The largest-ever expansion of Middle Eastern oil-refining is poised to curb the region’s imports of gasoline, reducing dependence on shipments from India and Singapore and sapping margins for European and Asian processors.
Saudi Arabia, the region’s biggest gasoline importer, will add enough processing capacity to cut purchases of the fuel 50 percent by this time next year, according to a Bloomberg survey of four traders and analysts based on data from state-owned Saudi Arabian Oil Co. The United Arab Emirates expects to become self-sufficient in gasoline when it starts units at the Ruwais plant in 2014, Sultan Al Mehairi, the head of refining at Abu Dhabi National Oil Co., said April 22, while Kuwait, Qatar, Bahrain and Oman are also developing operations.
The unprecedented expansion, which may cost as much as $100 billion in the next seven years, is raising the prospect of a shift in the flow of refined products from a region that accounts for 46 percent of world crude exports. Seeking to cater for populations growing as fast as 4.2 percent in some countries, the boom risks further eroding refining margins at a time when companies such as China Petroleum & Chemical Corp. (386) are already adding to capacity in Asia.
“The Gulf is generally short on gasoline and diesel, and that is set to change in the coming years,” said Robin Mills, who worked for a decade on Royal Dutch Shell Plc (RDSA)’s business in the region and is now head of consulting at Dubai-based Manaar Energy Consulting and Project Management. “They are putting more refining capacity into an oversupplied market,” he said by telephone April 28.
Crack spreads on low-sulfur diesel, or the profit refiners make from processing crude into the transport fuel, have fallen to about $15 a barrel in Europe, from $20 as recently as August, according to Bank of America Corp. Margins in Asia were at about $14 a barrel earlier this week, down from $20 in February, according ESAI Energy LLC, an energy researcher in Wakefield, Massachusetts.
Diesel’s premium to Dubai crude in Singapore has risen this week and gained $1.18, or 7.7 percent, today to $16.39 a barrel at 5:42 p.m. London time, according to data compiled by Bloomberg.
Cracks “will likely remain under pressure in 2013 and 2014,” Bank of America analysts Francisco Blanch in New York and London-based Sabine Schels said in a May 1 report.
Saudi Arabia, the largest Arab economy, will need to import 100,000 to 120,000 barrels of gasoline a day from June through August to meet summer demand, the traders and analysts in the Bloomberg survey said. A joint-venture facility at the port of Jubail will produce 90,000 barrels of the fuel a day after it starts operating next quarter, according to Saudi Aramco, as the state-owned company is known.
Total SA (FP), which has a 37.5 percent stake in the refinery, plans to export to Europe its share of diesel produced at the plant, “depending on economics,” Pierre Barbe, president of the company’s trading and shipping division, said April 22 in Abu Dhabi, the U.A.E. capital. Paris-based Total will also own the same proportion of gasoline that Jubail produces.
Aramco’s output from the plant will be sufficient to cut Saudi Arabia’s need for imported fuel during the summer months, when demand to run air conditioners peaks as temperatures reach 120 degrees Fahrenheit (49 degree Celsius). Even with Jubail, the state-run company will still need to buy some gasoline and diesel, which can be used in generators, according to Robert Smith, a Dubai-based analyst at Facts Global Energy.
An Aramco official declined to comment yesterday. A media official at Reliance Industries Ltd. (RIL), the Mumbai-based processor for which the Middle East is the largest market, didn’t respond to two phone calls on May 7.
Reliance, which operates the world’s biggest oil-refining complex, is seeking to export fuel because margins overseas are higher than those on domestic markets, where it competes with subsidized fuel made by state companies. Aramco bought two gasoil cargoes from India’s Essar Oil Ltd. (ESOIL) in March, two traders familiar with the transaction said March 7.
Saudi Arabia is likely to compete with Indian refiners for sales of cleaner-burning diesel fuel into Europe, while both Gulf and Asian processors will target new markets in East Africa, where demand is growing, Neil Beveridge, head analyst for oil and gas in the Asia-Pacific region at Sanford C. Bernstein & Co., said by phone from Hong Kong on April 30.
Indian refiners supplied 85,000 barrels a day of diesel to Saudi Arabia last year, Vivek Mathur, a researcher at ESAI Energy, said in an April 22 report. The desert kingdom imports 150,000 barrels a day of the fuel, according to two of the traders and analysts surveyed.
“It’s a question of increased competition for these refiners, and they’ll have to find new markets,” Mathur said by phone May 7. “You’re seeing increased competition for low-sulfur diesel in Asia and that’s already impacted margins. In Europe, we’re seeing softening gasoil spreads because of rising supply and slower economic growth.”
Aramco is leading the Gulf in building refineries, with plans for three facilities adding 1.2 million barrels a day of capacity. Regional expansion projects in the six Gulf countries would raise combined processing capacity to about 7.6 million barrels a day from 4.3 million barrels, according to data compiled by Bloomberg based on information from the companies.
Surging domestic demand may absorb some of the new production as populations grow annually by 1.5 percent in Saudi Arabia and as much as 4.2 percent in Qatar. Middle East refining will expand over the rest of this decade with the biggest addition of capacity planned in 2018, according to Singapore-based Facts.
Even if some facilities are delayed, Chinese refiners alone will add 555,000 to 690,000 barrels a day of capacity this year, according to Bank of America and Barclays Plc. A slowdown in China’s economic growth would probably boost exports of the Asian country’s fuel, the banks said.
Aramco itself is a partner in a 240,000 barrel-a-day refinery and petrochemical complex in China’s Fujian province with China Petroleum & Chemical and Exxon Mobil Corp. (XOM:US)
“Refining capacity is growing strongly in India, China and the Middle East, and that’s creating downward pressure on refining margins in the coming years,” said Beveridge. “We are into a weaker margin environment for the next few years.”
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