Last week I discussed the upstream sector of the oil industry as presented to us by the Opec Secretariat report World Oil Outlook 2016. But the upstream sector can go nowhere without that highly technical interface between crude oil production and consumers.

By this I mean the refining industry, of which the report discusses at great length.

Although we often read that there is surplus refinery capacity, we also know that expansion and renewal of this industry is ongoing regardless. Especially in the developing regions “capacity continues to follow demand growth” and nowhere is this more demonstrated as in the Asia-Pacific.

Worldwide, it is estimated that additional distillation capacity of 7.3 million barrels a day (mbd) is likely to be added by 2021. And there may be 12.2 mbd additional requirements leading up to 2040 making the total 19.5 mbd.

Of this, 9.5 mbd is projected to be in the Asia-Pacific, 3.4 mbd in the Middle East and 4.6 mbd “split between Africa and Latin America”. The remaining 2 mbd is shared by the OECD states, East Europe, Russia and the Caspian. Especially in Europe, surplus capacity puts a break on any possible expansion even after the medium term.

This is related to the gradual reduction in demand, increased efficiency of use and the encroachment of non-crude oil streams such as alcohols and biodiesel. The expected refinery capacity increase to 2021 surpasses the “net incremental demand for refined products of 5.2 mbd”. This excess capacity may act to reduce refinery profitability and utilisation rates.

Long-term prospects

In a later period, the “reduction in demand growth rates together with increases in the supply of non-crude streams steadily reduces the level of required refinery additions.”

Thus 40 per cent of total additions are foreseen by 2021 while 60 per cent forecast during the years up to 2040. A slowdown will be the result unless there are more refinery closures and replacement of old refineries increases, a possibility that should be kept in mind.

Therefore, the report tells us that “given the need for continuing closures, the long-term prospects are for an era in which there could be no net increase in global refining capacity, and even the possibility of a net shrinkage”.

Refinery distillation capacity is one thing, but refinery configuration is probably more important to follow. Configuration is defied by the products demand slate and the evolution of petroleum product specifications. The trend is well established towards demand growth for light petroleum products and the gradual demise of heavy fuel oil.

As for specification, the world is destined to complete the programme of producing low and ultra-low sulphur products to protect health and environment and equipment life too.

The Opec report tells us that “firm secondary unit projects to 2021 are significant, with conversion at 41 per cent of new distillation capacity, desulphurization at 70 per cent and octane units at 18.3 per cent”.

But over the rest of the period to 2040 these rates are expected to be 60-, 100- and 25 per cent for conversion, desulphurization and octane units respectively. This trend is even affecting world crude oil trade, where light crude oil is going more into areas of less sophistication.

And heavier sour streams are increasingly going to areas where refinery configuration is well developed with respect to conversion and product specification. This is well demonstrated by the lifting of the crude export ban from the US where its light crude is exported increasingly in lieu of its imports of heavier streams.

It is heartening to know that every major refinery project in our region is sophisticated enough to follow the current trend.

Investment

Now that we know the projections for the up and downstream of the industry, the question must be asked as to the investment required to realise the objectives of the industry. The report estimates global investment up to 2040 to be $10 trillion (Dh36.7 trillion) where $7.4 trillion (in 2015 dollars) is expected to be in upstream, $1.5 trillion in refineries, $0.9 trillion in maintenance and replacement and $1.1 trillion in midstream (pipelines and storage).

The annual average investment is $300 billion, and Opec countries are expected to invest $65 billion a year and the rest of the world would need to invest $235 billion mostly in OECD countries where higher costs in exploration and development and projects are the norm.

There is a need to discuss the up and downside of WOO projections. Let us not forget that there are close 2.7 billion people worldwide who still rely on biomass for their energy needs and 1.3 billion who have no access to electricity.

Any improvement in their prospects could turn current projections upside down and the same goes for the opposite of a worsening situation. Let us hope for the best.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.