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Tuesday, October 23, 2018

Fueloil supply crunch by 2010?

Global refinery upgrades may be going too far, said Wood Mackenzie analyst Ms Aileen Jamieson at Prime Marine's third Product and LPG Tanker Seminar held this week in Edinburgh. In fact, they could lead to a global fueloil supply crunch, she said.


Globally, the regions with a fueloil deficit today are Asia Pacific (40m tonnes) and North America (20m tonnes). This significant fueloil deficit in the Asia Pacific region will actually increase by 2010 to over 50m tonnes, while the smaller deficit in North America will reduce by around half. The rest of the world is in fueloil surplus today, but by 2010, this surplus will be wiped out by growth in Asia Pacific's fueloil deficit and by reductions in the surplus elsewhere. "Has too much refinery upgrading been planned?" asks Jamieson.


Globally there are 31 new refinery projects (total 6.6m bbls/day) and 93 refinery expansion projects (total 6.8m bbls/day). Whereas new refinery projects have a poor track record of coming to fruition (about one in three that are announced actually happen), the ongoing expansion projects have a much better track record (the 93 underway today come from 110 announcements of expansion projects). So expansion/upgrading projects outnumber new projects by three to one.


Putting new refinery projects and expansion projects off track have been increased costs - contractors' desire for greater profit margins, greater risk premia (in case costs continue to rise) as well as increased cost of materials, labour and equipment. Cost increases have been in the order of  60%, with some even doubling initial cost estimates.


70% of all capacity additions are in Asia (where there is a balance between new projects and expansions) and the Middle East (where new projects outnumber expansions due to the desire to export products to the U.S. and Europe). In the U.S. expansions outnumber new projects because of the planning and environmental difficulties surrounding getting new refineries off the ground.


Upgrading refinery capacity means more emphasis on converting straight-run and simple-cracked residual fueloil, squeezing out more lighter (and more valuable) products, and leaving less residue of a lower quality. Whereas the supply of gasoline and distillates such as diesel and gasoil is increasing, fueloil supply is actually decreasing, emphasises Jamieson. Moreover, she adds, the current forecast is for growth in demand for high sulphur fueloil and reducing demand for low sulphur fueloil. This appears to be contrary to shipping industry needs for more low sulphur bunker fuel. However, the forecast is in fact based on inland demand switching from low sulphur fueloil to gas,  which reduces the demand for low sulphur fueloil, whereas demand for high sulphur fueloil remains on track.


This emphasis means that upgrading capacity coming on stream 2005-2010 will bring about a significant reduction in the global fueloil supply, which could create some shortages around 2010. At the same time, we could be heading for a global gasoline glut whereby the deficit in the U.S. would be more than made up by surpluses in the rest of the world (particularly in Europe) leading to a potential 60m tonne gasoline oversupply by 2010.


Contact: Bill Box