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combined with high taxation systems and outdated business models.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
