“If You Build It, He (They) Will Come” – A Focused Look at Global Refinery Construction Activity
By John Mayes and Michael Leger
The iconic line in the title of today’s blog worked miracles for Iowa corn farmer Ray Kinsella (Kevin Costner) in the classic 1989 baseball movie, Field of Dreams. But it’s not so easy in the real world, and specifically not in the petroleum refining industry. It is true that with petroleum continuing to supply the majority of the world’s growing demands for energy, particularly for transportation, refineries will have to be built and expanded in major ways over the coming years. However, those expansions have to be done in ways consistent with petroleum product demand growth patterns. In addition, the expansions have to take into account changes in crude production and the quality of that crude. Building a refinery is also a bit more complex and expensive than hacking a baseball diamond out of a cornfield, so financing sources, relative construction costs, logistics and a host of other factors will determine if a given project will ultimately be built, or whether it will end up as just a “dream” in the minds of the project sponsors. Turner, Mason & Company has been monitoring global refining projects for over a decade as part of our Worldwide Refinery Construction Outlook (WRCO). This product, which we have expanded in our most recent edition, includes an analysis of virtually all of the refinery projects currently being considered around the world. An in-depth look at all of the factors mentioned above (regional product supply and demand, crude supply dynamics and capabilities, project sponsors, construction costs, etc.) is used to determine which of the 250+ projects examined have the greatest probability of moving from dream to reality. We also forecast start up dates, the ultimate cost of the project and its impact on product and crude S&D by product type and crude quality. In today’s blog we will highlight some of the methodology we employ and the outcomes of our recently issued version of the WRCO.
“You’re going to lose your farm, pal”
Between now and 2021, global hydrocarbon demand is expected to increase by about 6.7 million BPD. This represents an annual increase of slightly over 1.1 million BPD. Global refiners on the other hand have announced new refinery additions or expansions to existing refineries which would add 22.4 million BPD of capacity for the same time period. This imbalance is made even worse by the reality that alternate fuels (ethanol, biodiesel, CNG, LNG, etc.) are expected to grow by 700-900 MBPD through 2021. This means that announced refining additions will grow at a rate of nearly three and a half times as fast as global petroleum demand. Clearly, not all of these projects can be economically built and undoubtedly the majority will only be “dreams.”
Our current list of announced new refineries and expansions encompasses 252 projects (our Announced list). Not all of these projects include crude-processing additions, as many are focused on improving product slates either in grade shifts or sulfur reductions. One-third of these projects are new refineries, while the remaining are expansions to existing sites.
“If you build what, who will come?”
Asia Pacific has the largest number of new projects (68) and represents slightly more than a quarter of the total list. The U.S. is second at 41. The largest of the announced global additions are the new refineries in Al-Zour, Kuwait (615 MPBD) and Kitimat, Canada (550 MBPD) and the expansion of the Essar complex in Vadinar, India (500 MBPD). If all of the projects were completed, the total cost would be slightly under $740 billion. This would equate to an annual construction expense of nearly $125 billion.
“I never got to bat in the major leagues”
A batting average of .300 (a base hit 30 times out of every 100 official at bats) is a mark of excellence for a major leaguer and history bears out that this is not too bad in the refinery construction world as well. Many projects are announced without sufficient financial backing, face significant regulatory obstacles or simply represent a concept rather than a well-defined construction venture. In many parts of the world, announcements of new projects are more of a political statement than an actual project with a realistic timeline.
At TM&C, we use multiple criteria to assess the likelihood of construction for each of these 252 projects. In order to sort out the winners and losers, we have established a Probability Index with a scale of one to five. A one would represent a project with the lowest likelihood of completion, while a five would be the highest. Projects with a five are generally those well into construction. The criteria which set the Probability Index for each project are the funding capabilities of the principals, the level of detail in the announcements, the historical track record of the principals in completion of other projects, regional crude and product balances, and perceived environmental and strategic obstacles. The amount of crude-capacity additions for each ranking is shown in Figure 1.
Projects with a ranking of three or higher (in our Probable list) are deemed likely to be constructed and are included in our biannual Crude & Refined Products Outlook, released in July. Only one-third of the crude-capacity additions are ranked as three or higher.
“The Voice is back.”
There are 132 projects in our Probable list including 26 new refineries. The total crude-capacity additions total 7.4 million BPD. With a utilization rate of 90%, this would increase global crude runs by 6.7 million BPD or roughly equivalent to the global demand increase. The increase in alternate fuels will likely be absorbed by refinery closures or utilization rates of less than 90%.
As with the Announced list, the bulk of the Probable projects are to be constructed in Asia Pacific. The region has 30% of the new projects, but these comprise 46% of the additional global crude-processing capacity. The Middle East has fewer projects, but they are generally much larger in size. The average project in the Middle East will add nearly 128 MBPD of capacity, while the average Asia Pacific project will add 88 MPBD. The average project in the U.S. will add only 18 MBPD. Figure 2 is a regional comparison for the two construction lists.
“It has been erased like a blackboard, rebuilt and erased again.”
The need to build, expand and modify refineries will continue as product demand grows, aging facilities in less opportune places close, market conditions change, and new regulations are imposed. A variety of sponsors will develop projects to attempt to satisfy these market forces. The success of these projects will depend on a complex set of factors, and ultimately be determined by how well the projects satisfy the true market forces, how well financed those projects are and in some case even a bit of good fortune and good timing will play a major role in their success. A detailed analysis of current projects being considered is featured in TM&C’s 2016 Worldwide Refinery Construction Outlook, which has just been completed. This product includes specific details on each of the projects, a handicapping of the probability each project will be successfully completed, and a comprehensive discussion of the factors which will determine that success. If you would like more information on this or our other products, please go to our website, send us an email or give us a call.