“With or Without You” – Which Refinery Projects Could Hold Key to Global Product Supply and Demand Part 2 – Asia

By:  John Auers

Last week we discussed the potential fate and impact of a variety of proposed large refinery capacity expansions in the Western Hemisphere.   These are all projects that are included in the latest version of our World Refining Construction Outlook – (2017 WRCO).   In all the cases we reviewed last week, the proposed projects were considered “1’s” or “2’s” on our probability scale, meaning they had less than a 40% chance of completion within the next five years.  In our discussion we highlighted the fact that, assessing the expected success of refinery projects (which are only in early development stages in many cases) is an inexact science at best and tried to identify where surprises might happen and the impacts of those surprises.   We learned that while there is no shortage of projects to add refining capacity on the Latin American and African continents, past success in executing those projects has been poor and the outlook for the future seems equally pessimistic.  However we also highlighted some potential surprises which might take place, and what those “black swan” successes would mean to regional and global product supply/demand balances.

Over the next two weeks, we shift our focus to the Eastern Hemisphere, where success in adding capacity has been markedly better, with the vast majority of capacity additions globally taking place in Asia and the Middle East over the past decade.   But even in these regions project success has been very mixed, with many proposed projects not making it to start-up and significant cost overruns or delays in other cases.   Spurred by continuing expectations of strong demand growth, project activity continues at a frantic pace.  Many of these projects are large grassroots facilities and success is difficult to gage.  In today’s blog we will first examine the Asia refinery construction environment.  This is a region where demand has boomed, incentivizing significant capacity addition over the last decade.  While overall demand growth will continue, it is shifting within the region, with China passing the growth baton off to other countries further down the development chain.  We will discuss the major projects that could yield surprises, both those we currently rate as probable and those which we believe are unlikely to be completed within the next five years.  In doing so we will address the factors that will influence their success and the potential impact to refined product balances  “With or Without You (Them).

“I Can’t Live, With or Without You” – Asian Demand Will Continue to Spur Global Refining Projects

Asia (including Oceania) has been where most of the action has taken place over the last decade with regards to both product demand growth and refining capacity expansion.  Since 2005, over 85% of the growth in global demand has taken place in Asia, amounting to about 9.3 million BPD.  At the same time, the region increased it’s refining capacity by about 9.5 million BPD, also accounting for over 80% of the net worldwide increase.

Looking to the next five years, while Asia is expected to continue to be dominant in new project completions, that dominance will slow somewhat as relative demand slows as well.   In our 2017 WRCO, we forecast that product demand will grow by 3.4 million BPD in Asia through 2021,, equal to about 63% of total global growth.  During the same period we have a relatively similar amount of capacity additions taking place in Asia (3.3 million BPD) or about 56% of the amount we see happening worldwide.  But considering that a total of over 10 million BPD of capacity increases are actually being considered, if we are wrong about a few projects (in either direction), the impacts on the regional supply balance could be significant.

“Slight of Hand and Twist of Fate” – China/Gearing Down as Demand Slows

When discussing Asian (or overall global) refining activities, China certainly has to lead the conversation.  Since 2005 China has added almost 7 million BPD of refining capacity, which is over 70% ‘s of the total increase in Asia (and over 55% of the global net total).  This aggressive activity, primarily driven by government policy to remain independent of product imports, even as demand boomed, was primarily effected by the construction of new refineries by government controlled Sinopec and PetroChina.   But with demand slowing, refinery capacity in China is actually in surplus, and some recent months have seen China hit product export records, particularly for gasoline.  This has led to a scale back in construction plans, with only about 1.2 million BPD of capacity expected to be added over the next five years (after the recently announced cut in initial capacity at Sinopec’s new Zhanjiang refinery from 300 MBPD to 200 MBPD).   This is out of a total of 2.6 million BPD of announced projects, and although several of the other projects included in that total which we current list as “not likely” could surprise on the upside, we believe the biggest “wild card” might be a project we currently have included in our “probable” list.   This project, a 400 MBPD grassroots refinery and petrochemical complex planned for an island near Shanghai, comprises fully one-third of the total capacity growth expected in China.  Sponsored by privately owned Zhejiang Petrochemical, it is to be the first large-scale refinery built by a non-government entity.  The price tag for the complex is reportedly between $11 and $15 billion with a target start-up date of 2020.   But roadblocks remain, including funding sources and the potential that the government won’t grant final environmental or other approvals necessary to complete the project.  As a result delays or even the cancellation of this project are possible, but at the same time the success of this project could lead to a discussed second phase of a similar size or other privately sponsored projects within China.

“And I’m Wating For You” – Projects Shift to Rest of Asia; Success is Uncertain

As demand growth slows in China, it is accelerating in other parts of developing Asia.  And with demand growth come plans to expand refining capacity.  India has not only been active in this arena, but they have also been quite successful, led by private firms Reliance and Essar.  Both of these companies have become major forces in product supply, with the construction/expansion of mega-complexes on the northwest coast of India in recent years.   In fact not only these projects completed, but they were done on schedule and as cost effectively as any foreign projects anywhere.

Further significant expansion is being considered at both of these plants, although at this time we have those projects listed as “2” on our probability scale, thus excluding them from our Probable list.  Based on their past success however, we are following developments closely.  In the case of Essar, the impending sale of a 49% ownership stake to Rosneft is an important event.   While the sale has recently been delayed by a few weeks and could still be derailed, it appears likely.  Whether this makes the proposed 500 MBPD expansion at Essar’s Vadinar facility more likely is anybody’s guess.  Reliance, which already operates the world’s largest refining complex at nearby Jamnagar, is also considering a 400 MBPD expansion.

Perhaps the biggest unknown in India however is the mega-project that the three state owned refiners in India is promoting in Maharashtra, further down the western coast of India from the Reliance and Essar plants.   In this project, Indian Oil Corporation Ltd (IOCL), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) are teaming up to build a 1.2 million BPD integrated refining/petrochemical complex in three phases.  Construction is slated to start this year, and while we are skeptical that the entire $30 billion project will get built, we have included the completion of a 400 MBPD Phase 1 in 2021.

This mega-project is not the only project India’s state owned companies are pursuing to keep up with rapidly growing domestic product demand.  In fact India leads the world in proposed expansion projects over the next 5 years, a total of 3.5 million BPD.   Most of these are projects are being sponsored by IOCL, HPCL and BPCL, in some cases partnering with other firms.  Our current forecast calls for 1.4 million BPD of capacity to actually be completed by 2021 (including the 400 MBPD Maharashtra Phase 1), also a global leading figure.  Time will tell whether this is an over or under-estimation.

Other fast growing economies in Asia, most of which are growing importers of refined product, are also promoting significant new refineries and expansions.   Indonesia and Vietnam have among the largest product requirements and also the most ambitious refinery expansion plans.  Indonesia’s state owned oil company, Pertamina, has plans for up to 1 million BPD of new capacity, almost all in partnership with other state controlled companies, including Aramco, Sinopec and Rosneft.   Currently we have most of these projects rated as a “2” (20 to 40% probability of completion by 2021) and therefore not included on our Probable list.  The one major project we have on our Probable list is the 300 MBPD Pertamina/Rosneft JV grassroots refinery at Tuban in East Java, a project that Pertamina is prioritizing and targeting for completion by 2021.   Whether this plant gets built, or whether any of the other projects is advances will depend on developments over the next few months and years.  One thing to note is that despite great efforts Indonesia has not built a new refinery since 1994.

With demand beginning to explode and anticipation of accelerating growth, Vietnam also has a project list totaling a potential of 1 million BPD of new capacity.  One of these, the 200 MBPD Nghi Son refinery in the northern part of the country is set to start up this year, making it the second refinery in the country.  The only other project we have on our Probable list is the proposed 70 MBPD expansion of Vietnam’s current refinery at Dung Quat, also slated for a 2021 completion.  Petrovietnam, the state owned oil company is partnering with Gazprom on this project, and it is certainly far from a done deal at this point.  The largest proposed project in Vietnam, the 400 MBPD Nhon Hoi plant, appears to be dead at this point, with the announcement last year from the main sponsor, the Province of Binh Dinh, that it was cancelling the project.   The $20+ billion project needed funding from Saudi Aramco and Thailand’s PTT, and both entities soured on the project, especially after the fall in oil prices.

Other countries in Asia are also attempting to develop projects to keep up with demand and limit import dependence, with most of the activity in South and Southeast Asia (Pakistan, Bangladesh, Malaysia, Thailand, Myanmar, Brunei).  In total, 2 million BPD of projects are including on our comprehensive list for the rest of Asia, with about 500 MBPD making the Probable cut.  In most cases, significant uncertainty exists and there could certainly be shifts from one category in reaction to developments affecting the viability of the projects.  In next week’s blog, we will look at projects in the rest of the Eastern Hemisphere – essentially the Middle East and the Former Soviet Union (FSU) – to look for potential surprises and how those could impact global product balances.

TM&C has recently completed and published its 2nd edition of the WRCO.  Some of the key findings in this study were summarized in our February 7th blog.  In the 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.