Global refining industry to reach $7.78trn, with good growth potential
The global oil and gas refining and marketing industry is forecast to reach an estimated $7.783 trillion in 2017 with a compound annual growth rate (CAGR) of 6.7 per cent during 2012-2017.
The market reached an estimated $5.027 trillion in 2011, according to a report.
Asia Pacific (Apac), followed by the Rest of the World (Row), dominates the industry, and with continuous improvement in the economy, there is good future growth potential as well.
As per the Research & Markets study, these companies are faced with certain challenges such as increasing use of alternative sources of energy and stringent environmental standards and compliance costs that affect the operating margins of the companies.
Despite the weakening economic performance of the European region and decline in its oil consumption in the fourth quarter of 2011, the oil and gas refining and marketing sector grew in 2011.
Rise in living standards, growing population, and emerging economies are the major drivers that are increasing the demand for petroleum products in the Apac region.
India and China are seen as the largest potential market opportunities.
In order to satiate these demanding markets and to expand their business, companies have often established strategic partnerships with domestic concerns.
BOOM TIMES AGAIN
Meanwhile, booming fuel exports are reportedly bringing profits back to the oil and gas refining sector.
Strong exports of gasoline, diesel and other fuels are transforming the economics of the refining industry, at least for the time being.
Last year, oil and gas major ConocoPhillips rid itself of its refining operations, spinning off its entire downstream business segment to form the new Phillips 66 company.
When that decision was made, the reasoning behind it was sound – oil and gas exploration and production were booming, but refineries were struggling with managing tight profit margins in the face of flat-lining US demand for refined products.
Back then, refining was seen as a tough business model – refineries were squeezed between rising prices for their feedstock crude oil, a fact they couldn’t control, and trying to pull a profit by selling finished products into a US market that had all it needed, while actually cutting back on consumption.
But the tables are turning lately, thanks almost entirely to booming exports.
Oil firms with refining operations including
ExxonMobil got a lift Some of the largest oil and gas companies are reporting that their first-quarter earnings have taken a hit compared to last year because of softer oil prices.
But those with refining operations got a lift, helping to offset the reduced income from oil sales.
ExxonMobil and Royal Dutch Shell are among those reporting this effect.
And downstream companies like Valero and Marathon Petroleum reported rising earnings as sales of refined products abroad soared, even as they continued to stagnate domestically.
The reason, say analysts, is that rising oil production is coming up against infrastructure constraints, depressing the price of much domestic crude oil.
Meanwhile, refineries are increasingly able to offload this cheaper surplus crude in the form of refined products that are more closely tied to higher international crude oil prices.
“The world price for these refined products is more closely tied to the world price for oil,” explains Edward Hirs, an economist at the University of Houston.
Data compiled by the US Energy Information Administration (EIA) show the dramatic rise in exports of refined products.
Back in 2005, EIA estimates, US refineries sold roughly 1 million barrels a day (mbpd) of finished petroleum products to foreign purchasers.
That number has since nearly tripled.
EIA puts average 2012 finished petroleum products exports at more than 2.6 mbpd.
Many market watchers, including Hirs, believe overseas sales are now closer to 3 mbpd on average.
Hirs says that the curtailed demand for fuels in the US has almost entirely been swallowed up by stronger demand overseas and exports to those new demand centres.
PROOF IN THE PROFITS
The sharp increase in sales abroad is now showing up on refining companies’ income statements.
Marathon Petroleum, an independent spinoff from Marathon Oil, reported a 22 per cent jump in quarterly earnings for the first three months of this year over what it reported for the same period in 2012.
Likewise, Valero Energy turned a $432 million loss for the first quarter last year into a $654 million profit for first quarter 2013.
For major vertically integrated energy companies, the boost given by refining operations helped to keep stagnant or declined year-over-year earnings from becoming worse.
Shell says its 6 per cent net earnings decline for the quarter would have been worse were it not for the strong performance of its downstream operations.
ExxonMobil reported the same when explaining to investors its flat financial performance, growing earnings year over year by 1 per cent.
Robert Sharp, an analyst who tracks this market for the energy pricing and information firm Platts, agrees that it’s the solid export numbers that are benefiting the refining industry.
“As late as June 2011 we were a net importer of products,” Sharp notes.
“Now we’re a net exporter.“ Gasoline prices have declined in the US recently, following the decrease in oil prices.
But the profit margins for refineries able to sell into overseas markets have stayed healthy, Sharp says, benefiting refining companies while simultaneously depressing earnings for producers a bit.
As the US inches closer to becoming a net energy exporter, because of refined products exports that are not restricted by law, it’s “just common sense” that the booming export market is causing domestic fuel prices to be higher than they otherwise would be, Sharp says.
“If they didn’t export so much, we’d be swimming in gasoline, and then the margins would come down,” he says.
He also noted that refining capacity in the US has actually been expanded recently, by Marathon and Shell, even though most energy industry analysts, including those at EIA, foresee flat and gradually declining domestic demand continuing for at least three decades.
The capacity expansions are being made to meet foreign markets, Sharp points out.
Exporters see Latin America and Asia as the growth markets to target.
This market dynamic is expected to continue for most of the year.
But Hirs at the University of Houston cautioned that it is too soon to tell whether the changed business climate will last beyond then.
“It’s a good time to be a refiner,” Hirs says.
“Will it last? Will it continue for three or five years? Who knows?”
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