By John Auers and Andy Hill
In recent years refiners around the world have found lots of reasons to invest in new refinery projects. Strong demand growth in the developing economies of Asia led to significant expansion, particularly in China and India. A similar dynamic influenced the development of multiple projects in Latin America in an attempt to reduce their dependence on imports, although many of those projects have run into significant hurdles. Middle East counties, looking to leverage their abundant crude production developed multiple projects, many very large, both to supply rapid internal demand growth and the growing markets in Asia. Even the U.S. had seen an uptick in capacity expansion, fueled by booming production both in new Light Tight Oil (LTO) basins and in the oil sands regions of Western Canada. However the downturn in crude markets beginning in mid-2014, combined with a fear of slowing product demand, has led to a marked slowdown in refinery investment plans over the last couple of years. This is particularly true in the Middle East, where declining oil revenue is limiting the ability of oil producing countries to fund megaprojects like the Jubail, Yanbu and Ruwais refineries of recent years. With the decline in North American production prospects, projects in the U.S. are drying up as well and cost/schedule overruns in in Latin America are putting a damper on new project development in that region
2017 certainly seems to be setting up to be another dynamic year for the oil industry. Crude prices now seem to be rebounding, stimulated by what looks like renewed seriousness within OPEC to restrain production. But with a significant overhang of crude still in storage, headwinds are significant. Demand is also a question mark and dramatic developments in the political environment around the world (not the least of which has been the surprise election result in the U.S.) are setting things up for another volatile year. In light of this very uncertain oil market environment, along with recent instances of projects which have been economic failures fresh in the minds of refiners around the world, caution in regards to capital planning is becoming a coming theme as refiners take a cue from the classic Who tune – We Won’t Get Fooled Again.
TM&C follows refinery construction developments and activity on an ongoing basis, with that research being rolled into our Outlook that will be released in early February. In today’s blog we provide a brief synopsis of our analysis, considering all of the theses discussed above.
Just Like Yesterday – A Review of 2016 Projects and Developments
2016 certainly wasn’t bereft of construction activity or start-ups, although there was a noticeable slowdown in new project announcements and even a pickup in project cancellations. For the first time in the last few years there were no major (200 MBPD+) grassroots refinery start up in 2016, although several key expansions were completed. Asia again saw the greatest level of activity, with a total of 520 MBPD of refinery capacity added, although that is lower than seen in most recent years. Additions in the Middle East, which had been the sight of 3 major new refineries in Saudi Arabia and UAE in the last three years were down to 240 MBPD. In Latin America, the long awaited 85 MBPD expansion and modernization of Ecopetrol’s Cartagena refinery was completed early in the year, although not until after significant delays and cost overruns. Europe and the developed countries in Asia/Oceania continued to see very little new construction, while closures of existing facilities continued (most notably Total’s 150 MBPD refinery in La Mede, France). The U.S. stood out from the rest of the developed world in that total capacity was increased by almost 300 MBPD, mostly as a result of a number of projects designed to increase refiners capabilities to process Light Tight Oil (LTO).
Perhaps more notable than project start-ups was the cancellation or indefinite postponement of several projects. Many of these were in Latin America, with the most prominent of these being Pertrobras’s projects in Pernanmbuco and Rio de Janeiro. These were among the most important cogs in Brazil’s plans to reduce dependence on product imports. In Pernambuco, Petrobras was able to complete a Phase I start up (115 MBPD) of the Pernambuco refinery back in early 2015, but only after significant delays and cost overruns. That capacity was supposed to be twinned with another identical 115 MBPD plant in 2017, but due to continued construction issues, the second phase has been postponed to at least the early 2020s. The COMPERJ Phase 1 and II projects in Rio de Janeiro have run into even more complications. Together these projects were slated to add up to 465 MBPD of refining capacity, but after expenditures of at least $15 billion, no progress has been made and the projects have been indefinitely postponed. These projects serve to highlight the difficulty in executing complex refinery projects in many (if not most) emerging economies. Projects in other countries in Latin America, including Mexico, along with Asia (notably Indonesia and Vietnam), Africa and the Middle East have also run into significant problems and the downturn in oil markets and uncertainty regarding demand growth has made it even more difficult to find financing for new projects.
The Change it Had to Come – What’s in Store for 2017 and Beyond
Given the uncertain and difficult environment, refinery projects to expand capacity will continue to face significant challenges. However with environment standards, particularly in regards to fuels specifications, growing ever more stringent, a new emphasis on clean fuels projects is taking place globally. The two largest consumers of transportation fuels, the U.S. and China, both have new, lower sulfur specifications which go into effect on January 1, 2017, and a number of projects have either recently been built or are in construction to allow refiners to meet those standards.. Fluid catalytic cracking units (FCCU’s) are generally the main focus of these projects.. Refineries can add gas oil hydrotreating for the FCC feed, but most choose to selectively treat the product streams. FCC gasoline hydrotreating is a bit tricky – a normal hydrotreater would cause significant octane loss due to hydrogenation of a high-olefin content stream. Technologies such as S-Zorb (now owned by the Chinese) and Selective Hydrotreating accomplish the desulfurization necessary with minimal octane loss. Other refineries may need to desulfurize the straight-run gasoline and/or pentanes instead. It is important to note that every refinery is different and will require different investment solutions..
With oil prices expected to stay low, investment in refining capacity in the Middle East will continue to suffer over at least the next couple of years . Some exceptions are condensate processing projects in both Iran and Qatar that are expected to start up in 2017. The Iranian project is the third 120 MBPD phase of the Persian Gulf Star, the first two phases of which came online 2016. The Qatar project is designed for 146 MBPD. Both of these will contribute heavily toward the lighter products – LPG and gasoline, with some kerosene and diesel production. Looking out another two or three years, the largest project on the horizon in the region is Aramco’s Jazan refinery, a 400 MBPD project in southwestern Saudi Arabia which we forecast will start up in 2019, but which could start up a bit earlier or later depending on developments in the Kingdom.
Globally, the largest capacity expansion in 2017 is expected to occur in China with the start-up of a 200 MBPD refinery by PetroChina in Anning city, Yunnan province. This project was originally slated for 2016, but due to delays, completion has been pushed back to 2017. While some other refinery projects are continuing to be developed in China, overall capacity growth will continue to slow from the breakneck pace that prevailed over the last 15-20 years. That growth, which led to a tripling of capacity and China’s ascension to a clear #2 position worldwide (behind the U.S.), was driven by a desire to aggressively keep pace with its petroleum demand growth. With the tempered economic growth and transition to a services-based economy, Chinese product demand growth is slowing , as is refinery development.
But sitting in the wings, is India, which is potentially ready to take the mantle of capacity growth from China. Already in the past several years, Indian private refiners Reliance and Essar have very successfully built world scale refineries, with Reliance’s Jamnagar refinery complex the largest facility in the world. Indian government owned refiners are looking to join the party, and the announcement in recent months of a major project by the combined forces of IOCL, HPCL, and BPCL to construct a complex on the scale of Jamanagar in Maharashtra certainly bears watching over the next few years.
TM&C’s Outlook
TM&C tracks refinery construction activity on a regular and ongoing basis. We keep tabs on all project announcements, utilizing all publicly available sources and then handicap each as to their likelihood of coming to fruition over the next five years (through 2021). For each project, we analyze and estimate key details and market impacts. In each case our handicapping and project analysis considers regional issues, refinery ownership, competitive positioning, and other key factors of the project. TM&C provides a breakdown of the following categories listed below:
These breakdowns are increasingly valuable when completing a long-term balance of product supply vs. demand. On the supply side, it is also of value to understand the capabilities of the world’s refining system with regards to light, medium and heavy crude versus production growth for each of these types of crudes. Imbalances are useful in determining pricing pressures upward or downward for crude differentials in future years.
TM&C will be issuing its next Crude and refined products outlook in February. Among other things the Outlook will include TM&C’s detailed analysis of refinery construction activity over the next five years. This is a key input into the global and regional price forecasts for both crude and products which will also be included in the Outlook. We also use this market analysis to assist us in specific engagements for clients in all segments of the oil industry. Please feel free to contact us regarding either the Outlook or any other industry analysis work that we do.