At a recent conference organised by the industry journal Platts in Dubai, I was given the opportunity to speak about the expansion of Middle East refineries. Not an easy task due to the multitude of projects at different points of development and where only scant information is available in the public domain.
The refining industry in the Middle East is almost 90 years old when small plants were built in Iraq and Iran by the international oil companies. However, over the years the norm became large plants with some sophistication, especially in certain countries. The capacity of 46 refineries in the Middle East is over 8 million barrels a day (mbd) but there are plans for expansion in spite of the challenges facing this industry not only in the region but worldwide.
In surveying the countries of the region, it is found that refinery distillation capacity may grow from just over 8 mbd now to about 15.5 mbd in the years to 2020. But this is not matched by a commensurate expansion in hydro-treating capacity to produce better products or by conversion capacity to lessen the production of fuel oil. This means the region will remain dependent on fuel oil exports, a product which is under severe constraint all over the world except in our region. Even the shipping industry is to shift from fuel oil in the coming years.
The reason the Middle East still consumes large volumes of fuel oil is because of the lack of gas sufficient to fuel electricity generation. Therefore, fuel oil consumption is to rise slowly in many countries but the faster growth will be taken by the transportation products of diesel, gasoline and jet fuel.
The domestic consumption of refinery products is expected to rise from about 6.6mbd in 2011 to about 7.5mbd in 2020. While the region had a deficit in certain products such as gasoline and diesel in 2011, there will be none with the coming expansion. But still the projected distillation capacity is too high for domestic demand or for the expected rise in exports.
Therefore, I stress the need to review ongoing plans to reduce distillation capacity on the one hand and to reduce fuel oil production to the need of domestic requirements by increasing conversion capacity.
Low profit margins
Domestic consumption is rising due to low and subsidised prices and although there are some moves in some countries to reduce subsidies, the region still has a long way to go.
Refineries worldwide are suffering from low profit margins, with the exception being the years from 2004 to 2008 due to the lack of adequate capacity. Low margins are expected to continue and thus making investment decisions more difficult.
We know how many times the refinery expansion in Kuwait, for instance, was put on hold due to low profitability and rising costs.
Speaking about investment costs, it has risen by almost 100 per cent in the last 10 years and even the decline in 2008-09 was short-lived as costs resumed their upward moves.
On a positive note, many countries have invested in projects to improve diesel and gasoline specification, especially with respect to sulphur level. Yet there is room for further improvement if export markets are to be maintained. Of course, these changes are rightly driven by environmental policies domestically and internationally.
Some countries such as Saudi Arabia, Kuwait and the UAE have substantial investment in foreign refineries. The current capacity of such refineries is close to 6 mbd and the average share of the investing countries is about 50 per cent. While such a policy is good for producing countries to lock the sale of crude oil, these refineries do compete with domestic refineries on exports.
It is not by chance that both Opec and IEA in its annual report forecast the Middle East refineries to increase distillation capacity by 3-3.5 mbd through to 2035 because of increases in other regions, especially in Asia. This is another reason for countries to rethink and restructure some of their projects as surplus capacity may pressure margins further and reduce refinery utilisation.
This is so even if some refineries are destined for closure, especially in Europe, and within the Middle East itself where small and old plants could be binned.
There is no doubt of the role the refining industry has played and continues to perform in the economic and technical development of many countries in the Middle East. But for this to continue vigorously and economically, they have to be aware of changes in the global refining situation and act accordingly.
— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.
