New refinery projects will help steady market

As oil prices hit $100 a barrel it is easy to conclude there is not enough petroleum to go round. Producers though have long argued the increase is not just a result of accelerating international demand for crude, particularly in emerging economies, but also due to a chronic world shortage of refining capacity. This shortfall, they say, has added to oil price volatility and exacerbated the effects of high demand and uncertainty over petroleum supplies and not least the effects of speculation in forward markets. “Nowhere along the value chain do we see capacities as tight as they are in the refining sector. Crude oil is of little use to the average end user until it is refined into useful products, and at the moment, our industry’s ability to do that is being stretched.” says Saudi Aramco’s Chief Executive Abdullah Jum’ah. According to Organisation of Petroleum Exporting Countries “the market volatility witnessed in recent months has been to a large extent the result of imbalance between the available refining capacity and the demand for petroleum products. Until the necessary investments are undertaken in the downstream sector of the industry, volatility is likely to remain a feature of the oil market worldwide.” Refinery capacity globally has not increased in line with demand because until relatively recently, low or negative margins have dissuaded most refiners from investing in new plants, while environmental regulations in the main consumer markets have barred any new refineries being built. No new refineries, for example, have been built in the United States for 30 years or for about 20 years in Europe. The resulting decline of spare refining capacity has added to supply bottlenecks. Total world refined output is some 86 million barrels a day. However, on present trends output will need to rise to 93 million bpd by 2010 and grow to 113 million bpd by 2030 to meet a global demand that is now driven as much by the energy needs of emerging economies as much as demand in traditional industrial countries. The International Energy Agency (IEA) says a third of the additional investment in capacity will be needed in the Middle East and in China. Any easing of supply constraints will depend on the nearly 70 new refineries planned by oil companies and producers being built. This involves an overall investment commitment of some $300 billion (Dh1.1trn). According to Claude Mandil a former executive director of the IEA there is general recognition now that the lack of spare capacity in refining combined with the shortage of spare capacity in crude production comprise the key factors that have to be managed in order to rein in high prices. The bill is going to be huge. About $160bn needs to be spent on developing downstream capacity over the next decade as well as a further $150bn on maintaining existing plant and replacing out-of-date units. Saudi Arabia and other Gulf oil producers have accepted the challenge and risks involved with a wave of refinery expansion projects under way or planned. At present, the Middle East and North Africa account for less than 10 per cent of world’s oil refining capacity in spite of controlling about half the world’s petroleum reserves. They now see a window of opportunity to take advantage of strong margins and take more control over international oil prices as a result, and thereby reducing the effect of speculation by commodity brokers. It is not going to be an easy task. The Opec wants to see additions of about four million bpd to its members’ refining capacities by 2010. Saudi Arabia holds the bulk of Opec’s spare oil output capacity but most of its unused capacity consists of heavy sour crude that refiners find difficult to easily process into transport fuels. But if the schedules are met, Opec country investments may add 5.9 million bpd to global refining capacity by 2011. Significantly, the new production capacity planned in the GCC will be predominantly for the high-sulphur sour crude, which only a small proportion of the world’s oil refineries are equipped to process. While the investments required are huge, by developing the refineries themselves, the Gulf countries can set the conversion yields to produce the high demand, light products that world markets increasingly seek. Kuwait National Petroleum Company is modernising its Al-Ahmadi and Mina Abdullah at a cost of $3bn, which will increase refined products capacity to 1.4 million bpd from 915,000 bpd at present. A major boost to capacity will result from a planned 615,000 bpd refinery to be located at Al-Zour, 100 kilometres south of Kuwait City. Some 30 companies are bidding including France’s Technip, the US’ KBR, Bechtel, Foster Wheeler and Italy’s Snamprogetti. At 615,000 bpd the refinery would be the largest ever built and exceed the processing capacity of Saudi Arabia’s Ras Tanura plant, which is currently rated at 550,000 bpd. The growing focus on refining is seen thr