By: Ryan M. Couture and John R. Auers
While the 70’s punk rock tune, “China Rocks” (recorded by among others, The Hearbreakers, The Ramones and Sid Vicious) certainly had a vastly different topic, we thought it appropriate to use as the title for today’s blog as our continuing series on global refining project activities moves to Asia. Rapid demand growth on most of the continent has driven the construction of new refineries and expansions/upgrades of existing facilities over the last couple of decades. And nowhere has refining activity “rocked” more than in China, where capacity has doubled in the last 10 years, accounting for about two thirds of the net increase in global refining capacity in that timeframe. But Asia is huge and diverse, comprised of countries both poor and rich, with economies which are developed, undeveloped and developing. As a result refiners in the region face a wide variety of challenges and opportunities, and the dynamics continue to change, due not only to economics, but also politics, demographics and other factors. Today we will take a look at these factors, discussing how they have and will continue to impact refinery projects in the region.
“You want to take a walk”
While Middle East demand growth on a percentage basis may have led the globe in the past decade (as noted in last weeks blog), on an absolute basis, Asian refined product demand has been far and away largest component of world demand growth (75% of the total) as shown in Figure 1 below.
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That said, the region is vast, and has had some significant winners and losers on the demand front. In recent years, the economies of India and especially China have grown rapidly, causing a surge in demand and subsequent refining investment. At the same time, the region’s developed nations have seen a decline in demand. Japan has been the biggest loser, with over 1 million BPD drop in the last decade, nearly 20% of total demand. Taiwan has also seen declines, although they have been more modest at about 6%. South Korea, Australia, and New Zealand have been relatively stagnant in the preceding decade.
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“I should’ve been rich”
This surge in developing countries’ demand has sparked a massive infrastructure buildout. Turner, Mason & Company is tracking nearly 10 million BPD of potential refining projects (both greenfield facilities and refinery expansions), almost exclusively in developing countries in our Construction Outlook. The projects total nearly $290 billion. That said, we expect only a little better than one third of the 70+ projects will see completion, owing to a number of factors. This estimate could change dramatically, especially in China, depending on the outcome of their precarious economic situation.
With changes in demand come changes in refining capacity. Due to the close proximity of “developed” Asia to “developing” Asia, the refining industries in the developed countries have felt pressure from both the government and the market. Owing in part to Japanese legislation there that has effectively forced consolidation by setting refining hurdles, Japan has seen significant capacity rationalization of over 1.3 million BPD since its peak in the late 1990s. Australia has seen a drop in recent years as well, losing three refineries (Shell Clyde, Caltex Kurnell and BP Bulwer Island). Competition from large, export-oriented refineries elsewhere in the Middle East and Asia/Pacific coupled with the much higher cost of both labor and energy and stricter environmental regulations have all put pressure on margins there.
On the other hand, demand growth has been strong in many developing countries; China, being the leader. Between 2005 and 2014, demand has grown by over 4 million BPD, and refining capacity has surpassed even that, growing by 6.9 million BPD, making China the undisputable growth leader of the world. This overbuild was split between the major Chinese oil companies and the smaller teapot refineries, and was kept in check as the Chinese government kept tight controls on the crude supply. With relaxation in recent years, China is poised to become a net exporter of refined products, putting increasing pressure on fledgling projects their poorer neighbors have announced.
Besides China, demand growth in India has been the second strongest in the region, rising by over 1.3 million BPD in the last decade. Indian refiners, on the other hand, have grown by 1.8 million BPD in the same time, outpacing demand. Indian refiners have managed to defy “logic” and have proven to be extremely adept at building and operating refineries, so much so that it will be the focus of its own blog.
The remaining countries in the region remain net importers in aggregate. While demand has grown by nearly 1.3 million BPD in the last decade, refining capacity has increased by only 600 thousand BPD. Refining capacity increasingly lags behind demand for those countries, even for the on again/off again OPEC member, Indonesia. Thailand’s demand has grown rapidly, and may soon pass domestic refining capacity if expansions don’t materialize, and Indonesian demand has outstripped their refining capacity.
“But I’m just diggin’ a Chinese ditch”
The supply and demand dynamics carry into project execution as well. Similar to the U.S. and Europe, the developed countries in the region, with established markets and highly skilled workforces, have much higher costs of operation and have seen capacity fall off. South Korea is an exception to this, although South Korea has been facing increasing challenges from China. Among the developing countries there exists a spectrum, with countries such as China and India expanding their capacity quickly relative to their demand, while others have struggled due to a variety of factors that we will discuss.
China’s booming economy over the past couple of decades has demanded more of everything, including petroleum. This surging demand coupled with China’s central planning model has controlled capacity buildout in the past, and has played a unique role in the direction of the two refining segments: the state-owned companies and the teapot or teakettle independent refiners.
A vast majority of the Chinese projects currently being tracked are part of the state-owned companies. Owing to the nature of the companies and projects, less information is known on them than true “free market” refiners. Based on their announced project costs, the dozen or so projects spread across PetroChina, CNOOC, Sinpoec and CNPC average $25,000/bbl of new capacity for grassroots, and $22,000/bbl for expansions. These are respectable numbers, especially when compared to the Middle Eastern and Latin American projects, but the limited information available for completed projects points to higher costs of about $35,000/bbl for grassroots facilities, with notoriously murky numbers masking true costs. While the projects may not face the full force of the markets, holding monopolies in their respective areas, they do answer to the central planning commission. Of the projects we are monitoring, most have seen several delays as the government balances out refining capacity with demand, revising startup dates and project capacities as they progress. With such a heavy hand and thick veil of secrecy, it is hard to know what the reality is.
Teapot refiners have historically played second fiddle to the state-run refiners. With no ability to import crude or directly sell products, they were beholden to the state-run facilities for fuel oil as feedstocks and to sell their products back to the state-run companies. These refiners often operate at the will of regional governments, even without support from the central government. A lot has changed recently, though. The government has opened up quotas for crude imports, allowing for increased access to feedstocks as well as allowing for export quotas. One can’t help but wonder if the government is doing this to increase their viability in the face of a slowing economy. While these moves are recent, it could have a long-term impact on the future of the “private” Chinese refiners, and spark a wave of investment there unlike what has been previously seen.
“All my best things are in hock”
Moving past China, a host of smaller neighbors have projects on the table, in most cases geared towards meeting growing demand and lessening dependence on product imports. Unlike in China, the smaller countries lack the central planning that dictates the size and timing of projects. More importantly, in many cases they lack the financing necessary to move these projects forward. Indonesia, Vietnam, Malaysia, Cambodia, Brunei, Myanmar Mongolia, Sri Lanka and Pakistan all have announced significant projects, but with varying prospects for success.
Indonesia’s national oil company, Pertamina, announced plans for five refinery upgrades and four grassroots refineries in a bid to overhaul their refining system and make them less dependent on imports. Due to the lack of funding, the intention was to use JV partners to aid in refinery expansions, while building out new grassroots facilities on their own. A majority of these expansions were announced in 2009-2011, with completion anticipated in 2017. Of those five expansions, all were delayed, with partner JX Nippon dropping out of the Balikpapan expansion, and Saudi Aramco and Sinopec still partners in the four remaining expansion projects, which would now see completion in 2020-2021 at the earliest if agreements can be reached. Given the track record thus far, we anticipate only one or two of these expansions will ultimately see completion, with the Calicap JV with Saudi Aramco the most probable. In addition to the expansions, there are plans for four grassroots facilities ranging from 300-350 MBPD. Only one project has seen progress in Bontang, with the remaining three pending. With an estimated price tag of $9.2 billion each, the expansions will be more expensive on a $/BBL basis than those in Saudi Arabia, if funding can be secured. Mired in bureaucracy and delays, startup of these facilities is likely 2022+ if they happen at all.
Vietnam has worked toward expanding its aging refining infrastructure for years, but due to political instability and lack of capital, projects have been consistently delayed. There are five projects currently being tracked in the country, but only two that have seen significant progress. PetroVietnam has been working since 2009 on expanding the country’s lone Dung Quat refinery. The joint venture with Gazprom is estimated to cost $2 billion, expanding the facility by 70 thousand BPD and enabling increased clean product make. In addition, four other grassroots refineries were announced, ranging in size from 160-400 thousand BPD, and in cost from $4-20 billion. Only one project is under construction, the $9 billion, 200 thousand BPD refinery in Nghi Son, which is scheduled to be completed in late 2017 or 2018 after facing delays due in part to a military coup. The three remaining projects, JVs between foreign oil companies and Vietnamese companies have been at a standstill, with continued delays and changes in JV partnership as time drags out. The probability of these projects, which have steadily increasing costs, has fallen dramatically.
Malaysia’s Petronas is constructing a $28 billion, 300 thousand BPD grassroots refinery and petrochemical complex at Johor. Known as the RAPID (Refinery and Petrochemical Integrated Development) project, it is now scheduled to be completed in 2019, after having seen several years of delays. The facility, which will produce both clean transportation fuels and petrochemical feedstocks, comes in at $93,000/BBL of capacity, pushing costs into the rarified air of some Petrobras projects. Once complete, it will be the largest refinery in the country, and shift Malaysia into a net product exporter.
“Do you wanna take a walk”
More than a dozen other projects exist in Cambodia, Brunei, Myanmar, Mongolia, Sri Lanka and Pakistan. Despite the number, most have been announced years ago and have shown no recent progress. This highlights the difficulty in expanding projects in these locations, where it is hard to secure financing or commence projects due to political and economic instability and heavy competition. The economics become increasingly difficult to justify in places with limited infrastructure and less capable workforces, which continually hampers development. As China, India and Middle Eastern refiners begin to increase exports, it will become increasingly difficult for projects to get outside financing and ultimately get constructed. Ultimately this becomes a challenge for these nations to become self-sufficient from a refining standpoint without government intervention.
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Conclusion
Asia/Pacific is a tale of two markets, the developed which has seen a decline, and developing, which has seen strong growth. Declining demand coupled with higher costs to operate in developed nations has caused a decline in refining capacity, while developing Asia, led by China and India, has seen impressive growth. Smaller countries have announced many ambitious projects, but few have made it much past that, as they face multiple challenges. China has certainly been the undisputed heavyweight in the refining sector in Asia, but even that status is not permanent. Their industry does not have the advantage of operating in a free market system as exists in the U.S., and it is hard to gauge its actual competitiveness. In a future blog, we will look at India, who potentially could be the next heavyweight champ. Indian privately operated refiners have already managed what few others in the world have been able to do, build and operate refineries as cheaply and successfully as the reigning World Champ of refining, the U.S. Gulf Coast.
Turner, Mason & Company tracks hundreds of projects as part of our 2016 Comprehensive Construction Outlook. The Construction Outlook analyzes refinery projects across the globe, broken out by region, project type and impact to both crude demand and product slate. In addition, we provide probability rankings of the ultimate completion of each of these projects, based on a variety of factors, including economic viability, strength of sponsors, available financing options and other key criteria. This analysis is also included in our Crude and Refined Products Outlook which is released biannually, and looks at national and global trends in the crude and refined products market, providing insight and analysis on specific key refining regions and topics. For more information on these products or on any other services that we may be able to provide, please feel free to send us an email or give us a call.