By Robert Auers
Over the previous weeks we have reviewed the refinery construction landscape in several regions around the world, including Africa, North America and Europe. Today we continue this series, focusing on Asia, the region where refinery construction activity has been the most active of anywhere in the world. All of the projects discussed in today’s and the previous blogs, are covered ion a comprehensive basis in our recently released World Refining Construction Outlook (WRCO), a report we issue on a biannual basis. An understanding of how much refining capacity is being added (or closed) and how this compares to the level of demand growth which will take place is critical in determining the prospects for refining margins and the overall prospects of the refining industry. In the WRCO we attempt to forecast the supply side (refining capacity) of this equation of which Asia will certainly continue to be a huge part.
Since 2007, Asia has not only been the primary driver for world product demand growth, but also for world refining capacity growth. While global refining capacity grew by a little over 10 MMBPD from the beginning of 2007 until the end of 2017, Asian capacity alone grew by 7.3 MMBPD. Moreover, the vast majority of this capacity growth has been in just a few countries – most notably China and India. Chinese refining capacity has increased by 70% (or almost 6 MMBPD) since 2007, despite the closures of a large number of inefficient “teapot” refineries over the last several years. Meanwhile India has added nearly 1.8 MMBPD of capacity, representing just over 60% capacity growth in the country during the same time period. Net capacity additions have also taken place in other developing Asian countries, but the more mature economies have experienced different fortunes. Japan is the biggest example of these divergent fortunes. Due to continuing declines in domestic demand, high operating costs, and generally uncompetitive refinery economics, Japan has seen refinery closures of roughly 1.2 MMBPD over the past ten years , about a 27% reduction in overall capacity. The figure below details Asian refining capacity from 2007 to the present.
As mentioned before, China has been the driver, not only for Asian capacity growth, but for world refining capacity growth as well, over the past decade. Virtually all of these capacity additions have come from the three state-owned ingrated firms – CNOOC, CNPC (Petrochina) and Sinopec. In fact, the net capacity of independent refineries has decreased since 2013 due to the closure of several Shandong teapots and the reform of China’s crude import laws. However, going forward we see private entities participating in future capacity growth in addition to the state-owned giants. The two most notable of these are two complex 400 MBPD facilities to be built by Hengli Petrochemical and Zhejiang Petrochemical.
The Hengli petrochemical plant is planned for Dalian, which is located just west of the Korean Peninsula and across the Bohai Sea from Tianjin and Beijing. It will be a complex, high conversion refinery designed to process a combination of Arab Heavy, Arab Medium, and Brazilian Marlim, giving the plant and estimated weighted average crude gravity of ~27 API. In fact, Hengli has reportedly already secured small volumes of Arab Heavy and Arab Medium crude oil for trial runs at the plant later this year. The plant will include two Axens H-Oil units to destroy resid, two conventional hydrocracking units for gasoil conversion, distillate jet and naphtha hydrotreating, and CCR reforming. Moreover, a major focus for the refinery will be the addition of a large petrochemicals plant that will also produce butylenes for feedstock in a planned 25 MBPD alky unit.
The Zhejiang plant is very similar to Hengli’s in that will be roughly the same size, share the focus on petrochemicals production, and process a similar quality crude slate. It will be slightly different however, in that it will utilize resid fluid catalytic cracking to destroy resid and will not include an alky unit. However, the two plants are still remarkably similar in configuration and strategy.
Both facilities represent a significant shift from what we’ve historically seen regarding independent Chinese refiners (commonly called “teapots”). The majority of these plants are relatively small (<100 MBPD), simple facilities located in the Shandong province near Beijing. We do note that this has been changing, at least to some extent, in recent years, however, as the Chinese government has encouraged closures of the least efficient plants and upgrades at the remaining ones. Still, these two plants will be by far the largest and most complex independently owned facilities in the country and rival some of the China’s largest and most complex state-owned refineries. Furthermore, most Teapots ramp utilization up and down depending on margins and purchase most of their crude on the spot market when margins are favorable. This is largely due to the import quotas imposed on independent refiners in china. Similarly, Hengli Petrochemical was only able to secure import quotas for 5 million mt/year (~100 MBPD) of import quotas and will likely sign agreements with the state-owned integrated firm for its remaining crude supply to maintain high utilization rates. Zhejiang Petrochemical has stated that they expect to pursue a similar type of arrangement for their own crude supply. This situation leaves these two independent refiners at a notable disadvantage to those owned by China’s national oil companies who are allowed to import all of their own crude.
India has been second in the race to add new refining capacity in Asia, adding nearly 1.8 MMBPD of total throughput capacity since 2007. Unlike in China, most of these additions have come from the private sector, with Reliance and Essar leading the way. Going forward, we expect state-owned entities to take the baton in continuing Indian capacity growth, with Indian Oil Corporation, Ltd (IOCL) leading the way. If fact, the company just announced plans to invest INR 1.4 trillion (USD 22 billion) to double refining capacity from its current 1.6 MMBPD to 3.2 MMBPD by 2030. IOCL’s most notable currently planned project is a massive JV greenfield plant planned to be constructed in the Ratnagiri district of Maharashtra state, just south on Mumbai, on the country’s west coast. IOCL’s two state-owned partners, HPCL and BPCL, would each have a 25% stake, while IOCL would have a 50% interest in the facility. The refinery’s planned capacity is 1.2 MMBPD (to be constructed in phases, with initial startup scheduled for 2021), and it would contain complex conversion units, including a delayed coker. The project, however, has been met with considerable local opposition, and this, along with a $30 billion price tag, may prevent the project from moving forward. For now, the state government has stated that will not support the project as long as strong local opposition exists. Still, as Indian product demand continues to grow, the Indian government will look for avenue to move forward with this strategic project. Additionally, IOCL continues to move forward with capacity expansions and upgrades at several of its existing facilities.
The Indian private sector is also not likely to stay put. The largest and most successful private refining company in India, Reliance Industries (owner and operator of the 1.2+ MMBPD Jamnagar refinery) has proposed an additional 400 MBPD expansion at that plant, already the largest in the world. Limited details are available regarding this project since it was first announced in 2014, but we continue to follow it closely and watch for updates.
TM&C recently completed and published its 2018 World Refinery and Construction Outlook (WRCO). The WRCO includes a much more detailed list including all announced global projects with total crude capacity and individual unit capacities for each project. Furthermore, each project we track is listed by region and ranked based on its probability of success. In addition, a detailed discussion of the regional factors and trends that are affecting refinery construction projects is provided. If you would like more information on this or our other products, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or contact our subscription coordinator, Cindy Parker, at 214-754-0898.