The GCC countries are in a diversification drive away from crude oil export dependency, but as global capacity also rises, increasing competition means a more uncertain long-term outlook for the region’s refineries, APICORP said in its new energy research report.
The refining sector saw tremendous growth over the past few years, mainly driven by significant government investment during a period of high oil prices, according to the report titled “An uncertain outlook for the refining sector in the GCC.” This was partly motivated by rising domestic demand in the GCC for gasoline, diesel and fuel oil in the transportation and power sectors. It was also driven by a diversification strategy as well as a commitment to create more value in regional economies. The last few years saw the expansion of refining capacity due to the commissioning of several projects. The completion of the two Saudi refineries - Yasref and Satorp - in 2014 and the expansion of the Ruwais facility in the UAE added approximately 1.2 million bpd of new and cleaner refining capacity. Built with an eye on supplying the growing Asian market, these new refineries have contributed to turning the GCC into a net exporter of refined products in 2016, particularly in the diesel segment.
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 bpd in 2016, up from 310,000 bpd in 2015. Of the recent 1.2m bpd of additional capacity, diesel represents over half, while gasoline and jet fuel output stood at around 350,000 bpd and 140,000 bpd. These additions have had a measurable impact on trade flows, particularly in the diesel market. “The GCC’s new refineries are very sophisticated and are competing with the Asian ones. Additionally, the region’s strategic position (between Asia & Europe) give it a competitive edge,” Ghassan Alakwaa, research analyst at APICORP said to Pipeline Magazine. As GCC countries ramped up to reach full capacity in 2015, the economies slowed mainly from an oil-price slump, and governments introduced limited pricing reforms, slowing domestic demand growth and, in some cases, reversing growth. This was particularly the case for diesel in Saudi Arabia. After having peaked at 779,000 bpd in 2015, diesel demand declined to 701,000 bpd in 2016, representing a decline of 10 per cent in one year, the report said. The slowdown in the rate at which demand had been growing in the region is freeing up more refined products for export, competing with Asian refineries in a more congested products market.
As a result, Saudi Arabia has become a net exporter of diesel, with cargos competing in the European market. Further price reform will likely have a more significant impact on domestic demand, possibly freeing up more refined products for exports, APICORP said.
In 2016, the Kingdom exported 5,000 bpd of gasoline, coming from an average net import level of
55,000 bpd and 60,000 bpd in 2015 and 2014. “The impact of this is mostly felt in the Asia Pacific region and in India, which used to be major exporters of refined products – and particularly diesel - to the Middle East and Europe,” the report said. Prior to the recent ramp ups, Kuwait and
Bahrain had been the only two net diesel exporters in the region. While for gasoline, refineries in GCC countries were built to meet domestic demand.
“GCC diesel-oriented refineries were built with anticipation of growing demand in Asia. But diesel demand in China in particular has been flat-lining. As a response, these refineries are increasingly targeting the European market,” Alakwaa said. Meanwhile, 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, intensifying competition to a crowded refined fuel market.
Despite the oil price collapse since mid-2014, the region is still seeing significant investments in its refining sector and in the medium term, GCC countries are expected to add 1.5 million bpd of refining capacity between 2017 and 2021, APIRCORP 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, providing GCC refineries with a competitive edge in a tough market.
Saudi exports in particular have a competitive edge in ultra-low sulphur diesel which meets European standards for cleaner fuels, while also offering less transportation cost and travel time than their Asian counterparts.
The 600,000 bpd Al Zour refinery in Kuwait and the 400,000 bpd Jazan project in Saudi Arabia will be 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 bpd 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, APICORP said.
In addition, Bahrain’s plans to expand the Sitra Refinery, which aim to add 100,000 bpd to the existing 260,000 bpd, are ongoing.
Most clean fuel projects are taking place in Saudi Arabia and Kuwait. The Jazan refinery will produce high quality transportation fuels including ultra-low sulphur diesel as the Kingdom aims to reduce sulphur content to 10 parts per million (ppm) and benzene amount to 1 per cent in gasoline. The recent refinery additions in the Kingdom represented a major shift in fuel grades. Prior to 2012, the
Kingdom’s sulphur level in diesel exceeded 500 ppm. Other refineries such as Ras Tanura and Riyadh are also being upgraded to meet higher standards. In Kuwait, ambitious plans are underway to upgrade and expand its refining sector with investments expected to surpass $20 billion in the medium term. The Al Zour refinery is expected to be one of the largest in the world, with high specifications allowing it to produce clean fuels. Projects to upgrade Mina Abdullah and Al-Ahmadi refineries will significantly reduce sulphur and benzene content – from 500
ppm to under 10 ppm in gasoline and from 4.5 ppm to 1 ppm in fuel oil.
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.
However, 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.
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.