Walking a refine line

The global recession is has impacted heavily on most industries around the world, and the oil and gas sector is no exception. We hear about its effect on refining with EnSys Energy’s Martin Tallett.

“Our approach - and belief - is that you have to evaluate the downstream industry on a global scale and in a way that captures the supply, product and regional interactions”
-Martin Tallett

How is the economic crisis impact refining?
Martin Tallett. The place we must start is with demand. Versus what the industry was planning, we are facing a reduction of over five million bpd for 2010 – and one that does not recover but extends to seven million barrels per day (bpd) and higher by 2015 and beyond. This is a huge – and seemingly permanent – loss. Together with supply changes centred on increasing supplies of biofuels and other non-crudes, it is going to rewrite the outlook for and economics of refining for many years to come. Non-OECD countries and Asia will continue to grow, but it is the Atlantic basin that has been most severely impacted and where demand will stay flat. The implications are for substantial refinery rationalisations and closures. Our recent WORLD model based projections, including in support of the 2009 OPEC World Oil Outlook, show, without closures, refinery utilisations at unsustainable levels, below 75 percent in several world regions.

What does this mean for refinery projects, including those in the Middle East?
MT. The \golden’ margins from 2003 through to mid-2008 led to 24 million bpd of listed projects by late 2008, of which four million bpd are under construction. Based on our projections, the world needs total new capacity of only around 7.5 million bpd by 2015 and somewhat over 11 by 2020. If you list out projects for the Middle East, you arrive at eight million bpd of planned additions, plus over three million bpd in North Africa. It is difficult to see that more than two million bpd of these projects being justified for start up before 2015, and three million bpd before 2020. It is our sense that every project needs to be very closely scrutinised in terms of its justification and security of product outlets in the context of a global market that has substantial excess capacity and willingness to export.

What does this mean for the major projects in the region?
MT. In our view this means there is scope for a number of the leading projects. Saudi Aramco has delayed both Yanbu and Jubail but is now moving ahead with bids at today’s, hopefully lower, cost levels. It is similar for the al Zour refinery project in Kuwait, plus there are some other advanced projects in the UAE and elsewhere.

The two leading Saudi projects will provide assured outlets for heavy crude oils – although, interestingly, there could be a medium term shortage of such crudes because of supply declines and substantial new coking capacity. Both refineries also stress distillates over gasoline which we believe makes sense and Jubail incorporates production of paraxylene, benzene and propylene, all petrochemicals which have been experiencing growth rates much higher than those for fuels products. Where projects emphasise these products and assured domestic demand, we believe their economics will be sound. The issue comes with projects that export.
 
How does Ensys help oil and gas companies best plan ahead against the backdrop of the volatile worldwide energy market?
MT. Our approach – and belief – is that you have to evaluate the downstream industry on a global scale and in a way that captures the supply, product and regional interactions. This is the core of our WORLD modelling approach. It is used by and for government agencies such as the US DOE and EPA, by international institutions, notably the World Bank, International Maritime Organisation and OPEC, and major oil companies, to obtain quantified assessments of future refining activity, economics, investments and trade.

Today, we are focussing on new services that provide our projections in the form of integrated outlooks of downstream ‘strategic parameters’: crude and product prices/differentials, refinery utilisations, investment requirements and margins by region. We believe these will provide sound planning bases for strategic decisions. The projections will be developed using different scenarios, thus enabling users to address the wide uncertainties that exist in the outlook.

Martin Tallett heads EnSys Energy, specialists in refining economics and global oil markets analysis and projection. EnSys works closely with major and national oil companies, specialty companies, government agencies and industry institutions including the World Bank and OPEC to address strategic issues. EnSys Energy’s international experience covers North and South America, Europe, the Middle East and Africa.