Middle East takes advantage of slack in US refining

The demand for refined products world over is only going up. The pinch is felt now more than ever, as US has almost stop building any new large refineries. So, Middle East, as expected, comes once again to the rescue.

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By  Adam Porter Published  October 5, 2005

|~||~||~|If Hurricane Katrina is to have a lasting global impact, it could be on the oil refinery industry. As the tempest rode in from the Gulf of Mexico it seriously damaged at least four major US refineries, Pascagoula, Meraux, Belle Chasse, and Chalmette. As a result it knocked out close to one million barrels per day of refined product. This in turn has finally led to the media being able to question the bottleneck in global refinery capacity. Demand for refined products has never been higher around the world. Since the US stopped building refineries 29 years ago its refinery capacity has fallen by around 10%. Yet its intake of gasoline has risen by 45%, and has been joined by energy thirsty China and India. As long as the supply of crude can keep pace, and currently it just about does, increased refining is needed more than ever. To put it into context, the nature of the American and European refinery industry is almost completely moribund. These two huge economic blocs are currently only online to create one more refinery; a 150,000 barrel per day (bpd) refinery in Arizona, whose capacity will only be a drop in the American fuel ocean. This is a country that consumes 27 million barrels of crude every day. “There is just no slack,” says Paul Horsnall of Barclays Capital bank in London. “There really was very little leeway for any accident, any unexpected disruption, [because there is] no spare capacity. Therefore a very heightened transmission of shocks through to prices. And it had already been working like that throughout the summer. Prices had been very sensitive to refinery disruptions already in the US, and it was getting to the point where even relatively small refinery disruptions were feeding through into significant impacts on prices.” As a result, the rest of the world has taken advantage of this lack of global refining capacity and are set to cash in. Right across the Middle East, Indonesia, India, and China new refinery projects are ready to exploit the gaps in the market left by the OECD nations, especially the USA. Saudi Arabia is already a major regional exporter of refined products. Its new Yanbu refinery on the Red Sea is going to be financed to the tune of around $8 billion. It should be online by 2010 at the latest. This will add to the general round of work that is going on in Saudi Arabia on refining operations. The existing refinery at Rabigh is to receive somewhere in the region of a $2bn upgrade in conjunction with the Japanese company Sumitomo. Then the refinery at Ras Tanura is also to be upgraded, at a cost of $1.3 bn. As well as this, Saudi Aramco has been aggressively pursuing refining operations overseas. To add to its existing joint ventures in Greece, the United States, the Philippines, and Korea, the state oil company is looking further afield, notably in China. Here Aramco will work on joint ventures with the Chinese state oil company, Sinopec to create a $1.2 bn operation in Qingdao province. Perhaps most interestingly is the three-way venture between the Chinese state, Aramco, and American company, Exxon Mobil to build a $3.5 bn refinery in Fujian province. This refinery is especially important as it will be built to handle brands of heavy Saudi crude. In other words, the crude that the market currently does not want. The lack of refining opportunities for heavier crudes has hampered both investment and production of the sandier or more sulphurous grades. This is easily seen by the lack of desire on the part of American refiners to take heavy crude. As an excellent example Exxon, BP, and Murphy have all even refused to take the emergency heavy crude on offer from the US government’s Strategic Petroleum Reserve in the wake of Katrina. They do not want it because they cannot refine it. OPEC has also consistently stated that new production is going to come from heavy crudes. The result is that options are closing for the existing industry. Expensive refits may be needed in some countries just to process the oil that is now available, as light sweet crude becomes scarcer. This opens the door for Saudi Aramco and others to start afresh with heavier grade crude oil. So, other opportunities are now presenting themselves to Middle Eastern and also Asian countries. Indonesia is building a new refinery in Tuban, Eastern Java. China of course is undertaking a huge expansion programme including a $3.3 bn build in Dushanzi to process oil from Kazakhstan. Also, India is perhaps the most aggressive nation with $8 bn worth of new refining operations, upgrades, and joint ventures. Kuwait, too, has multi-billion dollar plans. A new $6.5 bn plant near Kuwait City to come online by 2010 will produce a whopping 600,000 bpd. Plus $3.3 bn in upgrades for the Al Ahmadi and Mina Abdullah refineries will mean Kuwait could be producing as much as 1.3 million barrels of refined product every da, within five years. Only in Iraq, where so much uncertainty remains, are new refinery builds and upgrades unlikely. Although one is possible in the Kurdish sector near the border with Turkey, nothing has as yet been finalised. Iran, too, is in desperate need of new refining capacity. It currently imports refined product from Saudi Arabia, amazing for a country so bathed in crude, to the tune of $7 bn a year. Recently Iran announced a 300% upgrade of their Arak refinery, but more may be needed. Yet underlining this sea change is the absolute reluctance of richer nations to become involved in new refinery builds. It may mean Middle Eastern nations do eventually create an over-build in the sector reducing prices. But it is just as likely that it may not. It also means that the next few years may continue to see great price volatility on the back of tight capacity. In the medium term the Middle East could benefit, but it could be a bumpy ride. Paul Horsnell from Barclays Capital said: “If you had a magic wand solution, your magic wand would give you a few more refineries within the US system. That is not going to happen. We’re stuck in an imperfect world. I think...for the rest of this decade...at various points these refining dislocations, refining shortages are going to play a key role in price formation. But in terms of getting more capacity into the system, you have look at it and say, ‘no’. I think the slight shock is when we did check through what are the firm expansions, not just new refineries but expansions in straightforward distillation capacity due in the world over the next five years, and the real shock was...there are no firm expansions in refining capacity, not just in the US but in North America, South America, and Europe. All of the expansions are in the Middle East and Asia.”||**||

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