ENERGY | The Great Refining Transition : A Market Analysis

Strong competition from US, Middle East and Asian markets is threatening to dethrone Europe’s pioneer refining position.

By Mahin Siddiqui

Energy Analyst and An Associate at The Gulf Intelligence

Cover Art Attribute: White smoke clouds above oil refinery image via horiavarlan/flickr.

Creative Commons 2.0 license.

"Strong competition from US, Middle East and Asian markets is threatening to dethrone Europe’s pioneer refining position"- Mahin Siddiqui, Associate at Gulf Intelligence reports

It is the best of times, and it is the worst of times. Such is the complexity of the global refining industry, which is entering a transition phase as demand and supply centers shift from the developed nations towards developing economies.

Europe, the traditional refining behemoth, had a rude awakening when Swiss Petroplus filed for bankruptcy suddenly in 2013 after an 85 year refining sprint.

Two years later, shocked politicians, industry professionals and energy economists saw as many as 15 refineries shut down in December 2015.

Refineries are expensive to run, offering little if any return on investment on upgrades. Europe’s ageing refineries had already been squeezed due to rising crude prices combined with high taxation systems and outdated business models.

If history has twisted Europe’s refining arms, current events have stabbed it in the back. According to the International Energy Administration, stocks of petroleum and diesel are near record high in northwest Europe, suffering from overcapacity.

The European population is choosing to be more environmentally healthy, and contributing to declining fuel demand as hybrids and electrical cars enter the market set to meet green standards. The market is also witnessing the emergence of the bio fuel industry.

New Refining Markets

Fortunes for the US could not be more different as the spectacular crude glut continues. The crude in their possession is comparatively priced lower than what goes in European refineries while diesel and petrol demand has surged due to low oil prices and an emerging US economy.

According to analysts at Morgan Stanley, 2016 will be another strong year for the US where consumption will exceed fuel production.

Elsewhere, the Middle East is exposed to new export markets. Asia faces an upward demand for fuel products due to strengthening economies, and an emerging urban population will soon need to satisfy their thirst for fast cars with cheap petrol.

Despite panic, China continues to grow at a healthy 6.3% according to the International Monetary Fund and Moody’s Investors Service places India’s economic rise between 6.5% to 7.5% in 2016. Savvy refiners in the Middle East have latched on to gaping opportunities by offering new business models to tap into fresh emerging Asian markets.

Around 2.5 million barrels of refined product is expected to fill petroleum tanks in India, China and Pakistan from Middle East’s expansion plans in Oman, Saudi Arabia, Kuwait and Fujairah.

King Salman recently announced the YASREF refinery - a partnership between Saudi’s Aramco and China’s Sinopec holding 62.5% and 37.5% respectively with a capacity to refine 400 kbpd. It has modern refining facilities including a distillate hydro-cracker and hydro-treater.

On the other hand, India not content with just importing fuel will set up additional three new refineries by 2025 even as Essar and Reliance prove to be profitable sourcing crude from across the bridge.

Pressure on Europe

Undoubtedly, global refining trends have changed and none is more impacted than Europe.

Further pressure is heaped on Europe’s aging refining infrastructure as the US looks to produce and refine its own fuel, thus selling cheap petroleum to car owners.

On the other hand, the Middle Eastern crude will either refine or be refined to reach Asia largely led by demand surge in China, India and neighbouring Pakistan. Leftover petroleum will provide even more competition to Europe.

The Middle East is rallying as the refining hub for Asia as the region builds its own production centers, closing down the export market for Europe.

Low crude oil prices have only served to put strain on refining budgets in Europe where the industry can neither upgrade nor sell ailing refining infrastructures.

All of this is pushing Europe’s refining industry to becoming almost obsolete. Fuel demand in Europe while diminished, has not finished, and between Germany, Belgium, France, and Switzerland a total of 667.3 million barrels a day of refined product could go off-line, putting Europe’s supply at stake as independent refineries shut down.

For international oil companies, low refining margins such as in Europe will mean weathering low E&P profits and stale downstream deals therefore the likes of Shell and BP will rely on independent oil refiners.

The great refining transition from Europe to the Middle East and Asian region has put Europe’s fuel supply, and its pioneer position in jeopardy.

As the Middle East ramps up its refining capacity by employing new technologies and innovative business models, the current investment climate is proving risky for any new outlets in Europe. In the future, the region will need to import not only crude but also fuel from traditional oil producers.

While the Middle East fuel is competitive, it is dangerous to envision a future fuel monopoly of such magnitude over Europe. Should current trends continue, very soon Europe will be left unrefined and forced to buy petrol, aviation fuel and petroleum at price benchmarks set by emerging oil producers.

About The Author:

Mahin Siddiqui is an energy analyst and communications professional based in Dubai. She started her career with UAE and Iraq based energy consultancy Manaar Energy Group where she worked on energy trends and holistic analysis of MENA energy issues. Currently she is an associate at Gulf Intelligence, a Dubai based strategic communications agency and think tank, where she handles the media and production engagement for the company and partners. 

Her interest is in upstream and downstream conventional energy analysis, holistic trends identification, geopolitical analysis, and risk analysis of the MENAP region. She has a Bachelors in Social Sciences majoring in International Relations from Karachi based Shaheed Zulfiqar Ali Bhutto University of Science and Technology and a Masters in International Studies from the University in Wollongong, Australia. Mahin is fluent in Urdu and has basic knowledge of Arabic and French. She tweets @siddiquimahin 

Cite This Article:

Siddiqui, Mahin "ENERGY | The Great Refining Transition : A Market Analysis" IndraStra Global 002, No:03 (2016) 0015, http://www.indrastra.com/2016/03/ENERGY-Great-Refining-Transition-Market-Analysis-002-03-2016-0015.html | ISSN 2381-3652