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Refining's big expansion

Teapots are vying with the state giants in China, while India and the Middle East are ramping up

Investors aren't doing much to build new refining capacity in Europe and North America, but Asia, the Middle East and Africa are another story. There, demand continues to grow and governments want to cut down on import bills (or beef up export capacity) and improve energy security.

In the first half of 2017, global demand for refined products outpaced expansion in crude distillation unit (CDU) capacity, even without allowing for maintenance shutdowns and output reductions due to technical problems. So capacity utilisation remained high.

The longer-term trend of growth in global CDU capacity was actually interrupted in early 2017, due in part to a scaling back of capacity in Japan. But business as usual is now returning, as China, India, Vietnam and others add processing units. Construction takes time, so capacity will stay tight for now.

Assessing the amount of room for capacity expansion in the Chinese market is complicated by the mix of major state-backed entities and the so-called teapots, independent refiners that provide products for the domestic market. The teapots, which account for around 12% of Chinese demand, had very high run rates at the start of 2017, but their crude imports dipped after the first quarter, implying that the Chinese market was becoming saturated.

Consultancy Energy Aspects notes that this may also reflect greater competition in the domestic market from leviathans PetroChina and Sinopec, which have been discounting products in an effort to boost market share. In the case of Sinopec, the company has been trying to beef up its position ahead of a possible initial public offering in 2018.

Any sign of weakness in demand from the teapots tends to get highlighted by the oil price, as China's independent refiners buy much of their oil on the spot market. The bigger refiners, on the other hand, tend to have their imports wrapped up in longer-term contracts.

The teapot sector could be facing contraction in the face of imminent capacity expansion by the state refiners and a tougher regulatory environment imposed by the government, in an apparent bid to give the state-owned companies an edge.

Eastern promise

India, meanwhile, remains the market poised to expand its refining sector fastest in coming years, even allowing for a recent reduction in estimates of oil-demand growth in the country.

In August, Dharmendra Pradhan, India's energy minister, said the country would absorb 226m tonnes—nearly 5m barrels a day-of refined products in the 2021-22 fiscal year, compared with 205m tonnes forecast for the 2017-18 year.

Bharat Petroleum, Reliance Industries and Indian Oil Corporation are among those reaping the benefits. Indian Oil said in August it plans to spend $2.4bn on capacity expansion at its refinery in Gujarat, in western India. Capacity will expand to 360,000 b/d by end-2021, from 274,000 b/d now. It is part of the company's plan to increase its total refining capacity by almost 90% to 3m b/d by 2030, though a mixture of greenfield projects and refinery expansions.

In the Middle East, Gulf Cooperation Council countries, primarily through projects in Saudi Arabia and Kuwait, are set to add 1.5m b/d of distillation capacity by 2021, according to a July report published by multilateral development bank Apicorp. GCC countries are keen to find new ways to boost revenues from their oil reserves and diversify their economies.

Sub-Saharan Africa is also likely to experience rapid growth in refining capacity in percentage terms, though the region is starting from such a low base in terms of production and demand that it will be years before what happens there has much impact on the global market.

1.5m b/d - New distillation capacity due online in the Mideast by 2021

Nigeria has the biggest potential to expand refining capacity. Despite being the region's largest oil producer, the country imports virtually all its refined products, because its existing refineries have lapsed into decrepitude through lack of investment.

With a recent improvement in Nigeria's investment environment, various companies are now talking about adding refining capacity. In August, Forte Oil said it was seeking to strike up partnerships for local refining. In May, Oando said it was talking to Eni on rehabilitating a refinery in Port Harcourt, one of four in the country. Meanwhile, tycoon Aliko Dangote is already constructing the country's first private refinery, with a 0.65m b/d capacity, in Lagos, with a view to starting operations in 2019.

In Latin America, refinery rehabilitation is also needed. The region absorbed 2.5m b/d of fuels imported from the US in the first quarter of 2017, a rise of almost 8% on a year earlier, in part due to reduced refining capacity at home. Cash-strapped Venezuela's refining output has collapsed—its largest facility has been running at less than half its 0.955m b/d capacity—while Mexico has been seeking more imports following a fire at its largest plant. Meanwhile, in Brazil, a failure by Petrobras to adjust its prices to meet new global norms mean that fuel distributors have been importing US products rather than home-grown ones, as the latter have been more expensive.

This article is part of a report series on Global Refining. Next article is: Storms gather for refiners

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