Refining margins and utilisation rates are falling in view of a global surplus created by huge growth in refining capacity in India and China, a new report has shown.
The global refining industry has changed in the last decade with a shift in demand growth away from OECD to non-OECD countries, said Saudi-based Jadwa Investment in a report.
“The supply of highly complex and modern refineries, as a way of decreasing dependency on imports, has also increased. India and China have seen a huge growth of refining capacity which has contributed to creating a global surplus, all of which has led to decreasing refining margins and utilisation rates.
“Older and less competitive refineries have therefore been forced to close, with Western Europe being one of the worst affected regions. With the help of shale oil, the US has transformed itself from being the world’s largest importer of gasoline to a major exporter of diesel, further adding to the supply of high quality refined products available in the global market,” Jadwa Investment said.
Regardless of the apparent over supply of global refining capacity, a plethora of refining projects will add around 7mn barrels per day (bpd) of highly complex capacity between now and 2020. This also includes new refineries from Saudi Arabia, which will make it a net exporter of middle distillates (including diesel) by the decade-end, joined by Russia, China, US and India.
Saudi Arabia will see 1.2mn bpd of new refining capacity come online by 2020. This includes the Satorp refinery, which is already up and running, and the Yasref refinery, which will start up in Q4, 2014. This major investment in downstream sector by the Kingdom coincides with a huge growth in modern refineries in countries such as India and China, which will mean that these new export-orientated Saudi refineries will compete in a very tight international market. Investment in the refining sector in Saudi Arabia has been a long term policy goal for the government as it was, and still is, seen as sure way of achieving diversified economic growth and employment for the Saudi population.
At the end of 2013, Saudi refining capacity totalled 2.5mn bpd, the largest capacity in the GCC region, with Kuwait a distance second at 0.94mn bpd.
Since the majority of the Saudi refinery capacity was built before 1990, such assets are older and less advanced and therefore produce a large proportion of lower value heavy distillates (such as fuel oil) comparative to other regions, Jadwa said.
The report noted the changes currently taking place in global refining market, with large scale highly complex capacity coming online will mean that, in the longer term, Saudi refiners will have to look beyond traditional markets such as Europe and Asia Pacific and actively orientate themselves to seeking out ‘new frontiers’ for its refined products, with the obvious destinations being Africa and to lesser extent, due to the distance, South America.