By Robert Auers and John Auers
Over the previous weeks, we have reviewed the refinery construction landscape in several regions around the world including North America, Europe, Asia, Africa, and Latin America. Today, we finish this series focusing on the last major region we have yet to cover, the Former Soviet Union (FSU). Certainly, both the dynamics which have driven the refining industry in this region in the past and those that will impact its future are very different. What is similar is that in each case, capacity expansion and upgrading activities (or lack thereof) will have important impacts on global product supply/demand balances, although here, too, those impacts will vary on a regional basis. All of the projects discussed in today’s and previous blogs in this series are covered on 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 that ultimately takes 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, and the FSU has the potential to be a major contributor if it is able to execute on some ambitious plans, especially in Russia.
In contrast to Western Europe, the countries to the east, which comprise the FSU, have seen an increase of about 730 MBPD of refining capacity over the last decade. Essentially, all the growth has come in the Russian Federation (about 1 MMBPD) with the troubled Ukraine suffering a similar fate as Western Europe, with almost 200 MBPD of capacity idled. As with most aspects of the FSU, Russia’s refining industry dominates the region, making up about 75% of the total capacity of 8.7 million BPD, and ranking behind only the U.S. and China in that category on a global basis. This information is detailed in the chart below.
Russian refinery expansion and upgrading (and to a much lesser extent smaller expansions and plans in the Central Asian “Stans”) have been incentivized by growing crude production and resulting feedstock cost advantages. Product demand growth has also been generally healthier than in Western Europe, although that growth has stagnated in recent years. With the entire economy, and especially the petroleum industry, under significant government control, governmental policies, particularly regarding taxes, domestic prices, and investment plans have played a major part in the growth of the Russian downstream segment.
While the Russian refining industry is large in terms of capacity, it is very limited in its downstream upgrading capabilities. This results in the production of significant quantities of fuel oil and unfinished intermediates, which make up the bulk of Russian product exports. In an effort to increase the complexity of Russian refineries and the production of higher valued products, the Russian Government has, over the last several years, taken a number of steps to encourage the upgrading and modernization of the downstream industry. The most comprehensive of these steps was the adoption of a system-wide program in 2011 to construct over 120 upgrading units (FCCU’s, hydrocrackers, reformers, alkylation units, cokers, HDS units, etc.) by a target date of 2020. The Ministry of Energy was tasked to implement this program and there was some early progress, with almost 35 new upgrading units completed by the end of 2017, including nearly 180 MBPD of coking capacity, 90 of FCC capacity, and 390 MBPD of hydrocracking capacity. Despite this progress, Russia still exports a significant volume of intermediates that are used as refineries feedstocks in other countries. The chart below shows U.S. refinery imports of Russian VGO and resid used as refinery feedstocks dating back to 2006. Notice the large decline in Russian resid imports since the beginning of the Russian refinery modernization program and tax changes in 2011. U.S. VGO imports from Russia, however, have grown steadily, primarily due to refinery rationalizations in Europe and Japan (the more traditional export destinations for Russian VGO) and a lightening of the overall U.S. crude slate due to the light tight oil boom, leading to spare upgrading capacity at many U.S. refineries.
The bulk of the new upgrades were to come in the 2017 to 2020 timeframe. In TM&C’s most recent issue of the World Refinery Construction Outlook (WRCO), we have over 1 million BPD of potential upgrading capacity additions (almost half for FCCU and hydrocracking) included in our comprehensive list; however, the precipitous drop in oil prices, along with the negative impacts from the sanctions the E.U. and U.S. have implemented as a result of the Ukrainian aggression, have led to a significant slowdown in the upgrading plans. Financing from Western sources is drying up, as is the ability to procure equipment and technical services. Our current “probable list” includes less than 400 MBPD of upgrading additions expected to be completed by 2020, and several projects included in that total are on our “watch list” to be downgraded to “unlikely by 2020” status.
While refining construction activity is slowing in Russia, it might be picking up a bit in the Central Asian republics. This area is also endowed with strong crude resources, but the downstream segment is still limited in scale; however, with crude production picking up (especially with the long-delayed 300+ MBPD Kashagan development in Kazakhstan finally ramping up to full production last year) and investment not impacted by sanctions or OPEC/Russia cuts, activity in the downstream is picking up as well. Kazakhstan is the big player here and two reasonably large ($1-2 billion) refinery upgrades by the national oil company, KMG, came on stream just last year. KMG is also looking at building a grassroots, 120 MBPD refinery in the Mangystau region and a new refinery in neighboring Tajikistan is also a possibility in coming years.
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.