The global refining sector, due to its capital-intensive nature, is a cyclical industry and has in the past been prone to boom and bust cycles. For the first few years of this century, the refining industry appeared to be experiencing what the oil and gas research team of one of the world’s largest investment banks referred to in 2002 as the “Golden Age of Refining”.
Whilst this bullish outlook did hold true for some time, it was rather short-lived. In the first half of 2008, the industry fell from grace and prompted another large investment bank to herald what it called the "Dark Ages" of the refining industry. Exhilaration turned to desperation as the economic downturn took hold and the industry found itself faced with rising crude oil prices, uncertain product demand, decreasing margins and with a surplus of refining capacity, all of which have hit profits hard.
These developments have combined to cast a shadow of uncertainty over the future of the refining industry - a future that has been further threatened by the changing energy landscape. According to a recent report from the International Energy Agency, in the 30 developed countries that comprise the OECD, demand for oil products has fallen from a peak of 49.5 million b/d in 2006 to an estimated 45.4 million b/d for 2010. Yet total global demand has jumped from 85.3 million b/d in 2006 to 86.6 million b/d in 2010. This proves that any growth we are experiencing in oil demand is coming predominantly from the developing world, notably China.
Whilst developing countries experience this growth, developed economies are suffering a drop in demand. In 2006, the developed world was consuming 58 percent of oil product demand, compared with 52 percent in 2010. This can be attributed to the fact new legislation pertaining to climate change and environmental protection has advocated the use of alternative fuels, particularly biofuels and natural gas, which could potentially displace oil use in many spheres, particularly transportation. Regulators will therefore play an important role in the future of the refining industry and their decisions will impact refining margins.
The short-term effects of the development of alternative fuels may not be particularly noteworthy given the lengthy periods needed to replace vehicle fleets for example. However, the long-term consequences could be profound as these potentially game changing developments come into play putting increasing pressure on refining margins.
In light if these evolutions, many refineries, particularly in the US are being forced to close as companies take the decision to divest themselves of their non-profitable assets to free up resources which could be spent elsewhere. Whilst the future remains uncertain, most international oil companies are at least tending to reduce or cancel their investments in the refining business.
Meanwhile, national oil companies are forging ahead with refinery projects as part of their long-term strategic objectives. National oil companies in the Middle East, China and India, in particular, are looking to boost domestic production and are therefore looking to introduce new refineries and expand existing ones. Certainly, with the Middle East's vast crude resources, strong cash reserves and strong government support, there is the potential for the region to become a global refining hub.
A 2010 report published by GBI Research and entitled The Future of the Global Refining Industry to 2015 - Benefitting from National Oil Companies' Growth outlines how the regulatory constraints preventing the construction of Greenfield refineries in North America and Europe will allow the Middle East to become a major petroleum product supplier to these countries rather than just being a supplier of crude.
However, the commissioning of new refineries in countries like India, China, Vietnam, Algeria and Qatar has led to global refinery throughput decreasing globally. Further decreases may well be foreseeable as OPEC Secretary General, Abdalla Salem El-Badri recently said that member countries were still investing in the industry despite the uncertainties and the price volatility.
At the seventh ministerial meeting of the European Union/OPEC Energy Dialogue, in Brussels at the end of June, El-Badri told the meeting that, in 2009, around 30 projects came onstream in OPEC Member Countries, resulting in an increase of 1.5 million bpd in net crude and liquids capacity. He added that over the next five years the completion of another 140 projects was expected to add about 12 million bpd of gross crude and liquid capacity.
El-Badri also said that it was important to note that OPEC Member Countries were not just concerned with upstream activities and they had also been taking the initiative to invest downstream where appropriate. Over the next decade, El-Badri said that OPEC Member Countries were expected to invest around $40 billion in refining capacity expansion.
With such substantial new refining capacity due to come online over the next few years, it is inevitable that increases in oil demand will be exceeded. In the period between 2009 and 2012, global refining capacity is expected to grow by approximately nine million bpd; in comparison demand growth is likely to be about three to four million bpd. Analysts at Deutsche Bank have termed this "refining Darwinism - survival of the fittest".
For an industry that has been historically plagued by the lure of incremental economics, the gloomy outlook looks set to continue into 2011, according to the International Energy Agency. In a 2008 report entitled Refining Trends: The Golden Age Or the Eye of the Storm? Part IV: Tough Choices Booz & Company offered some words of advice to those working in the refining industry: "Given the impact of regulatory changes in the refining industry, it is important for refiners to monitor the signposts of impending change, remain strategically flexible, diversify portfolios, and be aware that yesterday's planning may not suit the world that sits before us."
Just one of the latest refining projects in the MENA region, The Egyptian Refining Company's ambitious $3.7 billion Greenfield second-stage oil refinery in the Greater Cairo Area is due for completion in 2015. A $2.6 billion debt package has been signed to finance construction of the plant, which will eventually produce over four million tonnes of refined products per year, including over 2.3 million tonnes of EURO V diesel, the cleanest fuel of its type in the world.
The refinery will sell its production to the state-owned Egyptian General Petroleum Corporation (EGPC) under a 25-year offtake agreement at international prices.