While oil prices are continuing their descent and reaching the lower $60s a barrel, it may be a good idea to look at long term development instead of concentrating on daily events that are likely to change without notice.

Two weeks ago, I discussed the findings of Opec’s World Oil Outlook report, where, by 2040, it assumed oil prices to be at $100 (Dh367) a barrel (in 2013 dollar terms) and demand reaching 111 million barrels a day (mbd). The second part of the report deals with outlook for the refining and downstream sector, where individual petroleum products demand would dictate the evolution of refineries up to 2040.

To forecast future refinery capacity, the report looks at projects already committed and those most likely to go, in addition to what is required to satisfy future demand. Needless to say, t the transportation fuels of gasoline and middle distillates (jet and diesel) represent the greater majority of current and future demand.

Demand for gasoline is forecast to grow from 23 mbd in 2013 to 26.7 mbd in 2040, even though demand in OECD countries in general is forecast to decline due to market saturation and the move towards diesel-driven vehicles. Therefore, demand for middle distillates (jet and diesel) is forecast to grow from 32.7 mbd in 2013 to 45.3 mbd in 2040.

The increase in demand is forecast in all regions of the world but most noticeably in Asia and the Middle East. The period to 2019 is critical as the report says that “existing projects indicate that more than 9 mbd of new distillation capacity will be added globally in the period 2014—19”. These are mostly large-scale complex grassroots refineries where they “will be accompanied by an additional 4.6 mbd of conversion units, 6.5 mbd of desulphurisation capacity and 1.6 mbd of octane units”.

Most of the new refining capacity would be in locations where demand is growing — Asia-Pacific (plus 3.4 mbd) and the Middle East (plus 2.3 mbd).

Unfortunately for refiners, surplus capacity will grow according to the above numbers. Opec estimates that the surplus is probably one-third of the above expansion and the need for capacity rationalisation, already underway, would continue to be needed. This even though 5 mbd of refinery capacity has been closed since 2008 and double that would be needed in the longer run, according to Opec.

In the longer run to 2040, 22.5 mbd of distillation capacity is forecast to be added over 2013 capacity. This looks like a slowing down of capacity addition as compared to the period up to 2019. This would be accompanied by 14 mbd of conversion, 29 mbd of desulpherisation and 6 mbd of octane units capacities over those of 2013.

These units are absolutely necessary to reduce surplus heavy residue and increase light products’ production and meet ever evolving product specification, especially with respect of reducing sulphur levels in all products.

Capacity replacement

The investment requirements for the refining sector do include that for projects identified, projects needed and “the maintenance of the global refining system and the necessary capacity replacement”. Up to 2019, $250 billion would be required and the Middle East share is at $56 billion. A further $450 billion would be needed up to 2040 and the Middle East portion is expected at $62 billion.

But the greater investment requirement relates to maintenance and the replacement of installed capacity, which is forecast at more than $900 billion for the entire period. Therefore, total global refining investment is forecast to approach more than $1.6 trillion, which is huge by all standards and requires the attention of planners and designers as well as government bodies.

The refining industry — that important and highly technical link between the upstream and consumers — is known to be of limited profitability, where margins are often low and sometimes even in the negative. There is therefore a danger to profit margins “if all the development projects are implemented and substantial closures are not made over the coming years”.

It is difficult to estimate the impact of falling crude oil prices over refining margins because they do not necessarily follow the same trend. There may be a surplus in crude supplies, which pressures prices. But there could at the same time be a shortage of refining capacity and margins would go up as was the case in the years around 2004.

Product prices often lag movement of crude oil prices, or depending on the demand may be only marginally affected. But the fall in crude oil prices, if it persists, would make producers think twice about expanding refinery capacity. Some projects could be delayed or even cancelled.

 

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