Middle East companies ready to pounce on oil refining growth
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The oil industry’s historically forgotten business - petroleum refining and processing - is stepping into the limelight as the outlook for upstream exploration and production remains uncertain, writes Sara Stefanini.
And Middle Eastern companies, in particular, are preparing to pounce on the downstream pickup.
Forecasts show that the growth in global oil demand is slipping, as efforts to limit climate-warming greenhouse gas emissions lead to cleaner alternatives such as renewable energy and electric vehicles. Likewise, some predict that the rise in need for refined oil products will slow.
However, the International Energy Agency (IEA) does not see an imminent peak in oil demand just yet. That said, it expects the growth to slip to around 1 million barrels per day by 2023, from 1.4 million now.
Global refining capacity is also set to increase up to 2023, according to an IEA report published in March. The biggest rise is coming from the Middle East, where national oil companies are venturing into international markets, it said.
Petrochemicals, in particular, are projected to be the fastest-growing source of the increase in oil demand in the coming years, the IEA said. It is driven by economic growth, as rising incomes in developing countries push up demand for consumer goods such as food preservatives, fertilisers and lubricants for automotive and industrial operations.
BP, similarly, expects global demand for liquid fuels to go up by around 13 million barrels per day up to 2040, if climate policies and clean technologies continue their recent progress. The growth will wane and plateau towards the end of the period, the oil major said in its 2018 energy outlook report.
The downstream industry’s rise began with the collapse in crude oil prices from 2014. Refineries use crude oil to produce petrochemicals, diesel and jet fuel, heating oil and other products, so the cheaper the feedstock, the wider the profit margins.
As a result of low oil prices up to late 2017, integrated oil majors such as Royal Dutch Shell, Total and Exxon Mobil saw their refining business jump while exploration and production suffered. Investments in new oil and gas supply projects around the world slumped by about 25 percent in 2015 and 2016, and remained flat in 2017, according to the IEA.
But while crude oil prices surged again this year, the outlook is still choppy.
Oil production is expected to grow in the coming years, keeping prices in check in the lower $70s per barrel, according to the US Energy Information Administration. Much of the movement this year and next, however, will depend on whether OPEC countries continue to limit their production, as Iranian exports decline under new US sanctions.
Meanwhile, oil demand growth is slipping, however slowly. The risk management consultancy DNV GL is less bullish than the IEA, predicting that it will peak in 2023.
This uncertainty bodes well for the downstream oil business — especially in emerging economies. European refining has declined over the past decade, triggered by the financial crisis and higher crude oil prices up to 2014, according to S&P Global Platts. As a result, new and more modern refineries in the Middle East, India, the US and elsewhere are cutting into European refinery margins.
With growth in mind, there is a marked realisation in the industry that it needs to keep up to date with technological advances.
National oil companies in the United Arab Emirates, in particular, are looking to form joint ventures with international oil companies to share and expand on skills, knowledge and technology.
The Abu Dhabi National Oil Company (ADNOC) has a long-running plastics joint venture with Austrian polyethylene and polypropylene producer Borealis, called Borouge. The partnership continues to expand its projects: Borouge announced plans in September to build its fifth polypropylene plant in Ruwais, Abu Dhabi, and is investing in China to tap into a projected growth in plastics demand.
ADNOC also struck a deal with Moroccan phosphate maker OCP Group in May to look at creating a global joint venture to produce fertilisers. The same month, the Pakistan-Abu Dhabi joint venture Pak-Arab Refinery awarded a contract for the development of Pakistan’s largest refinery project.
For Middle Eastern exporters, a free trade agreement between the European Union and Gulf countries would make petrochemicals exports even more profitable. For now, however, the liberalisation of trade between the two remains a far-off hope. The EU and Gulf Cooperation Council started negotiating the deal in 1990, but effectively halted talks in 2008.
In the meantime, Abu Dhabi is shifting its attention downstream, including at the Abu Dhabi International Exhibition and Conference (ADIPEC) this November.
The event will host a series of technical sessions looking at how to drive a circular economy in the downstream sector, and how state-controlled and private oil companies can meet new rules for environmental and sustainable operations. Speakers include representatives from Brazil’s Petrobras, the Nigerian National Petroleum Corporation, Bahrain Petroleum, ADNOC, Spain’s Repsol and Italy’s Eni.