By: John Mayes and John Auers
Over the last several weeks we have taken a “Trip Around the World”, analyzing the geographic disparities in refining construction activity and costs. In these discussions we’ve learned that building and expanding refineries (not to mention operating them) is a complex task. The journey from project conception, through design, financing, construction and start-up is often a “Long and Winding Road,” that is unpredictable and doesn’t always end in success. But new capacity is necessary, as global product demand continues to grow, rising by an average of 900 thousand BPD over the last ten years, and accelerating from that pace recently in the new low price environment which has developed. New capacity and refinery modifications and upgrades are needed not only to satisfy this demand growth, but also to replace outmoded existing capacity, provide the capability to refine changing qualities of crude oil, meet more stringent product specifications and other government imposed regulations, and respond to other changes impacting petroleum markets. Turner, Mason & Company has been following refinery construction activities for years and over the last decade has issued regular assessments and forecasts of refining projects on a regional and global basis. One of these products, our Comprehensive Refining Construction Outlook is issued twice a year, and provides a detailed listing of projects, including a “handicapping” of likely completion, quantitative estimates of impacts on both crude demand (by quality type) and product supply (by product category), and a variety of other details on a project-by-project basis. In our upcoming Mid-Year edition of this year’s Comprehensive Refining Construction Outlook we are expanding our coverage to include additional analysis and discussion of the key dynamics we see developing to incentivize new refinery projects and how these drivers will evolve and impact the refinery construction environment. In the words of Paul McCartney, the “long and winding road” of refining activity “will never disappear,” and in today’s blog we provide a brief glimpse at some of these dynamics we will be addressing in more detail in our Outlook.
While many countries desire to have domestic refineries for political or strategic reasons, most new expansion projects are driven by a few dominant factors which impact the global refining industry. In the last 15 years for instance, there have been numerous expansion projects in North America related to rising production rates of heavy Canadian crudes. Increases in Canadian production have been anticipated for many years, allowing refiners ample opportunity to expand capacities. Heavy crudes are priced significantly lower than lighter grades and can create substantively higher refining margins for facilities willing to make the investments. The ability to process additional heavy crude generally involves the construction of new or expansions of existing coking units as well as additional hydrotreating, sulfur processing and even hydrogen generation units.
Just as the wave of new, heavy crude expansion was peaking, the U.S. began to rapidly increase its light crude production from shale basins. This upsurge in output initiated the next wave of refinery expansions in the U.S., designed to take advantage of aggressively priced light and super light grades. The lifting of the crude export ban is likely to reduce the level of very light crude capacity expansions in the future in that incremental light grades can now be exported and allow the importation of heavier grades, which are more compatible with the existing U.S. refining system.
We see similar trends outside North America as well. The Russian refining system is in the middle of a modernization program. Historically, Russian refineries have exported large amounts of unfinished products, but with a shift in regulations, the government has stimulated refining companies to upgrade their refineries and convert these streams to finished products.
The Middle East has long been a rising source of refining capacity, well in excess of the region’s internal product demand. Very large export refineries have recently been completed in Jubail, Saudi Arabia (400 MBPD), Ruwais, UAE (417 MBPD) and Yanbu, Saudi Arabia (400 MBPD). An additional refinery is to be constructed in Jazan, Saudi Arabia (400 MBPD) in 2018, while the region’s largest project, the new Al-Zour, Kuwait refinery (615 MBPD) is slated to be completed in 2021. The region’s abundant crude supply guarantees the competitiveness of the new refineries.
Half of the global refining growth in the next six years will be constructed in Asia Pacific, but even in this region there can be conflicting strategies. Substantive new capacity has been added in China in recent years, but this is likely to slow in the future. Chinese petroleum demand growth is moderating, and the country has a stated objective of only adding new capacity as internal demand rises. China has attempted to temper capacity additions and desires to be neither a refined product importer, nor a product exporter.
Japan is also attempting to balance its refining capacity. Faced with declining product demand, the country is requiring refiners to reduce capacity by linking crude processing rates to downstream, upgrading capabilities.
Capacity additions in India have been somewhat bifurcated. The country has seen a modest increase in government-owned capacity, but dramatic gains have been made in privately held facilities. Reliance has two large refineries in Jamnagar (totaling 1.2 million BPD) and Essar has a 400 thousand BPD nearby in Vadinar. The region has recently become a major refining center and refined product exporter.
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Not all refinery projects are commercially driven, however. Evolving regulatory requirements stimulate many new refinery upgrades. Tier III gasoline regulations in the U.S. will take effect in January 2017, which will reduce sulfur levels from 30 ppm to 10 ppm. This has initiated a number of new desulfurization projects. Many countries are adopting Euro-grade specifications for gasoline and diesel, which also require additional processing capabilities.
One of the most significant regulatory developments in the near future is likely to be the push toward low sulfur bunker fuel (0.5%S) by the International Maritime Organization (IMO). This shift, likely to be in 2020, will force substantial volumes of distillates into the bunker pool to achieve compliance with the sulfur requirements and back out nearly an equal volume of high sulfur fuel oil. A new wave of refining projects will become necessary to rebalance the global distillate and fuel oil markets.
As part of our Crude and Refined Products Outlook, TM&C has been monitoring announced refining projects for ten years. We gather data from company announcements, media stories and press releases and statements from contractors to compile a comprehensive list of all announced projects. The time horizon for this list is generally around six years. Even though the credibility of some of these projects may be low, our comprehensive list is intended to be all-inclusive.
TM&C then compiles a second list of likely projects. Each individual project is assessed a ranking from one to five. Ones and twos are likely not to be completed, while projects with a ranking of three or higher are deemed likely to be constructed and are published in our biannual Crude and Refined Products Outlook. The individual project ranking is subjective and based on several criteria. The past track record and the borrowing of the owners, regional supply and demand requirements, and even political considerations are components of the ranking process.
The current Comprehensive Refining Construction Outlook details 254 individual projects, which include 82 new refineries in the next six years. The total construction cost of this list would be approximately $770 billion. Thirty-six of these projects are in the U.S. and include seven new refineries. If all of these projects were completed, over 24 million BPD of new crude processing capacity would be added through 2021. These additions are designed to process slightly under 39% of both light and medium crude grades while the remaining 22% of capacity will process heavy grades. Over 40% of the capacity additions will be built in Asia Pacific.
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In addition to the crude processing increases, the Comprehensive Refining Construction Outlook details over 1.4 million BPD of coking unit expansions and 1.0 million BPD of hydrocracker capacity gains through 2021. These units would enable global gasoline production to rise by 6.9 million BPD and distillate production by 10.4 million BPD.
As noted at the beginning of this blog, the newly expanded version of our Comprehensive Construction Refining Outlook will soon be completed and available on a subscription basis from TM&C. The list of refinery projects and associated discussion topics will be updated twice a year in conjunction with the publishing of the Crude and Products Outlook in February and August. For more details, contact Shanda Thomas at 214-754-0898.