Do we have more oil refineries than we need?
But the adequacy of the refining industry cannot be judged by the distillation capacity alone but by the product demand slate and specification.
Last week I discussed the Opec ‘World Oil Outlook’ report and prospects for supply and demand up to the year 2035. Here, I want to discuss what it takes to bring this oil and turn it into marketable products. The global refinery distillation capacity stood at almost 92.5 million barrels a day (mbd) in 2012 while crude oil throughput was only 72.3mbd, according to BP Statistical Review. Therefore, we already have surplus capacity as evidenced by refinery closures, especially in Europe. However, Opec estimates total addition to distillation capacity up to 2035 at just over 20mbd, which is inclusive of the 8.6mbd of existing projects through to 2018. Therefore, distillation capacity is almost tracing the rise in oil demand in general, although utilisation factor in 2012 was only 81 per cent and expected to be 83 per cent by 2035. This suggests that even if we have additional refinery closures, the estimated distillation capacity in 2035 is quite adequate and even in surplus. But the adequacy of the refining industry cannot be judged by the distillation capacity alone but by the product demand slate and specification.
Oil demand in 2012 of 88.9mbd is 79.4 per cent light (gasoline, naphtha and LPG) and middle distillate (diesel and kerosene and jet fuel), and this ratio is expected to rise to 84.4 per cent by 2035. These products are the main drivers of the transportation sector, where oil still enjoys a prominent position compared to any alternative.
It is true that gasoline demand is falling and may continue to do so in the US and Europe, but growth will come from other regions especially in Asia and the Middle East. At the same time diesel demand is rising much faster than gasoline in all regions, expect for a slight fall in the US and Europe. In contrast, fuel oil demand continues to fall as it has been doing for many decades now. Fuel oil demand in 2012 was 8.2mbd and 6mbd by 2035.
This kind of demand slate calls for further conversion of fuel oil and refiners are expected to add 12.8mbd of conversion capacity (coking, cracking and hydrocracking) in order to meet demand and to optimise the need for crude oil feed. At the same time gasoline related production units (reforming and isomerisation and alkylation) are expected to increase by 5.1mbd to cater to additional gasoline and octane requirements.
But the more dramatic forecast is that related to sulphur level in fuels. It is known that sulphur is the nemeses of fuels because of its corrosive and has an environmental impact, where sulphur oxides are guaranteed to damage health, agriculture and equipment. For these reasons sulphur levels in gasoline and diesel were progressively reduced in industrial countries first and then in developing countries, though at slower rates.
Sulphur content in gasoline in 2013 ranges between 30 parts per million (ppm) in the US and 875ppm in Africa. In 2035 or earlier, the range will shrink to 10 to 55ppm. In our region the reduction is expected from 500 to 10ppm.
Sulphur content in diesel ranges between 15ppm in the US and 3,350ppm in Africa; again the range is expected to shrink to 10 and 85ppm by 2035 or earlier. In the Middle East the level will shrink from 1,130 to 10ppm. Even fuel oil sulphur would undergo reductions to a maximum of 1 per cent.
Such reductions in sulphur level will require a great expansion of hydro-treating capacity and Opec forecasts an increase of 26.9mbd to 2035.
In the Middle East, while distillation capacity is expected to increase by 3mbd, conversion capacity could be up by 1.8mbd and hydro-treating by 4.6mbd, through 2035. I find this forecast conservative and there are others with much higher numbers based on projects which already announced.
Total investment up to 2035 in the refining industry is forecast at $1.5 trillion, of which about $175 billion is estimated for the Middle East. About $600 billion would be spent in Asia, the highest growth region for oil demand, and where product specifications are changing fast.
The time to 2035 is a long one and in the Middle East we may see further increases in refinery capacity as replacement for old refining units if major exporters countries aspire to maintain their standings.
Refineries last many decades and therefore to achieve the objectives in capacity and changes in products specifications, our region should aspire to optimise oil requirements to suit domestic and export markets with proven technology and good management.