LONDON: Refinery project cancellations have accelerated in recent weeks as escalating costs raise more questions over the future profitability of new units making key transport fuels.
Kuwait’s energy minister said on Tuesday the Gulf Arab state might scrap a plan to build a 615,000 bpd oil refinery and upgrade its existing Shuaiba plant instead.
State refiner Kuwait National Petroleum Co had said on Monday it would reissue a tender for a new refinery soon, after it deemed bids in the first round too costly.
Earlier this month, Russia’s Lukoil and Austria’s OMV scaled back their Turkish refinery plans, while Angolan state oil company Sonangol ended talks with China’s Sinopec on a new refinery in the southern African country.
The cancellations form a growing global trend of both new plants and refinery upgrades being shelved due to swelling costs, a shortage of engineers and uncertainty about future returns.
“We’ve seen costs of both new projects and add-ons three times higher than they were previously due to rising costs,” said Damian Kennaby of Texas-based oil consultancy Purvin & Gertz.
“Many companies are therefore thinking twice and asking ‘do we really want to go ahead with these projects’.”
But while shelved expansion plans will cut into future refining capacity, some analysts said they had already factored in such a scenario into their expectations.
“When we talk to people who build refineries, they tend to say they’re rushed off their feet and will be for several years,” said David Martin, refining analyst at the International Energy Agency (IEA). “It’s not a surprise that some of these projects are falling by the wayside.”
The IEA in its medium-term oil market report last month lowered its prediction of new refinery crude distillation capacity between 2006 to 2011 to 10.2mn bpd: 82,000 bpd lower than its initial forecast last July.
The Paris-based agency, which advises 26 industrialised nations on energy policy, said last July that 15.2mn bpd of new refining capacity had been announced for completion before 2011, but expected just 10.3mn bpd to be completed.
Lukoil said last week it had suspended plans for a new refinery in Turkey, while OMV said it was open to scaling back its participation in a refinery it aimed to build in the same country. Both companies had announced their Turkish project plans less than a year ago.
The cancellations and delays around the world follow years of rebounding refinery profit margins driven by accelerating transport fuel demand in countries including China and the US. That strained refiners’ capacity to supply sufficient volumes of oil products such as diesel, gasoline and jet fuel, prompting a wave of expansion plans to meet the shortfall.
But as new capacity has started to come on line, analysts and refiners have started to fret over future profitability.
“We are not very optimistic as far as refining margins are concerned,” OMV chief executive Wolfgang Ruttenstorfer said last week. “Over three to four years, they could come down.”
While expectations of lower returns may prompt the shelving of projects still on the drawing board, upgrading work already under way would continue and take priority, analysts said.
“Anything due in 2008 will not be cancelled,” said Mike Wittner, oil analyst at Calyon investment bank. “There’s a lot of crude distillation capacity due next year, and this will put pressure on cracks.”
Beyond that, the IEA last month raised its forecast for capacity expansion in 2009 by almost two-thirds to 1.9mn bpd because it expected Reliance Industries’ expansion of its Jamnagar refinery in western India to be completed that year, earlier than
expected.
“We brought the start date forward because they made better progress than we’d expected,” the IEA’s Martin said. “It’s not all doom and gloom.” –Reuters
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