added, is a limited ability to trade away, or arbitrage, surpluses.

Quality differences limit the degree to which refinery products from Asia-Pacific refiners can substitute for products elsewhere.

Recently high shipping rates have aggravated the arbitrage problem, McKenzie said.

Strength of the US dollar has further hurt Asia-Pacific refining by suppressing economic growth and constraining oil demand.

McKenzie noted these factors as crucial to the future of Asia�s downstream industry:

� Economic prospects, especially in the US and Japan.

� The potential for Asia-Pacific demand growth to remain relatively strong.

� Chances for crude-price stability, which would improve overall refining margins.

� Continued growth in �nontraditional players� in retailing, such as supermarkets and independent marketers.

� Growth in e-commerce.

More advice
Sultan, whose Dubai-based company holds a range of midstream, downstream, and nonoil interests, had advice for Middle Eastern producers beyond his warning about the price of crude.

�Oil is not going to last forever,� he noted. �It could also be replaced by alternative sources of energy one day.

�It is therefore high time for the oil-producing countries of the Middle East to rely less on oil and concentrate on diversification.�

That�s the course Dubai, which has oil reserves far smaller than those of most of its Persian Gulf neighbors, has followed. Aggressive growth has turned the emirate into a major commercial center and given it a great and growing need for natural gas.

How to meet Dubai�s gas demand is an important regional issue�and one that highlights another Middle Eastern problem cited by Sultan: �We let politics interfere.�

It has long been known, he said, that Dubai needed gas and that it would serve regional interests for the supply to come from other members of the Gulf Cooperation Council�essentially Persian Gulf countries other than Iran and Iraq.

�For years, groups and committees have been studying the subject,� Sultan said. �Just think of the cost of all of these delays in having a gas grid, an electricity grid, a water network system to sell surplus water produced.

�If it was a pure commercial decision, we would have had the supply earlier from the most competitive source.�

A planned project called Dolphin addresses Dubai�s gas needs. Sponsors�including Enron Corp., TotalFinaElf SA, and UAE Offsets Group�plan to lay a pipeline from Qatar�s supergiant offshore North gas field to Taweelah, Abu Dhabi, then to Jebel Ali, Dubai. The system might eventually be extended to Oman and possibly countries to the east (OGJ Online, Mar. 19, 2001).

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