Refiners struggle to keep up in Latin America
Imports are on the rise across the region as refiners struggle to keep up with demand
The global trade in refined oil products has taken a curious turn in recent months. The world’s two largest crude importers, China and the US, have ramped up exports of gasoline, diesel and other refined products. US refiners are processing more domestic crude than they have in years at the same time demand has fallen. China’s refiners are looking for better margins beyond the tightly controlled domestic market.
It raises the question: if the US and China are selling, who is buying? Increasingly the answer is Latin America and the Caribbean, which has emerged as an important refined products market, particularly for US Gulf Coast refiners.
Latin America was a net exporter of refined products as recently as 2006. But the region has seen that reversed and its imports have soared in recent years. Net imports of refined products in Latin America have grown from around 500,000 barrels a day (b/d) in 2008 to nearly 2 million b/d last year, according to BP data.
The growing reliance on imports is prompting concerns from policymakers wary of the affect increased fuel product imports are having on their trade balances. Brazil’s export-dependent economy, for instance, continues to run a healthy trade surplus, but many analysts are concerned by the degree to which fuel imports are eating into that surplus. The country’s oil and derivatives import bill has risen nearly 25% through the first eight months of this year compared to the same period last year, from $24.1 billion to $29.5bn.
The problem for the region is not crude production. Output has been stagnant in recent years, but at 7.3m b/d it produces more than enough to meet total demand of around 6.5m b/d.
Rather the problem is the state of Latin America’s refining infrastructure. As demand has risen in recent years on the back of relatively robust economic growth, countries across the region have mostly failed to invest in upgrading and expanding their refining bases. In some cases, such as Venezuela, even investment in basic maintenance has been lacking.
The result has been declining refining capacity and utilisation rates and rising fuel imports. In the early 2000s, the region’s refineries regularly ran at around 85% of capacity, but that has fallen to less than 80% in each of the last four years. Last year, a particularly bad year for the region after a series of accidents and natural disasters, run rates were just 76%, according to the International Energy Agency (IEA).
Not only is the region’s refining base not growing, it is actually shrinking. Last year, plants in Aruba and the US Virgin Islands with a combined capacity of nearly 750,000 b/d were shut down. The facilities were geared towards supplying the US market. But as demand for fuel products in the US has fallen in recent years, they were not able to re-orient themselves to serve markets to the south.
And further closures could be coming. The small Caribbean nation of Curacao, off the Venezuelan coast, is debating the future of its 300,000 b/d refinery. The plant is operated by Venezuela’s state-run oil company PdV, but needs significant investment if it is to continue operating.
That investment may not be forthcoming from cash-strapped PdV, which will see its lease for the plant expire in 2019. That would put the burden on the government. Many on the island want to see PdV’s lease lapse and the refinery scrapped. The plant’s rusting twist of steel pipes and belching smoke stacks stand in stark contrast to the postcard-perfect white sandy beaches and colourful Dutch colonial architecture pitched to the world by the country’s tourism board. But the refinery accounts for around 10% of the country’s gross domestic product, so it may in the end be too valuable to the island to let go.
Other smaller refineries across Central America and the Caribbean would likely have to be closed if Venezuela decides to scale back the PetroCaribe programme, which offers crude sales to many countries in the region on very favourable terms.
The region’s structural capacity deficit, however, could end as early as 2018, according to an IEA forecast. The IEA says that companies across the region have new build and expansion plans that would add more than 1m b/d to the region’s refining capacity by then, bringing the total to 7.5m b/d.
But that depends on state-run companies across the region being able to complete a host of major multi-billion dollar refining projects, a tall order that has bedeviled the region to date.
Brazil is emblematic of the dramatic shift for the region and Petrobras will be the most important downstream investor in the region over the coming decade. In 2009, the country produced a surplus of 156,000 b/d of crude and oil products. But by the first half of this year the country was running a deficit of 400,000 b/d of crude and oil products as it struggled to keep up with soaring demand.
In response, Petrobras has started working on a string of new refining projects. First up is the Abreu e Lima facility in Pernambuco state in the northeast of the country. The facility is now expected to start operations in late 2014 at half its total capacity of 230,000 b/d, ramping up to full capacity in mid-2015.
However, the project is already well behind schedule and costs have soared from the initial estimate of $2.5bn in 2005 to more than $15bn. Moreover, it is not clear where financing for the project will come from. In name it remains a joint venture between Petrobras and PdV, but the Venezuelan company has not yet funded its share of the project and has shown no sign that it will be able to do so anytime soon. The project is moving forward thanks to a $10bn loan from Brazil’s national development bank.
There are signs that Petrobras is looking for a new partner, having signed a memorandum of understanding to cooperate with China’s Sinopec on unnamed refining projects in the country.
Though splitting with PdV could prove politically tricky for the Brazilian government, bringing on a new deep-pocketed partner with ample refining experience such as Sinopec could be the shot in the arm the project needs.
After Abreu e Lima, Petrobras hopes to bring the smaller 165,000 b/d Comperj refinery on stream in 2016. Construction began on the project several years ago, but progress has been slow and the expected start-up date has repeatedly been pushed back.
Beyond the Abreu e Lima projects, Petrobras’ downstream plans become less clear. The company has drawn up plans for four refineries with a combined capacity of 1.2m b/d that could start-up between late 2017 and 2020. The projects, though, remain in the design phase and it is unclear if the company will go ahead with those projects.
Petrobras plans to spend $43.2bn over the next five years on just the projects being implemented. Going ahead with the projects currently being evaluated would add nearly $22bn in additional costs. The company is under intense pressure from its minority private shareholders to maximise spending on its more profitable upstream projects. Credit rating agencies have also warned the company about its spiralling debt. That leaves little room for additional spending on refineries.
Venezuela’s position is even more perilous. Once a major oil products exporter to the region, last year’s explosion at the 640,000 b/d Amuay refinery turned the country into an importer virtually overnight. And the country has struggled to recover. What had looked like a temporary reliance on imports while the Amuay facility was restored is starting to look more long term. Purchases from US Gulf Coast refiners rose again this summer after tapering off at the beginning of the year.
Like Petrobras, PdV has a slew refining projects on the drawing board. Those projects would increase its current refining capacity of around 1.3m b/d to just over 2m b/d by 2018, according to the government’s plans. But with the country struggling to maintain its current infrastructure and facing pressure to invest more to boost output from the Orinoco heavy-oil belt, new greenfield projects look likely to take a backseat.
Other projects across the region abound. Ecuador is pushing forward its $12bn 300,000 b/d Pacific refinery. Mexico’s Pemex hopes to build a new 250,000 b/d facility in Tula. Costa Rica has been working on a $1bn upgrade to its lone refinery that would boost output from 18,000 b/d to 65,000 b/d, though that project has been put on hold over environmental concerns. Tiny Nicaragua has even proposed building a Venezuela-backed $6.6bn 150,000 b/d refinery and trans-country pipeline called “Bolivar’s Supreme Dream”.
Two main factors will shape the future of Latin America’s downstream: subsidies and China.
Venezuela famously has the lowest gasoline prices in the world. At around $0.01 per litre, petrol is far cheaper than water. It is the most extreme example, but most countries in the region have significant fuel subsidies in place.
Although politically popular, the subsidies have had two very negative effects on the region’s economies. They have encouraged rapid, and often wasteful, demand growth, which has exacerbated the costs of the subsidies to governments. They have also discouraged investment in refining by making it a loss-making sector in much of the region.
It is telling that the one major exception to the region’s refining woes is Colombia, where fuel subsidies have been cut dramatically in recent years. As opposed to its regional rivals, state-owned Ecopetrol appears to be making reasonable progress upgrading and expanding the Barrancabermeja and Cartagena refineries.
The situation in Colombia, though, highlights the difficulty other countries will face if they try to lift fuel prices. In August, protesting farmers and other workers nearly brought the economy to a standstill, and high fuel prices were one of their central complaints. The protests started a debate in the country’s senate over whether or not to introduce more generous subsidies. In Latin America’s highly stratified economies it is difficult to raise fuel prices without hitting the poorest very hard.
Much to the relief of many governments and state-run companies in the region, China has appeared keen to step into the investment breach. Chinese companies have thrown their support, if not their cheque books quite yet, behind refining projects in Brazil, Venezuela, Ecuador and Costa Rica.
After building up a substantial presence in Latin America’s upstream, China’s state-run companies look ready to move into the downstream as they continue to build global integrated supply chains. The China Development Bank has been keen to provide funding to the sorts of large-scale projects that not only secure a place for China’s big three state oil companies in major projects but also provide opportunities for Chinese engineering and construction companies.
Chinese cash will likely be a crucial factor in whether or not many of the region’s proposed refinery projects ever go ahead.
In the meantime, Latin America’s growing need for refined products has been an unexpected boon to US Gulf Coast refiners. Because of restriction on US crude exports, the country has not directly exported its shale bounty. But refiners have been ramping up refined product exports, and Latin America has been an increasingly important market.
Between 2008 and 2012, exports of refined products to Latin America nearly doubled from 831,000 b/d to 1.61m b/d, according to data from the US Energy Information Administration. Exports to Brazil have more than tripled from 54,000 b/d to 166,000 b/d over the period. Exports to Mexico rose by nearly 70% from 333,000 b/d to 562,000 b/d.
In 2012, exports to Latin America and the Caribbean accounted for more than half of the US’ total refined product exports. The trend has only accelerated in 2013. And it will continue until Latin America’s refiners are able to catch up with its consumers.