IEA: Weak refining margins likely over next 5 years

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, June 23 -- Global refinery runs recovered in 2010, but early 2011 margins well below the past decade’s sometimes heady levels suggest excess capacity will exist and margins will stay low for another 5 years, an International Energy Agency official indicated on June 22.

IEA’s midterm oil and gas outlook, released June 16, forecasts 9.6 million b/d of crude distillation capacity increases during 2010-16, largely in China and India, said David Fyfe, head of IEA’s oil industry and market division. Further capacity additions will include 6.6 million b/d for upgrading and 7.3 million b/d for desulfurization, he said during a seminar at the Center for Strategic & International Studies.

“For margins to improve, about 4 million b/d of refining capacity would have to close by 2016, which is unlikely because national oil companies are snapping up and modernizing older plants, especially in Europe,” Fyfe said. Refiners also are feeling competition from growing use of natural gas liquids and biofuels, which bypass refining altogether, he added.

He would not comment on Federal Trade Commission Chairman John Leibowitz’s June 20 announcement that the US government agency will investigate whether oil and product price increases this spring resulted from possibly anticompetitive behavior. But Fyfe said refiners in consuming countries worldwide apparently have simply responded to weaker markets.

“Our view would be that economic signals have kept throughputs low overall and margins depressed,” he said. “We do expect throughputs to pick up from June onward, as they normally do.”

Price volatility
Fyfe said oil price volatility seems to be at more routine levels following the particularly intense 2007-08 period. Speculation has assuredly grown in the last decade, but has leveled off and even receded somewhat since late 2008, he said.

IEA’s latest midterm outlook said robust refining capacity growth—much of which is highly complex and strategically aimed at adding value to rising domestic oil production—in China, the Middle East, elsewhere in Asia, and Latin America will likely place older and less complex plants within the Organization for Economic Cooperation and Development under increasing pressure.

“Given the pattern of product demand growth expected to 2016, middle distillate markets could remain relatively strong, the more so longer term if the switch to marine diesel continues,” it said. “The fuel oil outlook also appears tighter than we envisaged last year, as lighter feedstock supplies and high levels of committed upgrading investment combine with a slightly more robust demand outlook.”

Fyfe said IEA also expects strong global petrochemical capacity growth through 2016, particularly in China and India, which look like good customers for distressed liquefied petroleum gas from Persian Gulf producers.

Anne-Sophie Carbeau, an IEA senior gas analyst, discussed the midterm outlook’s natural gas forecast. China “is betting on absolutely everything” in securing gas supplies, from increasing domestic production, including shale gas, to constructing pipelines from Turkmenistan and Burma and signing major LNG contracts with Qatar and Australia, she noted.

Contact Nick Snow at nicks@pennwell.com.



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