By John Richardson
THE refining industry enjoyed a golden era before the global economic crisis thanks to a booming economy and gasoline shortages caused by Hurricane Katrina. Inevitably, therefore, as is so often the case with commodity industries, too much new capacity was planned that came on-stream at the worst possible time.
But recently some financial analysts have been arguing that the worst is over for the industry. This is based on the premise that the world’s economic recovery is on solid ground – which we strongly dispute – and less capacity additions over the next few years.
A recent report by Kunal Agrawal, Singapore-based energy and chemicals analyst with BNP Paribas, suggests a more negative longer-term view for the industry.
“We expect global utilisation rates and benchmark refining margins to improve steadily over 2011-12 owing to incremental refined products demand outstripping refining capacity additions, which we believe will result in a sweet spot for refiners and Asian refiners in particular,” he writes.
“In our view, it is a good time to have exposure to refining, but a longer-term return to the ‘golden period’ of impressive refining margins of 2004- 08 is unlikely, as refining supply growth should exceed demand growth beyond 2012.
“We do not foresee global utilisations increasing beyond 85%. The utilisation outlook is healthy – but is unlikely to support a robust recovery in refining margins.
“We believe a longer-term positive sentiment on the sector is being a bit optimistic. Beyond 2012, we expect an excess of 1.8 mbd capacity to be commissioned annually, which would mean that supply will likely be ahead of demand growth. This is an unfavourable situation for a robust refining environment improvement, in our opinion.
“We also anticipate a significant amount of heavy-fuel processing capacities being commissioned over 2010-15, which will increase demand for heavy oil, and pressure the light-heavy spreads to contract. We believe this is negative for highly-complex refiners in the region that had enjoyed superior refining earnings during the refining supercycle of the middle part of the previous decade (owing to extremely strong light-heavy spreads).
“In the next refining cycle, we believe the ability of complex refiners to lock in the incremental dollar margin per barrel will be compromised.”
This could have major implications for the availability and affordability of petrochemical feedstocks in different regions.
We can speculate that while older European refineries might be pressured by the overall problem of supply being in excess of demand, they might find themselves in a relatively strong position because of the greater strain on the newer, more complex refiners.
The BNP Paribas report provides further reasons to believe that these European refiners could run relatively hard, providing advantaged raw materials to highly experienced and fully-depriciated domestic petrochemical industries.
The complex refiners, some of whom are integrated with new or fairly new petrochemicals capacity, might find their competitive positions challenged. They could be forced further to the right of the cost curve.
And overall with a significant oversupply of refining capacity being predicted, there might be plenty of spare naphtha to be traded globally, assuming there is no major consolidation.
What might this spare naphtha mean for the competitiveness of naphtha-based crackers versus the gas-based players?