By: John Auers
As in any industry, economic prospects for refiners depend on both supply and demand developments. On the demand side, refiners are dependent on market developments over which they have little control – economic growth, competition from alternatives, efficiency improvements, government policy, etc. On the supply side, refinery construction and rationalization determines the amount of capacity available to meet demand. In the end, if capacity grows to exceed demand by a significant amount, margins will suffer and some refineries will have to be shut down to bring things back into balance. On the other hand, if demand exceeds capacity growth, margins will be strong and refiners will prosper. In our blog from a few weeks ago (“Planes, Trains and Automobiles” – Feb. 7), we described the analysis we do at Turner, Mason & Company to forecast which way the refining capacity/product demand balance is headed. This analysis involves a detailed exercise in monitoring global refining projects, assessing the probability of success for these projects and their ultimate impact on both crude and product balances. In our latest version of this study, the 2017 World Refining Construction Outlook – (2017 WRCO), we saw expected capacity growth on a global basis, tracking demand growth fairly well, although there were regional imbalances which we believe bode well for U.S. refiners and not so well for European and Latin American refiners; however, assessing the expected success of refinery projects (which are only in early development stages in many cases) is an inexact science at best. If our assumptions on the success (or lack thereof) of some major project changes, both regional and global balances could be impacted significantly. In today’s blog (the first of two parts), we focus on the Western Hemisphere as we echo Bono in seeing which projects could have the greatest impact “With or Without You (Them).”
“See the Stone Set in Your Eyes” – North American Projects/Not Much Happening
A major “black swan” refinery project is less likely to come from North America over the next five years than from most other regions in our opinion. We make this judgment because we believe that assessing the probability of success for projects in the U.S. and Canada is generally easier than in most other parts of the world. This is (so for) a lot of reasons, including better and more transparent reporting of project progress and the clearer free market environment in which the refining industry operates. Of course, surprises could still happen, especially in response to a major change in industry environment. In fact, over the last few years, the U.S. has significantly increased refining capacity (1.7 million BPD since 2012), which was in response in large part to the market benefits which came from the Light Tight Oil (LTO) boom. While this was not expected a few years ago, it came about primarily through a number of small projects, all of whose completions could be seen a few years in advance of start-up. With the recess that crude production growth has taken since 2014, the development of new capacity in the U.S. (and Canada for that matter) is very limited currently. A huge expansion of Exxon’s Beaumont complex (500 MBPD) has been rumored, but we have relegated this to a low probability. Instead, we have included the smaller announced expansion (60 MBPD) at Beaumont in our highest Probability category, with the first stage (20 MBPD) expected to be complete this year.
In the case of Mexico, things are certainly different than in its neighbors to the north, with an industry wholly controlled by the government, and not necessarily responsive to market signals; however, we don’t expect any major surprises in that region over the next few years either. This is despite ambitious plans which have been in place for years to increase capacity to help reduce dependency on the U.S. for refined products, which has only grown in recent years (see “Down in Mexico” – February 21). The most ambitious project is the grassroots “Tula Bicentenario” refinery. This 250 to 300 MBPD refinery was originally announced to great fanfare back in 2008 and at one time was planned for completion this year (2017). But while it is still considered to be postponed, rather than officially cancelled, it has not been part of Pemex’s official five-year plan since 2013 and is classified as a “1” (0% to 20% chance of completion) in our probability rankings. In fact, although several other projects are included in PEMEX’s official plan, the only one which impacts capacity in any noticeable degree and which is included on our “Probable” list (and then only barely) is the addition of a coker at the existing Tula refinery. At this point, that project is only partially complete and stalled, and will require outside investment to be fully completed. Certainly a wild card is the energy reform process in Mexico, which is in its infancy, but we believe this is more likely to lead to capacity rationalization, rather than significant expansion.
“You Give it All, But I Want More” – South and Central America Projects Come Up Short
The rest of Latin America is similar in many ways to Mexico; government controlled industry, ambitious plans for refining expansions, lack of success in those plans, etc. And, like with Mexico, this lack of success in adding capacity has led to significant increases in product imports from the U.S., with over one quarter of total Latin American product demand now met by U.S. refiners. Most Latin American nations would certainly like to eliminate their dependence on these imports, especially those with significant domestic crude production. Like in Mexico, ambitious plans have been developed, and in many cases, enormous amounts of capital have been spent, but this has been met with few tangible results. In fact, total refining capacity and throughput in Central and South America has actually fallen over the last decade (even as demand has increased by almost 2 million BPD).
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 e Lima refinery in the northwest of Brazil came at the exorbitant cost of $16 billion and four years later than originally scheduled. 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. While we currently classify this project a 2 (20% to 40% chance of completion) in our rankings, we will be following it closely as almost anything is possible.
While most proposed projects in Latin America are geared towards domestic consumption, Ecuador has for several years been promoting plans for a major export oriented refinery. This 300 MBPD “Refinery of the Pacific” is to be located on the coast on a green field site in Manabí province. Originally Petroecuador was partnered with Venezuela’s national oil company PDVSA, but that partnership fell apart, not least because of PDVSA’s own financial issues. While land has been cleared and over $1 billion has been spent, another $10 to $12+ billion plus is still required and that might only buy a 200 MBPD plant. A partner would be needed and while China’s CNPC was involved for a while, they have pulled out and Petroecuador is attempting to find someone else (Hyundai and Sinomach are some that have been mentioned. At this time we have this project rated at our lowest probability level and only the involvement of a strong partner could move that needled.
In all, a total of 15 projects, spread over 12 Central and South American countries, have been announced and are include in our project list. Of these, totaling 1.3 million BPD of refining capacity additions, we currently expect only have 5 relatively small projects, adding less than 70,000 BPD of capacity, to be completed over the next 5 years. If that holds true, it is good news for US refiners, which will continue to be able to capture market share in the Latin America refined products markets.
“Through the Storm we Reach the Shore” – African Projects/Could There Be Some Surprises?
Africa is even farther behind the development curve vs. Latin America, and has had similar problems building and running refineries. As with Latin America, it has an excess of crude oil, but still must rely increasingly on product imports to meet demand. Africa has also had a number of projects (including several rather facilities) in development stages, mostly sponsored by NOCs. In fact total announced capacity additions equal almost 2.8 million BPD, but as of now we expect less than 100,000 BPD will actually be completed in the next five years. But there are certainly some potential “black swans” we are keeping an eye on. One is a gigantic 650 MBPD complex being developed by a private sponsor, the Dangote Group. This facility is located in the Lekki Free Trade Zone just east of Lagos, Nigeria. Although information is sketchy on this project, based on satellite images and recent pictures posted on the internet, construction at the site appears to be progressing at a fairly rapid clip. While the announced 2018 start-up date and the full 650 MBPD capacity are aggressive, it is very possible that this is one project that we might have to upgrade to “probable” status in the near future. In some aspects, this Dangote project resembles those of Reliance and Essar in India. These two Indian refineries were built by large private conglomerates in a country where the refining industry has been historically dominated by the state-owned Indian Oil Corporation, which had been unsuccessful in bringing new capacity online to meet India’s growing demand. The same is true in Nigeria, where the state-owned NNPC currently controls essentially all the country’s refining capacity. Additionally, despite growing product demand, increasing reliance on imports, and widespread fuel shortages, NNPC has been unable to bring any new refining capacity online or even operate their existing refineries. Another similarity of the Dangote group to Reliance and Essar is the success they have had in other businesses before entering the refining sphere. The success or failure of this project could also pave the way for similar, privately sponsored projects in the future, not only in Africa, but other parts of the developing world. If so they could provide some serious new competition for U.S. refiners as they attempt to continue to grow their export markets. In next week’s we will move further east and look at potential “black swan” in the Middle East, Asia and FSU, to see how product balances could be impacted “With or Without Them”.
TM&C has recently completed and published its 2nd edition of the WRCO. Some of the key findings in this study were summarized in the February 7th blog that we mentioned earlier. In WRCO, 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 give us a call.