The new rise of the Middle East’s refining industry

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The Middle East’s refining industry is on the rise. Currently, new oil refineries are being built in the Middle East at an accelerating pace, which will result in a one-third increase in the region’s refining capacity over the next 5 years. These newly built refineries were designed and constructed in accordance with the EU’s new product specifications, and the oil they produce will be exported to Europe where it will compete with oil from Asia and the United States. This will accelerate the phase-out of old and inefficient refining facilities in Europe. The decline of the EU’s refining industry presents new opportunities; due to the rapid growth in long-distance trade, the prospects for Europe’s already weak refineries have become even more bleak. The European refining industry has long been plagued by overcapacity, which is why the utilization rate of its refineries remains low. Most refineries in Europe are designed to maximize gasoline production. The low utilization rate of refining units leads to increased production costs for refined products, as the small volume of processing results in higher fixed costs per unit of product. Moreover, European refineries have a higher ratio of gasoline to diesel, with a lower proportion of diesel production; since the market profit margin for diesel is currently relatively high, this means that the economic efficiency of these refineries suffers. Last year, the utilization rate of European refinery units declined further. However, refining capacity in the Middle East has increased significantly, and plant utilization rates have also declined due to the impact of the global economy. Even in the Asia-Pacific region, which is a hub for global refining capacity and has strong local demand, the utilization rate of refineries has declined. In contrast, refineries in the northern United States are increasing production capacity, leading to a significant rise in plant utilization rates. This is mainly due to, on the one hand, the surge in shale oil production in the United States, and on the other hand, the difficulty in exporting crude oil due to legal restrictions. This forces oil refining companies to increase production, processing crude oil into petroleum products for export. In recent years, there have been successive waves of closures of refineries in the EU, but the decline in the consumption and production of refined oil products has outpaced the decline in production capacity. Last year, the EU’s refining capacity was 14 million barrels per day, down 8% from its peak in 2006. However, during the same period, refined oil consumption in the EU region declined by 15.6%, while refined oil production dropped by 17.2%. The wave of refinery closures in the EU is far from over, with Italy being the first to be hit. Italy’s remaining refining capacity is particularly notable: with 12 refineries, it has a total refining capacity of 2.062 million barrels per day. Eni operates 6 refineries and is planning to close 4 of them. France follows closely behind. France has 8 refineries with a production capacity of 1.52 million barrels per day. Total owns 5 refineries in France on a wholly-owned basis, with a production capacity of 830,000 barrels per day. The company operates the Provence refinery on the Mediterranean coast, as well as the Feyzin and Grandpuits refineries in the interior; these three small refineries are considered to be at risk of closure amid the current wave of closures in the industry. There is uncertainty regarding the closure of British refineries. There are 7 refineries in the UK, with a production capacity of 1.52 million barrels per day. It is reported that India’s Essar Company intends to sell its Stanlow refinery, but it is also possible to reduce the refinery’s processing capacity from 230,000 barrels per day to 195,000 barrels per day. The American company Murphy also intended to sell its Milford Haven refinery in the UK, with a capacity of 135,000 barrels per day. The demand for refined oil products in Europe has been continuously declining, and market demand is shifting from gasoline to diesel. Few refiners are willing to invest in upgrading their production facilities to adapt to this change in market demands, which creates market space and opportunities for the construction of new refineries in the Middle East. The construction of refineries in the Middle East is accelerating. The first wave of refinery construction in this region took place in the 1980s, but the growing regional demand has long since made these refineries insufficient to meet the needs. The newly built batch of refineries can not only meet regional demand but also achieve an export capacity of 3 million barrels per day. This also aligns with the development trend of long-distance oil supply worldwide. The refining industry once tended to transport crude oil over long distances to refineries located near markets but far from oil fields, where it was processed into finished products for sale. But today, newly built large-scale refining plants are more competitive than older plants with lower production capacity. The construction of large oil product tankers and independent import facilities has made the route for exporting oil products from the Middle East smooth. A survey by the U.S. magazine Oil Economist found that the pace of new oil refinery construction in the Middle East in 2014 was the fastest in Asia. The Middle East has the largest number of new oil refineries being built; in this survey, it accounted for 34.7% of all confirmed oil refinery construction projects, while Asia, which had previously been in the lead, now accounts for only 31% and has dropped to second place. According to this survey, the global planned capacity for oil refining construction and expansion over the next 5 years is 8.93 million barrels per day, a slight decrease from the 10.53 million barrels per day reported in the previous year’s survey. Part of the reason is that the planned construction and expansion of refining capacity from the previous survey have been completed. The planned additional refining capacity amounts to 9.4% of the total current refining capacity worldwide. A large number of inefficient refineries around the world have been shut down, making it inevitable to build new ones. However, due to weak global economic growth, demand for oil products worldwide has declined, and the originally ambitious plans for oil refinery construction may be scaled back. In the coming years, most new oil refinery projects in the Middle East will be located in Saudi Arabia, Qatar, the UAE, and Iran. Among them, Saudi Arabia is the main driver behind the construction of new refineries in the Middle East, and it is significantly expanding its refining capacity to meet the growing domestic demand as well as to increase its export capabilities. SATORP’s newly built refinery in Saudi Arabia, with a capacity of 400,000 barrels per day, is the largest new refinery project to come online in the Middle East. The refinery began trial operations at the end of 2013, and its processing capacity is gradually increasing; it is expected to reach full production capacity in the third quarter of this year. This joint venture oil refining project is designed to process heavy crude oil from the Manifa field, with a target output of 185,000 barrels per day of high-quality gas oil. The commissioning of this refinery will enable Saudi Arabia to become a net exporter of gas oil once again. The Yanbu SABIC Refining Joint Venture, a partnership between Saudi Aramco (which holds 62.5% of the shares) and Sinopec (which holds 37.5%), is building a new refinery with a capacity of 400,000 barrels per day in Yanbu, Saudi Arabia; it is expected to begin operations at the beginning of 2016. The refinery will further increase Saudi Arabia’s production of gas oil and gasoline. Once the plant begins operations, Saudi Arabia will become a net exporter of gasoline. In addition, Saudi Aramco plans to build a new Jizan refinery with a capacity of 400,000 barrels per day, which is expected to be completed and put into operation in 2019. The refinery is designed to process heavy and medium crude oils, primarily to produce gas oil and gasoline in order to meet the growing demand within Saudi Arabia, while also enhancing Aramco’s export capacity. Unlike the other two newly built refineries, the Jizan Refinery will be wholly owned by Saudi Aramco. The Emirate of Abu Dhabi in the UAE is building a new refinery with a capacity of 417,000 barrels per day in Ruwais, which is expected to be completed and put into operation by the end of this year. This refinery will significantly increase Abu Dhabi’s export capacity for naphtha and intermediate distillates. A joint venture owned by Qatar Petroleum (with 84% stake), Total (with 10% stake), Idemitsu Kosan (with 2% stake), Cosmo Oil (with 2% stake), Marubeni Corporation (with 1% stake) and Mitsui & Co. (with 1% stake) is building a new condensate refinery in the Ras Laffan Industrial City, named Ras Laffan II (LR2). The refinery’s designed processing capacity is 146,000 barrels per day, and it is expected to come online by mid-2016. The refinery will process condensate from the northern gas fields in Qatar to maximize naphtha production, which is mainly exported to Asian markets. Despite being under severe international sanctions, Iran is also significantly increasing its refining capacity. It is expected that Iran will have new condensate refining capacity of 360,000 barrels per day, which will come online in phases over time, starting from the end of 2015 or the beginning of 2016. This will transform Iran from a net importer of gasoline into a net exporter. The refined oil market in the Middle East is relatively small, and the newly added refining capacity will undoubtedly need to find outlets in external markets. According to this survey, the new refining capacity in the Middle East amounts to 3.098 million barrels per day, which is one-third of the region’s current refining capacity of 8.822 million barrels per day. Last year, the region’s refined oil consumption was 8.526 million barrels per day, while production was 6.353 million barrels per day. Once the new refineries come online, the market for refined oil in the Middle East will experience an oversupply, making it necessary to seek exports. Or disrupt the global refined oil market; the rapid expansion of refining industries in the Middle East will change the flow of oil trade in Asia and threaten Asia’s export-oriented refineries. Since the turn of the new century, these refineries have held a dominant position in the market. As oil exporters in Asia, India, Singapore, and South Korea will face fierce competition, as the Middle East is penetrating their main import markets, which could disrupt the existing structure of the refined oil market from Asia to Europe. At the beginning of this year, two new refineries in the Middle East were completed one after another. The competitive advantages of these refineries once they come online are quite evident: not only do they have access to new technologies and cheap crude oil supplies, but they are also located near European and African markets, enabling them to replace Asian and American suppliers in those markets. Yanbu Aramco said it exported the first shipload of 300,000 barrels of diesel on January 15, with the second shipload being loaded in February, both destined for Europe. These new competitors from the Middle East could deal a severe blow to refiners in the Asia-Pacific region, forcing them to compete more in their home Asian markets, where demand growth has been slowing down. Due to overcapacity and competition from local companies, some oil refiners in Australia have been forced to close in recent years. Japanese refiners have also reduced their daily production capacity by about 1 million barrels, and **plan to implement another round of capacity cuts soon. Currently, the main exporters of oil products in Asia are India, Singapore, and South Korea; these three countries primarily export to other countries in Asia, selling fuel and lubricants, with only India exporting oil products outside of Asia. With the rise of the refining industry in the Middle East, India will first face competition in European export markets, and in the long term may also encounter competition in other markets such as those in Africa. As demand within Asia is gradually met and more new refineries are built in the Middle East, export-oriented refineries will need to reconsider their export markets in the context of global competition.