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 and Africa. Today, we move back to the Western Hemisphere to focus on refinery developments south of the U.S. border in Latin America. The region has been endowed with significant hydrocarbon resources and has traditionally been a major exporter of petroleum. This is still true for crude oil, despite recent setbacks in key producing countries. However, the region has moved from being net long in refined products at the beginning of this Millennium, to being a major and growing importer (to the tune of 2.5 million BPD). The inability to add new capacity, along with operating issues at existing plants have led to this situation, which has been a boom for U.S. refiners who are making up the deficits. In today’s blog we discuss both what has gone wrong in the refining sector in Latin America and the plans for adding new capacity to reduce import dependence in the future. Success or lack of success in this endeavor will be important not only for the countries within Latin America, but also for U.S. refiners, who have become ever more dependent on this market. All of the projects discussed in today’s and the 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.
Region Wide Developments
Despite ambitious refinery construction plans throughout Latin America, the region has not only failed to grow capacity over the past decade, it has actually declined. Utilization of existing refineries has fallen even more drastically, resulting in a significant decline in crude throughput and refined product output. At the same time, product demand has grown steadily in the region, leading to increasing product imports, especially from the U.S. This data is detailed in the chart below.
All the while, National Oil Companies (NOCs) in the region, especially in Mexico and Brazil, have continually pursued expansion opportunities that have failed to come to fruition. Mexico proposed the 250-300 MBPD “Tula Bicentenario” refinery back in 2008, and, at that time, it was scheduled for completion in 2017; however, the government never made any meaningful progress on the project, and it officially remains “postponed,” with no imminent prospects. In fact, the only major refinery projects likely to be completed in Mexico in the near future are not capacity additions but upgrades to downstream processing facilities. The most prominent of these is the proposed addition of a coker at the Tula Hidalgo plant, and even this project is facing its fair share of setbacks, cost overruns and delays. As a result, it is still in need of external funding for completion, which we don’t forecast until 2020, if at all. Meanwhile, utilization rates in the country have fallen off a cliff, averaging just 52% in 2017. This was certainly due in part to Mother Nature (Tropical Storm Calvin and the Chiapas Earthquake), but poor operations and a new, reform-driven directive to prioritize profitability over throughput also contributed greatly. In fact, two refineries, Minatitlan and Ciudad Madero, were kept offline by choice for several months in 2017 due to insufficient margins. Perhaps changes are coming, as the front-runner in this year’s presidential election; left-leaning Lopez Obrador wants to strengthen the nation’s refining sector with the eventual goal of eliminating product imports from the U.S. His plans are certainly ambitious, and we view them more as campaign-speech than anything else. Executing on his goals would not only be extremely difficult, but also uneconomic, given the inability of the Mexican refining sector to compete with that in the U.S.
Brazil’s state-owned Petrobras has had the most ambitious spending program, announcing and initiating plans for several large grassroots refinery projects over the past few years. Despite the fact that billions have been spent and some were scheduled to already be in operation, only one has actually made it to start-up. Even with this “success,” Phase 1 of the Abreu y Lima refinery in the northwest of Brazil came at the exorbitant cost of $16+ billion and four years later than originally scheduled. Train 2 meanwhile is still “under construction,” and whether or not it will eventually enter operation remains in serious question. Petrobras is currently seeking a partner to help foot the bill for this second phase. All of the proposed refinery projects in Brazil have been plagued by delays, cancellations and cost overruns, with reasons ranging from inefficient and misdirected project execution, corruption, and other management failures, to ultimately running out of money. The COMPERJ grassroots refinery project, located just outside Rio de Janeiro, is perhaps the most spectacular failure. This proposed 165 MBPD plant was originally proposed in 2004 when $2.5 billion (reported cost estimates vary widely) was allocated for the project. By 2008, when the project broke ground, the budget had increased to over $8 billion and completion was scheduled for 2013. Construction on the project was halted in 2015 after a reported $14 billion (even more by some accounts) had been spent on the project. Plans to restart construction on the facility were most recently announced in July 2016, with completion stated to be in 2020. More recently, a partnership was announced with CNPC to help finance the project’s completion. As a result of this partnership, we’ve upgraded the probability of completion of a refinery (although not the full 165 MBPD) at the site to a 3 from a 2 on a scale of 1-5.
The refining industry in Venezuela, of course, is in the worst shape of any of the major countries in the region, due to its ongoing economic and political crises. PetroChina and Rosneft recently pulled out of a proposed ten-year agreements to lease and operate the Cardon (305 MBPD) and Amuay (635 MBPD) refineries. Both companies cited the facilities’ current state of disrepair and the high capital costs required to return the plants to a reasonable condition. Meanwhile, rumors have circulated that the government is considering indefinitely closing three refineries: Cardon, El Palito (140 MBPD) and Puerto La Cruz (190 MBPD) due to a shortage of crude, spare parts and skilled manpower. Together, these three refineries constitute nearly half of Venezuela’s 1.3 MMBPD refining capacity. Still, the closure of these facilities is not likely to have a major effect on the country’s total crude throughput due to the fact that total refinery utilization is already below 30% (and perhaps as low as 20% by some accounts). Given this information, refinery expansions and upgrades are obviously out of the question for now in Venezuela.
Rest of Latin America
While developments in Mexico, Brazil and Venezuela certainly dominate the news coming out of the refining sector in Latin America, projects elsewhere are also being considered. In most cases the prospects for these projects are not much better, especially for the more ambitious ones. There are some smaller projects, particularly upgrades at existing facilities which could be more successful, however. One of these is PetroPeru’s 30+ MBPD expansion and modernization of their Talara refinery, with the goal of converting it to a heavy crude facility with the ability to process more local crude oil. This project is included in our Probable list with an expected startup in 2019. Also slated for a 2019 startup and listed as Probable is the upgrade and 30 MBPD expansion of the Bridas/BP refinery in Argentina. Several much larger projects have also been publicly discussed in various parts of Latin America, but we don’t see realistic chances for the success of any of these projects over the next few years. Included on this list is Oban Energies’ proposal for a 250 MBPD refinery in the Bahamas. Oban, with encouragement from the Bahamian government, is proposing an export-oriented facility to process US light tight oil. We view the project as a long shot (giving it a probability rating of just 1/5) due to its likely inability to economically compete with brownfield expansions on the Gulf Coast or elsewhere. Another project which fits in the “ambitious but highly unlikely” category is Ecuador’s “Refinery of the Pacific”. This 300 MBPD project has been kicking around for a decade and a variety of potential partners with Petroecuador have been variously involved or at least mentioned over the years. While some site preparation has been done, it has not progressed beyond that level and is as far away (or farther) from becoming a reality as when it was first proposed.
Lastly, we should note some recent developments at the existing 300+ MBPD Willemstad refinery in Curacao and the idle200+ MBPD Aruba refinery, both of which are currently controlled by PdVSA. The Curacao plant, which is leased from the Island government, has experienced the same operating issues and low utilizations as their other refineries. The lease expires in 2019 and due to PdVSA’s inability to maintain and reliably operate the plant, the island is considering partnering with someone else after that date. One possibility is a Chinese firm, Guangdong Zhenrong, which has discussed a deal to upgrade and operate the plant. The island reportedly cancelled that agreement in January, but Guangdong Zhenrong still aims to work something out. In the case of Aruba, PdVSA, which has a long-term lease with the Aruba government,, has commissioned their U.S. subsidiary, Citgo, to revamp and restart the refinery. While significant progress had been made over the last couple of years, U.S. sanctions on Venezuela have recently inhibited financing and reportedly slowed work at the plant. In any case the plans for this facility are as a crude oil upgrader, and even if it was successfully reactivated, it would have minimal if any impact on product balances.
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.