Feature article
Shell Global Solutions takes a look at the refining sector
16/12/2007
Mike Mitchell, Business Development Director, Shell Global Solutions Middle East
Shell Global Solutions highlights some of the key issues the refining industry is facing
What have we seen in recent years in the oil markets?
In recent years, oil markets have seen record margins in all regions. Subsequently, we have seen refineries operating at high rates in an environment of tighter product specifications and changing product demand patterns, such as a progressive shift to use diesel as the main transport fuel in Europe. The industry is also experiencing renewed activity in capital projects.
What are the key drivers behind those changes?
Demand for light products has significantly risen since 2004, especially in China, but elsewhere as well, including the Middle East, which is quickly becoming a key demand growth region. As a result, refineries are running at near-maximum capacity and under high price incentives following a lengthy period of limited investment in refining due to structural over-capacity and poor margins.
Unsurprisingly, recent unprecedented refining margins have prompted the largest wave of investments in new capacity and product quality seen for the past 40 years. For example, Middle East crude distillation capacity is expected to grow by 1.2 million barrels a day (mbd) by end 2012, compared with end 2006, but may grow by 3.2 mbd if all "probable" projects currently under discussion also proceed. Accordingly, the Middle East is set to be a major product exporter into the global markets, but must invest heavily to meet tighter product quality specifications for certain markets.
Another key driver behind the recent changes in the refining market is that suppliers of crude are struggling to keep pace with growing demand from refineries. Low supply growth from non-OPEC sources is putting pressure on OPEC and its core Middle East members to increase supply in order to meet growth in global demand. As a result, OPEC’s spare capacity has fallen to near-zero levels. Despite the very strong crude prices these tight supply conditions have created, OPEC is still struggling to keep pace with demand due to limited growth contributions from non-OPEC sources, as well as declining production rates and delays in project start-ups.
Some sources – such as the International Energy Agency and the PIRA Energy Group – estimate global oil demand to grow by around 1.9 mbd in 2008 – with OPEC natural gas liquids (NGL)/condensate expected to grow by 0.5 mbd in 2008. Estimates show that with net-zero growth in supply from the rest of the world, OPEC will be called upon to provide supply growth of some 1.4 mbd.
Additionally, heightened geopolitical tensions and increasing climate change awareness are raising the stakes in gaining access to secure supplies of crude. Parallel developments are also taking place in the petrochemicals and power industries, also driven by demand growth for their respective products.
What are the key issues for refiners looking forward?
The challenges that the industry faces in some ways are now very different from those of ten years ago, especially in terms of changing legislation, supply and demand flows and technological innovations.
One of the problems the industry faces is to predict accurately how quickly capacity additions will proceed. Current plans see the global industry upgrading capacity during the next five years faster than at any time since the 1970’s. Current industry data shows that 12% of new refining capacity slated to come on stream by end 2010 is in the Middle East, but over 70% of new refining capacity additions globally are by NOCs, whose agenda is different to IOCs.
Refiners must consider a complex combination of factors when making decisions over the nature, size and location of their future assets. These include: the challenge of addressing growing demand amidst ever-tightening product quality regulations; rising biofuels use; the increasing shift in product splits (e.g. gasoline v. diesel in road transport, the growth in aviation activity); selecting the optimum refining technology; the growing need for economies of scale; increasing need of knowledge of how to strike the right balance in refinery complexity; and shifting geographic balance of demand as western markets mature and new markets grow rapidly in China, India and the Middle East.
New environmental, societal and ultimately legislative pressures are placing growing demands on the refining industry both in terms of how facilities are operated and the net demand for products. Growing acceptance of the need to manage greenhouse gas (GHG) emissions at all levels of society is leading to new legislative mandates, carbon taxes, trading schemes, operating constraints and new technical challenges such as carbon sequestration. These factors will affect the industry and product markets in all regions.
Globally, the focus on green products and solutions is rapidly increasing. The current growth of biofuels poses dilemmas for society as demand for fuel crops places strain on food resources and arable land. It also poses challenges for refiners who need to integrate biofuels into their manufacturing and supply business. Technological developments in fuel consumption are gathering pace, with more efficient engines, hybrid cards and flex-fuel vehicles in the automotive sector, lighter and larger aircraft in the aviation sector, and an increase in the use of gas as feedstock in power generation plants. Whilst all these are all essential developments in meeting the growing energy demands of the global population and reducing the reliance on oil, they all have major implications for the demand of refined products, which the refining industry must respond and adapt to.
Through all these challenges the security in the supply chain is only as strong as its weakest link. Safety, asset integrity and cost-competitive reliability will remain management prerequisites to ensure that maintenance programmes seek to minimise unplanned downtime which undermines the whole supply chain. The challenge remains to do this throughout the margin cycle as costs come under increasing pressure in the coming years and refiners experience escalating operating and project costs.
Conclusion
With all the issues that refiners face the one point that can be established with certainty is that the future is an uncertain place. Challenges facing the industry range from environmental to new legislation, ensuring continued crude supplies as well as responding to changing market demands. Global crude and product markets are increasingly inter-connected and changes in one region in either supply or demand have rapid global consequences.
The refiners that are likely to succeed in the future are those who maintain a global perspective on supply and demand and can manage changing market and regulatory demands effectively through their supply chains. With the growing demand for supplies of crude oil, the near-zero projected growth in non-OPEC supply, increasing difficulties in finding and developing new oil and gas reserves, and the changing geographic balance of product demand and the required refining capacity, the Middle East region is set to play an increasingly significant role in the future crude and oil products markets.
It is a fascinating time to be involved in refining as legislative changes, developments in fuels and new fuels are all vying for a place on the agenda.