【Quality Reading】Review and Outlook of the Global Refining Industry in 2014

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I. Overview of the global refining industry in 2014
1. Global refining capacity continued to grow; new capacity primarily came from the Asia-Pacific and Latin American regions
In 2014, the world saw an increase in refining capacity of approximately 61.25 million tons per year, with most of this new capacity originating from the Asia-Pacific region. Among them, a number of Chinese refineries have added approximately 39.5 million tons/year in refining capacity through expansions and new constructions ； The refinery with a capacity of 15 million tons per year, built by Indian Oil Corporation at the Paradip port on India’s northeast coast, has come online ； The first phase of the newly built Abreu e Lima refinery by Petrobras has been put into operation, adding 5.75 million tons/year of primary processing capacity. Meanwhile, Australia, Europe, and the United States have shut down several small refineries, resulting in a reduction of refining capacity by approximately 21.2 million tons per year. Examples include Chevron converting its Kurnell refinery in Sydney, Australia—with a capacity of 6.75 million tons per year—into a fuel import terminal; and Murco Petroleum, a subsidiary of Murphy Oil, converting its refinery in South Wales, UK—also with a capacity of 6.75 million tons per year—into a storage and sales terminal. After taking increases and decreases into account, the world’s net increase in refining capacity in 2014 was approximately 40 million tons per year, bringing the total capacity to 4.628 billion tons per year (see figure below). http://123.57.64.218/uploads/public/450f01b7dfa27b2d51944963b18f8086c5239959.pngIn 2014, the total number of refineries worldwide was 643, and the average size of these refineries increased slightly, rising from 7 million tons per year in 2013 to 7.18 million tons per year. The total refining capacity of the world’s top 25 oil refining companies amounts to 2.72 billion tons per year, accounting for 58.9% of the global total capacity, thereby further increasing the concentration in the refining industry. Chevron dropped in rank due to adjustments in the refining operations of Garda Energy, of which it holds a stake, and swapped places with ConocoPhillips. Formosa Plastics Petrochemical has replaced Sun Oil of the United States to enter the top 25 oil refining companies in the world (see table below). http://123.57.64.218/uploads/public/3e654e470f07453a68e6f7230e6ca1e27554ceae.pngIn 2014, the world still had 22 refineries with a capacity of over 20 million tons each, and the ranking remained largely unchanged (see table below). http://123.57.64.218/uploads/public/98c0f2591b9df1c91486aaaafc6cc24db0b77797.png2. Globally, the crude oil processing volume in refineries has shown an upward trend with fluctuations, with the overall volume still reaching record levels. In recent years, the refining capacity outside of OECD countries has been increasing, while that in OECD countries has continued to decline. In 2014, the total crude oil processing volume by refineries around the world was approximately 77.3 million barrels per day (see figure below), representing a 2.0% increase year-on-year and reaching a record high. http://123.57.64.218/uploads/public/8d8a10330ba28c4becbe623ec48f44c68252f9a9.png Among these, the OECD’s crude oil processing volume is approximately 36.7 million barrels per day, slightly higher than the 36.6 million barrels per day in 2013 ； The processing volume at non-OECD** refineries was approximately 40.6 million barrels per day, representing a year-on-year increase of 3.59%. The increase in global crude oil processing capacity came mainly from non-OECD countries; in 2014, global crude oil processing volume showed an upward trend with fluctuations. Processing volume was around 77 million barrels per day in the first quarter, dipped slightly to a yearly low of 76.3 million barrels per day in the second quarter, and reached a record high of 77.9 million barrels per day in the third quarter. Processing volumes at refineries in the United States, Europe, China, and the Middle East all increased on a month-on-month basis in the third quarter, with processing volume expected to rise slightly to 78 million barrels per day in the fourth quarter. 3. The operating rate of refineries worldwide has seen a slight recovery, but it remains at low levels overall, with varying performance across different regions. In 2014, the average operating rate of refineries globally was around 83% (see figure below), slightly higher than the level in 2013. The OECD** refinery utilization rate is around 81.6%, slightly higher than 81.4% in 2013. http://123.57.64.218/uploads/public/63fa61123697d10957766b24837682b0e713bd54.png The average operating rate of refineries in the OECD’s North America region was 86.6%, higher than 85.6% in 2013; this is mainly due to low raw material costs in some areas of the United States as well as an increase in oil exports ； In Western Europe, the OECD region, the decline in refining capacity due to years of continuous plant closures has slightly eased the downward trend in operating rates; the operating rate of refineries increased slightly from 76.4% in 2013 to 77.5% ； In the OECD Asia-Pacific region, refinery utilization rates dropped from 79.3% to 76.6%, mainly due to an excess supply of diesel and restricted exports, which forced refineries to operate at reduced capacity. 4. Overall global refining gross margins declined. In 2014, the overall performance of refining gross margins in the world’s key regions was poor; those in Western Europe and the Asia-Pacific region were both lower than in 2013. The cracking gross margin for processing Brent crude oil in Rotterdam, Europe, dropped from $3.48 per barrel in 2013 to $3.32 per barrel, mainly due to a decline in European gasoline exports and an influx of diesel from the United States, the Middle East, and Russia. However, in the third quarter, as refineries in Northwest Europe and the Mediterranean region shut down part of their capacity for maintenance, refineries in the United States, Russia, and Asia also carried out maintenance work in September and October. This led to a significant reduction in diesel exports, resulting in a noticeable improvement in the profit margins of refineries in Western Europe. The cracking gross margin for Singapore’s refineries in the Asia-Pacific region, which process Dubai crude, dropped from $4.46 per barrel to $3.95 per barrel. The main reason is the surplus of diesel supply in the Asia-Pacific region, coupled with reduced imports by Western Europe, the traditional export market, which has pushed diesel profits in this region to their lowest level in 4 years. In the central United States, due to the sharp drop in oil prices, the gross profit of refineries processing WTI crude oil dropped significantly from $17.43 per barrel to $14.62 per barrel. Meanwhile, refineries in the U.S. Gulf Coast have seen their profit margins improve, as they have adapted well to processing low-cost tight oil/light shale oil. The cracking margin for HLS/LLS has risen from $5.66 per barrel to $8.43 per barrel, making this region the one with the most impressive refining margins worldwide (see the chart below). http://123.57.64.218/uploads/public/4d34987c6b6d67595efc0e429b985fb074eee787.png II. New Trends in the Development of the World’s Refining Industry 1. North American refiners take advantage of the increase in shale oil production to expand their capacity and achieve new levels of development. Thanks to the rapid growth in production of tight oil, especially shale oil, the supply of crude oil in the United States has increased significantly, with prices remaining relatively low. American refiners have benefited from this, seeing a notable improvement in their profit margins; exports of refined oils have also increased substantially. Some independent refiners have begun to expand their refining capacity again and are adjusting their processing strategies, thereby enabling the U.S. refining industry to experience new periods of growth. Due to the low cost of raw materials, U.S. refined oil products have a significant advantage in terms of export, making them highly competitive in European and South American markets as well as in Asian markets that are even further away. Moreover, most of the additional crude oil produced in the United States is light oil, which can be processed in relatively simple refining facilities with lower construction costs. As a result, the U.S. refining industry entered a new wave of capacity expansion (see table below). http://123.57.64.218/uploads/public/f9c348b9d0bca808cdabf56e221da2432b12cb0c.png In 2014, the first new oil refinery built in the United States in decades became operational in Dickinson, North Dakota. It is expected that by the end of 2015, the U.S. will have added at least 310,000 barrels per day of new refining capacity. In addition, there are several smaller-scale refining projects (around 20,000 barrels per day) that are either planned or under development. The additional capacity expected from these projects could exceed 500,000 barrels per day, which is equivalent to 2.8% of the current U.S. refining capacity. 2. The European refining industry remains in a difficult situation, with structural adjustments still underway. Affected by factors such as overcapacity, structural issues in oil products, and high costs for crude oil and processing, the European refining industry is facing challenges and will continue to undergo structural adjustments. Since 2009, 22 refineries have been closed in Europe, resulting in a loss of 2.3 million barrels per day in refining capacity. Additionally, 15 to 20 refineries have been sold by oil giants to independent traders or investors. Refineries in this region will face fierce competition from American refiners with advantages in terms of raw materials and refinery fuel, newly built large-scale refineries in the Middle East, and Russian refiners. Looking at the situation of refineries across Europe, some refineries in the European refining hubs of Rotterdam and Antwerp have, thanks to their scale and geographical location, carried out technical upgrades in recent years aimed at improving product yields and value ； Some inland European refineries that receive crude oil via pipelines can continue to operate by running at an appropriate level to meet the local market’s demand for petroleum products ； Refineries that lack significant conversion capabilities, require low-cost crude oil to achieve high yields of light oil products, and produce products that fail to attract local market consumers simply cannot compete with imported oil products. Such refineries have no choice but to shut down. As BP and Shell have decided to abandon their refining capacity in Europe, Total has become the largest refiner in the region. Total possesses a refining capacity of 1.742 million barrels per day in Western Europe, which accounts for 85% of its total global refining capacity. In July 2014, Murphy Oil announced its intention to sell its refinery in Milford Haven, UK, but the deal fell through and the plant was set to shut down. 3. The refining capacity in the Asia-Pacific region is generally excessive, and adjustments are being accelerated; however, countries such as India and Vietnam continue to expand their refining capacity. In 2014, economic growth in Asia slowed down, and diesel subsidies were reduced, leading to a decline in demand for diesel. With new refineries coming online in Asia, particularly in the Middle East, there is an excess of diesel in this region. Due to limited exports of surplus diesel at present, some refiners in Asia have reduced their plant operations, resulting in meager processing profits. Japanese refiners continue to shut down outdated facilities, and South Korean refiners are also considering reducing plant capacity; the average operating rate has dropped to around 80%. Due to the significantly lower operating costs of several newly built super-large refineries in Asia, multinational oil companies are adjusting or reducing their refining operations in Australia. Three of Australia’s seven refineries are expected to be shut down one after another: BP’s Bulwer Island refinery, with a capacity of 102,000 barrels per day, is gradually ceasing operations and will be converted by mid-2015 ； In July 2014, Shell sold the Geelong refinery with a capacity of 120,000 barrels per day to the Swiss group Vitol ； Later in 2014, Chevron transformed its Kurnell refinery in Sydney into a distribution hub for imported refined oil products. While some oil refining industries in Asia are undergoing adjustments, countries such as India and Vietnam continue to expand their refining capacity. In 2014, Indian Oil Corporation planned to nearly double the refining capacity of its two refineries. Previously, Indian state-owned refiners such as Indian Oil Corporation and Hindustan Petroleum Corporation, as well as private refiners including Reliance Petroleum Corporation, were planning or had already begun implementing large-scale projects to expand and upgrade their refining capacities. It is expected that by 2016, India’s refining capacity will increase from the current 215 million tons per year to 265 million tons per year. Vietnam is striving to develop its refining and petrochemical industries; the six large-scale projects planned there will cost over $50 billion in total, and they will add 66 million tons per year of refining capacity. Vietnam’s **Petroleum Company plans to invest $3 billion in partnership with Rosneft to expand Vietnam’s Nong Loc refinery’s capacity by 10 million tons per year. It is expected that in 2020, Vietnam will transition from a net importer to a net exporter of refined oil products, becoming one of Asia’s major oil product exporters. 4. The Middle East continues to expand its refining capacity in order to increase the production of cleaner petroleum products. Despite some project delays, refining capacity in the region is still growing rapidly, with Saudi Arabia, Qatar, the UAE, and Iran all building new refineries. Qatar is constructing the Ras Laffan II (LR2) refinery, with a capacity of 146,000 barrels per day, near the existing Ras Laffan I (LR1) condensate refinery, which also has a capacity of 146,000 barrels per day. The new refinery is expected to become operational in mid-2016; it will process condensate from northern oil fields and produce products that meet European standards. Saudi Aramco plans to invest over 100 billion dollars in the development of its refining industry over the next 10 years. Iran expects to bring online 360,000 barrels per day of condensate distillation capacity between 2015 and early 2016, allowing it to shift from a gasoline importer to an exporter. The expansion project of the Ruwais refinery at Abu Dhabi Refining Company in the UAE is scheduled to be completed around the end of 2014, adding 20.75 million tons per year of refining capacity. In early 2014, Iraq began building the long-planned Karbala refinery, with a capacity of 7 million tons per year. Kuwaiti **Oil Company is investing $31 billion to upgrade its existing Mina Abdullah and Ahmed refineries in order to produce cleaner fuels, thereby becoming the largest producer of low-sulfur fuels in the Middle East. It is also building the Al-Zour refinery, which will have a processing capacity of 30.75 million tons per year and will be the largest of its kind in the region. In the future, refining capacity in the Middle East will continue to grow, and the production capacity for clean fuels will increase significantly. 5. Russia is investing heavily in upgrading its refineries to produce cleaner fuels and increase exports of ultra-low sulfur diesel to Europe. Russia’s oil refining industry has a long history; however, due to outdated equipment and relatively backward technologies, refineries have long produced large quantities of high-sulfur fuel oil and middle distillates. Recently, however, this situation has begun to change. Russia **plans to gradually raise the tariff on fuel oil to 100% of the tariff on crude oil exports by 2015, while reducing the tariff on diesel exports from 66% to 61% between 2013 and 2016. Therefore, many Russian refiners are currently investing heavily in upgrading their plants to convert fuel oil into intermediate distillates. Given that both the domestic market and the European market require cleaner products, Russia is accelerating the upgrading of its refineries in order to meet the requirements for producing Euro V fuel by 2015. Many refineries have begun building hydrocracking and hydrotreating units; some of these units are already in operation, while most will come online gradually by 2020. Massive investment will create a surplus in the domestic clean diesel market in Russia, leading to a surge in exports of ultra-low sulfur diesel. Currently, there is a surplus of high-quality oil products in Russia; in the future, exports to Europe will be increased via the Baltic Sea. 6. The oil refining industry in Africa is developing slowly, with most **refining investments remaining stagnant. In recent years, Africa’s economy and demand for petroleum products have been growing rapidly. The continent has abundant natural oil resources, but apart from Uganda, Algeria, and Cameroon, the construction of new refineries in other African countries has almost come to a halt. Difficulties in financing, a lack of technical expertise, and political instability are the main reasons for the slow development of Africa’s refining industry. Over the past 10 years, out of 90 refining projects in Africa, only 7 were ultimately completed and put into operation. Of the planned new refining capacity of 1.1 million barrels per day, only about one-third is likely to be realized. Insufficient refining capacity forces Africa to import large amounts of oil from other regions. It is generally believed that building sales terminals in Africa at present can better meet the growing demand for petroleum products than constructing small-scale refineries. However, some analysts believe that the small refineries built with Chinese assistance in landlocked regions of Africa could prove successful. 7. Fuel standards are becoming stricter, and there is an accelerating pace of improvement in the quality of petroleum products around the world. Currently, many countries have proposed new standards for the sulfur content in clean gasoline and clean diesel to be implemented between 2015 and 2035. The European Commission has required EU member states to produce gasoline with a sulfur content close to zero, while Japan limits the sulfur content in gasoline to no more than 10 ppm. In March 2014, the U.S. Environmental Protection Agency introduced new standards for vehicle exhaust emissions and fuel quality, requiring that the sulfur content be reduced from the current level of no more than 30 ppm to no more than 10 ppm by 2035 (see table below). Countries will begin to implement the new standards gradually starting in 2017. http://123.57.64.218/uploads/public/9af58fcdab26a33412e70a3ede927e39c2b2daa9.png China has implemented the National IV standard for vehicle diesel since 2015 ； Since 2018, vehicle gasoline and diesel meeting National Standard V have been supplied nationwide. At present, provinces and cities such as Beijing, Shanghai, and Guangdong have taken the lead in vigorously promoting gasoline and diesel meeting National Standard V. India has proposed a phased approach to the upgrade of clean fuels, requiring that gasoline and diesel meet the BS4 clean fuel standard (equivalent to Euro IV) starting from April 2017, with the upgraded BS5 clean fuel standard (equivalent to Euro V) to be implemented by 2020. Under the new standards, Indian refineries are expected to spend 800 billion rupees on upgrading their facilities. Russia requires that the sulfur content in diesel used as transportation fuel be reduced from 1,000 ppm in 2013 to 10 ppm by 2016; Russia will begin implementing Euro V standards for clean fuels in 2015. Currently, countries around the world have begun to increase investments, phase out outdated processes, introduce new technologies to upgrade or build new refineries, and implement projects aimed at improving the quality of clean petroleum products. In 2014, approximately $77 billion was invested globally in refinery capacity expansions and upgrades to cleaner fuels. III. Future prospects for the global refining industry: Due to the slow recovery of the world economy and an overall surplus in refining capacity, the growth rate of global refining capacity will slow down. Asia-Pacific and the Middle East will be the main regions where refining capacity will increase in the future. In 2015, the world saw an addition of 78.75 million tons per year in refining capacity, with the new capacity coming primarily from the Middle East, China, and Latin America. Among them, China will add 28 million tons per year of refining capacity ； The expansion project of the Ruwais refinery at Abu Dhabi Refining Company in the UAE will add 20.75 million tons per year of refining capacity ； Iran’s processing capacity for condensate, amounting to about 18 million tons per year, will be put into operation gradually starting from the end of 2015 ； The capacity expansion project at Bharat Petroleum Corporation Limited’s Kochi refinery in India will add 6 million tons/year of refining capacity ； Indian Oil Corporation is building a new refinery with a capacity of 15 million tons per year in Gadchiroli; the first phase of this project, which involves a refining unit with a capacity of 6 million tons per year, is expected to come online in 2015. It is estimated that 8 million tons per year of refining capacity will be shut down globally in 2015, primarily in Europe, with some closures taking place in Asia and Australia. The main reasons for this are weak refining profits, aging plants, new environmental regulations, and rising labor costs. The continuous decline in oil prices will dampen enthusiasm for refinery construction, and some projects may be delayed; it is estimated that the world’s net increase in refining capacity in 2015 will be around 60 million tons per year. Over the next 5 years, the surplus in global refining capacity will worsen; some refining projects may be delayed or canceled, and more refineries will inevitably close due to market saturation. Asia-Pacific and Africa, which are not part of the OECD**, will remain the main drivers of growth in refining capacity, accounting for 48% of the world’s new capacity (see table below) ； The development of refining capacity in the Middle East depends on project financing and progress in the region ； Plagued by project delays and funding issues, there is limited capacity for new additions in Latin America and Africa ； Refining investments in the former Soviet Union region have focused on improving the yield of light oils and product quality, rather than rushing to expand primary processing capacity. The sharp increase in shale oil and condensate supplies will spur investment in the refining industry in North America. http://123.57.64.218/uploads/public/d7e84d52895549844836147d5d12030345fe26b7.png With slowing demand and overcapacity, world refinery utilization rates will remain low in the coming period. Based on current production capacity and planned expansion projects, the operating rate of the global refining industry will drop to around 80% by 2015. With declining oil demand, refinery utilization rates in OECD** countries are expected to fall further, possibly dropping to 77% in 2019. For non-OECD** countries, the utilization rate is projected to remain at 78%–79% by 2019. Overall, the global refining industry will develop steadily amid restructuring and adjustments. Newly built and expanded refinery projects in resource-rich countries and emerging markets will continue to progress, and global refining capacity will keep growing, albeit at a somewhat slower pace ； Larger scale, cleaner operations, integration of refining and chemical processing, and the formation of industrial clusters will remain the inevitable paths for the development of the oil refining industry in the future ； Countries will step up efforts to upgrade and transform their refineries to meet the increasingly stringent environmental requirements regarding cleaner fuels, energy conservation, and emission reduction. With the further development and growth of the refining industry in the Middle East and the ongoing restructuring of the refining industry in Western Europe, the gap in refining capacity between the two regions will gradually narrow. The global refining industry will thus take on a new pattern characterized by four major hubs: Asia-Pacific, North America, Western Europe, and the Middle East. The global center of refining activity will continue to shift eastward; refiners in developed regions such as Western Europe and Japan will selectively adjust and develop their refining operations based on resource availability, market conditions, and the actual circumstances of their plants. (Published originally in International Petroleum Economics ； Author: Xu Haifeng ； China National Petroleum Corporation Research Institute of Economics and Technology)