Asian oil refiners brace for stiff competition from the Middle East

Asia’s oil-refining sector is getting crowded—and margins could be squeezed.
Persian Gulf oil producers are building both at home and across the region, and with their guaranteed, relatively cheap supplies and geographical advantage, look set to challenge long-established Asian refiners in local and global markets.
Among those in the line of fire: India’s Reliance Industries Ltd., Taiwan’s Formosa Petrochemical Corp., South Korea’s SK Innovation Co. Ltd. and S-Oil Corp., and operations in Singapore, where ExxonMobil, Royal Dutch Shell PLC and Chevron Corp. have major investments.
“Intense competition is expected between India, Singapore, South Korea and Taiwan refiners to retain their existing markets and capture new ones,” said Sushant Gupta, Wood Mackenzie’s senior downstream analyst.
A 400,000 barrel-a-day (bpd) joint venture at Jubail in Saudi Arabia owned by Saudi Arabian Oil Co., or Saudi Aramco, and Total S.A. will be first of the new behemoths, pumping out gasoline, diesel fuel and other products within three months. Three more such supersize operations will follow in the Gulf region alone—at Ruwais in the United Arab Emirates by 2015; at Yanbu, on the Red Sea in Saudi Arabia, by 2017; and at Jazan, Saudi Arabia, also on the Red Sea. Yanbu is a Saudi Aramco-Sinopec Group joint venture; Jazan is Aramco’s.
“Countries in the Middle East now have a strategy to diversify from exporting only crude oil to exporting value-added oil products,” said London-based Salar Moradi, oil market analyst at FGE. Those countries will also dry up as export markets for Asian refiners like Reliance Industries, which operates the world’s largest refining complex at Jamnagar in northwest India.
Saudi Arabia last year imported an average of around 315,000 barrels a day of gasoline, diesel fuel and fuel oil, worth US$35 million to US$40 million at current prices. Asia’s diesel fuel exports to Africa, the Middle East and Latin America in 2011 totaled 308,000 barrels a day, while gasoline exports to Middle East alone amounted to 90,000 barrels a day, Gupta said.
Meanwhile in China, Saudi Aramco, Kuwait Petroleum Corp., Qatar Petroleum International, Russia’s Rosneft and Venezuela’s PdVSA are all building new joint-venture refineries that will displace imports and boost exports. In Vietnam, Kuwait Petroleum International, PetroVietnam and Idemitsu Kosan Co. have agreed to build a relatively modest 200,000-barrel-a-day unit, which will trim that country’s imports.
Other refineries are planned by Indonesia, India and China, among others, many due to be on line within a few years. China alone is expected to add around 750,000 barrels a day of refinery capacity both this year and next, JP Morgan said.
Reliance Industries, SK Energy, Formosa and other Asian companies have enjoyed strong refining margins—the price difference between crude-oil and refined products—as demand has exceeded supply for three consecutive years, but the outlook isn’t rosy. Australia, Latin America and East Africa may absorb some of the growing supply, and so can India, China and Southeast Asia if economic growth there accelerates further, but even so, the risk of oversupply, and eroding margins is very real.
“Asian Singapore complex FCC margins are likely to drop from around US$10 per barrel currently to US$8-8.50 per barrel by 2015,” Gupta said.
A spokesman for SK Energy, South Korea’s largest refiner by volume, confirmed that it expects the new Middle East competition to pressure margins lower, though he declined to elaborate. A Chevron spokesman said that company’s investments to improve reliability, efficiency and flexibility at its joint venture refineries in South Korea, Thailand and Singapore would ensure that they, “continue to remain competitive in the longer term.”
Chevron isn’t alone in spending to head off competitors. Reliance Industries aims to trim operating costs to levels that can compete with the Middle East, and it is planning to convert a refining by-product to gas, which will boost margins by US$2 to US$3 a barrel, Macquarie Bank said in a research report.
(March 27, 2013)