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The next glut for refiners

Margins will suffer, with refiners about to add even more distillation capacity that the world probably won’t need

Global refining capacity is about to surge, a legacy of decisions made when the oil price was high and demand for products looked rosy. Quite how much more processing the world will have by 2020 is, however, up for debate. The downturn is likely to delay some projects. Even then, the world probably has enough distillation capacity to tide it over for several decades to come.

Opec, ever convinced of oil’s relentless growth, says 7.1m barrels per day of new distillation capacity will come on stream in the next five years – most of it to be built in the Middle East, China and the rest of Asia-Pacific. 

That equates to around 1m to 1.4m b/d of new capacity each year – a pace of growth that will probably be greater than that for demand. In 2014 global refining capacity rose by around 1.3m b/d. The Middle East on its own accounted for 0.74m b/d. 

Growth upon growth

The region isn’t stopping there; another 1.9m b/d are due online by 2020. This includes International Petroleum Investment Company’s 200,000 b/d Fujairah project in the UAE, which is due for start up as soon as 2018. Bahrain Petroleum Company plans to add 100,000 b/d of new capacity at its Sitra refinery, boosting it to 360,000 b/d, although a final investment decision, expected last year, has yet to be made.

China originally had plans to add 2.2m b/d of distillation capacity by 2019 – but the economic transition underway in the country has reduced the need for much of that. China will now add about 1.6m b/d. This includes Cnooc’s expansion of the Daya Bay refinery in Huizhou, which will increase capacity from 250,000 b/d to around 460,000 b/d by 2017. Sinopec and Kuwait Petroleum have plans to bring on stream a fairly substantial 300,000 b/d refinery at Zhanjiang, in Guangdong province, in 2018. 

Elsewhere in Asia, another 1.4m b/d of capacity is also due by 2020, says Opec. Smaller additions will come in North America, Europe and Africa.

Reassessing potential

That’s if the latest set of plans all happen on time. Opec has already downgraded its outlook for capacity additions, and may do so again. It originally expected the increment to be around 9m b/d.  Of the projected 7.1m b/d it now expects, only around 1.6m b/d is now under construction and another 1.9m b/d nearing that stage. That leaves about 3.6m b/d of planned distillation capacity that could and may well yet be scrapped.

Latin America, at least, won’t add to the glut. Its 0.6m b/d of planned capacity additions by 2020 will be “almost identical” to the increase in demand, believes Opec. But there, too, the oil price is ruling the roost. 

Pemex had planned to add deep conversion coking units to three of its six domestic refineries as part of a $20bn upgrade. But the project is now on hold. 

Petrobras said last year it had delayed construction of the Abreu e Lima refinery and Rio de Janeiro Petrochemical Complex while construction contracts were renegotiated following a corruption scandal.

Going for broke

A more realistic outlook for total global capacity additions may be in order. JBC Energy, a consultancy, says growth will be just 4.08m b/d in the next five years, the bulk (about 2.3m b/d) in Asia. This would bring total global refining capacity to 97.4m b/d by 2020. Middle East additions will amount to just 0.6m b/d by 2020, it says – less than a third of Opec’s projection. The Americas will account for another 0.7m b/d. 

Europe will be the only region to lose capacity with 80,000 b/d coming off line by 2020, expects JBC, as margins weaken and projects are shut down.

For its part, BP reckons that existing spare capacity, combined with the planned additions of the next five years, will be more than enough to compensate for demand growth of just 10m b/d over the course of the next two decades. Continued investment in new capacity would send refinery margins into a lengthy period of volatility, and the market may not be well enough prepared for that. 

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