GCC is leading the greenfield projects and refinery expansion drive in the Middle East with 1.5 million barrels per day (b/d) of new refining capacity expected online by 2021, a report said.
The new capacity will be dominated by the two major additions in Saudi Arabia and Kuwait, as well as clean fuel projects in the region, added the July edition of Apicorp Energy Research.
They will adhere to stringent European requirements for cleaner fuels, and will thus provide GCC refineries with a competitive edge in a tough market.
At the same time, these refinery additions are changing global trade flows, with the region exporting more refined products, particularly to Europe. As global capacity rises and fuel standards improve, competition will become more intense meaning a more uncertain outlook awaits the region’s refineries.
The GCC refining sector has seen tremendous growth over the past few years, mainly driven by significant government investments during a period of high oil prices. Governments have prioritised the expansion of the downstream sector for several reasons.
First, the region has witnessed rapidly rising demand for gasoline and diesel in the transportation sector, as well as diesel and fuel oil in the power sectors of Saudi Arabia and Kuwait. Second, governments are seeking to diversify away from crude exports towards more specialised refined products.
Third, they are also committing to create more value in their economies by integrating the crude, refining and petrochemical industries.
Refinery additions have shifted trade flows
Of the recent 1.2 million b/d of additional capacity, diesel represents over half, while gasoline and jet fuel output stood at around 350,000 b/d and 140,000 b/d. These additions have had a measurable impact on trade flows, particularly in the diesel market. Prior to the recent ramp ups, Kuwait and Bahrain had been the only two net diesel exporters in the region. As for gasoline, refineries in GCC countries were built to meet domestic demand.
As a result, Saudi Arabia has become a net exporter of diesel, with cargos competing in the European market. Thanks to the GCC region's geographical position between Europe and Asia, its refineries have turned into competitors to their Asian counterparts, especially in the overcrowded diesel segment. For example, Saudi Arabia had historically been a net importer until 2014; however, by 2016, the country had evolved into a net exporter of over 300,000 b/d.
This surge in diesel exports is attributed to the mainly diesel-oriented refineries that were recently built and geared towards increasing production in anticipation of rising demand in Asia, particularly China. As for gasoline, Saudi Arabia became a marginal net exporter of gasoline in 2016 after historically having been a net importer. In 2016, the Kingdom exported 5,000 b/d, coming from an average net import level of 55,000 b/d and 60,000 b/d in 2015 and 2014.
Second wave of expansion in the GCC region
Despite the oil price collapse since mid-2014, the region is still seeing significant investments in its refining sector. The main additions that came online in the past 12 months were condensate splitters in Qatar and Iran, which are geared towards producing gasoline and naphtha. In 2016, the Ras Laffan 2 condensate splitter added approximately 150,000 b/d of capacity.
This will reduce the country’s condensate exports from 500,000 b/d to 350,000 b/d, allowing the country to refine domestically before exporting. The splitter will mainly produce naphtha (60,000 b/d) and jet fuel (53,000 b/d), with the remaining being small amounts of gasoline and LPG.
In the period 2017-21, the region will continue its expansion plans with the 600,000 b/d Al Zour refinery in Kuwait and the 400,000 b/d Jazan project in Saudi Arabia being the major additions. The Jazan refinery is expected to commence operation in 2018-19 while the Al Zour refinery is expected towards the end of the decade. The rest of the additions will come from the Duqm refinery and the Sohar expansion in Oman.
The 230,000 b/d Duqm refinery -a joint venture between Oman Oil Company and Abu Dhabi's International Petroleum Investment Company (now merged with Mubadala) -is likely to come online in 2020. In addition, Bahrain's plans to expand the Sitra Refinery, which aim to add 100,000 b/d to the existing 260,000 b/d, are ongoing. In total, the GCC countries are expected add 1.5 million b/d of refining capacity between 2017-21, although the recent shutdown of the 200,000 b/d Shuaiba refinery in Kuwait means that net additions in the medium term will be 1.3 million b/d.
Uncertain longer-term outlook
The surge in refining capacity in the past decade was mainly a response to rising domestic demand but also an effort to diversify away from crude exports and integrate the crude, refining, and petrochemical industries. It is also having an impact on trade flows. The year 2016 marked a milestone for the GCC region as it became a net exporter of all refined products, although a marginal exporter of gasoline. On the other hand, diesel exports are expected to lead the way, having reached over 500,000 b/d in 2016, up from 310,000 b/d in 2015.
The slowdown in economic activity and the limited price reforms that were introduced in early 2016 have already impacted demand growth in the region, with diesel demand in Saudi Arabia hit particularly hard. Further price reform will likely have a more significant impact on domestic demand, possibly freeing up more refined products for exports.
In the medium term, there are plans to further increase refining capacity, but the outlook beyond 2021 is less certain. The Al-Zour project in Kuwait as well as the Sitra expansion program faced financing challenges which caused delay for several years, before finally reaching financial closure. On the other hand, tough competition in the products market and weakening demand is putting further pressure on the refining industry.
The recently commissioned projects, as well as the ones expected online in the next five years, are in the process of turning the region into a leading hub for exports of refined products. As elsewhere, the new refineries in the Middle East have been configured mainly to produce diesel to cater for the anticipated increase of diesel demand from Asia, particularly from China.
However, China’s economic rebalancing away from manufacturing towards consumer goods and services has changed demand patterns within the country: diesel demand, related to heavy industry and transport of goods, is flat-lining, while gasoline demand related to personal transportation continues to grow.
This has turned China into a net exporter of diesel. With US exports of distillates surging to record levels, Russia upgrading its refineries to produce more distillates, and Indian refineries ramping up their production, the competition in the products market, particularly in the diesel segment, has become more intense.
However, GCC export-oriented refineries might stand to benefit from the recent International Maritime Organisation rules which would alter demand patterns as fuel oil is replaced by diesel in 2020. – TradeArabia News Service
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