Where are all the refineries going?
The oil majors are selling aged refinery complexes in Europe
Declining demand for gasoline and other petroleum products as well as changes in the legal framework governing the industry may prompt the closure of gas stations and refineries in the months ahead in Japan.
Under the revised Fire Service Law of the country, by the end of last month (February), gas stations that installed storage tanks forty or more years ago will be required to either refurbish or replace them.
The measure is a costly requirement for owners of small stations. A number of refineries are meanwhile closing because of a law enforced in 2009 to improve their international competitiveness.
The trend is generating fears about jobs and local economic problems, as well as worries about how to supply fuel in the event of a disaster. Japan is not the only country that is facing refining closures.
An A.T. Kearney report titled Refining 2021: Who will be in the game? found that a number of refineries in the US and Europe face closure. The report says by 2021, refineries will need to restructure, strategically reposition their assets, or leave the market.
A case in point maybe the widely publicised troubles of the French refinery formerly owned by Shell and now insolvent Swiss company Petroplus, which is due to shut on April 16 if administrators decide that five bids submitted so far, including the Egyptian one and others by Swiss, Libyan and French firms, do not constitute valid offers.
End of last year, the organisation of petroleum exporting countries (Opec) estimated that a capacity of about three million barrels per day will close and under-utilisation will remain “high.”
The permanent closure of refineries, mainly in Europe and the U.S., is unlikely to boost profits from processing crude into fuels as capacity is added in other regions, said the Vienna-based agency.
It is no secret that the European refiners stand squeezed by a 15-year low margin not sparing even the oil giants like BP and Royal Dutch Shell. But Europe loss is Middle East’s toast at least in the refining business. The same AT Kearney report says the Middle East has seen more refineries open since 2005 than any other region.
Many joint ventures have been formed to integrate refining, petrochemical, and chemical plants. Local companies are partnering with international players to gain technical expertise, guaranteed offtake, and reduce exposure to geopolitical risk.
Middle East as a region provides compelling value proposition for new investments in refining.
The region attracts protected state-of-the-art technology, little or no state regulation on processes, enabling tax regime favouring domestic and export production, proximity to deep sea and hence logistics via ultra-large vessels, excellence in banking and above all technology enabled refining of all crude.
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The key features of this region include easier access to capital, proximity to the Asian markets, more flexible standards of health, safety and environmental regulations and most importantly, a reliable upstream partner to supply the feedstock.
In the Middle East region, Saudi Arabia stands out for the number of new refining project that are coming on line including the mega refineries like Jazan, Jubail, Satorp and Petro Rabigh 2.
While upstream integration continues to dominate in the Middle East, most new investment is going downstream, with the majority of refined products being exported.
The continuing trend is toward mega-refining and petrochemical integration, while forming joint ventures for local exports and target-market assets are increasingly becoming part of corporate strategies.
Another macro trend is emerging as talks between Middle East refiners (for example, Qatar Petroleum and Saudi Aramco) and Chinese downstream integrated players (for example, Sinopec) are underway to secure supply for Asia Pacific and outlets for the Middle East—these are the archetypal “win-win” situations, points out the A.T. Kearney report.
The International Energy Agency (IEA) expects the Middle East will account for 17 per cent, or 1.5 million barrels per day, of global new crude processing capacity of 8.7 million bpd to be on stream between 2008 and 2014. Most of it will be export-oriented.
That is an opportunity that has already attracted the same companies that are slimming their European operations. Total and Aramco are building the Jubail refinery in Saudi Arabia, while the French major is considering selling its refineries in Europe or converting them to terminals.
While the shifting of the landscape seems certain, refining excellence is imperative to sustain the advantage as the market gives no one a free ride, and it has become more important than ever to manage risk exposure.