Refiners profit from cheaper crude, shore up battle for market share

The plunging oil prices, which have dropped by more than 50 percent since mid-June and are expected to remain low at least until the second half of 2015, will help refining margins, which have been low in recent years.

The refining business benefits from lower crude prices in a number of ways like making some products, such as asphalt, that are insulated from oil price fluctuations. The refining boon more than made up for gloomy returns from oil and natural gas production as tumbling crude prices and faltering output dented profits from those businesses. 

Countries like South Korea with no oil and natural gas reserves of its own is home to three of the largest oil refineries in the world and has positioned itself as one of the dominant oil product exporters in the Asia-Pacific region. South Korean refinery margins should recover with some strength in petrochemical spreads after a very weak second half last year. ”Relatively weaker oil prices are supporting modest economic growth in South Korea, and  domestic oil demand as evidenced by stronger January data, which appears to show an uptick in transport fuel demand on a year-on-year basis,” he said.

In a wire report monitored by BusinessDay, Antonio Della Pelle, managing director of data provider and energy consultancy Singapore-Enerdata, agrees that low oil prices will support a rebound in South Korean refining margins this year and the oil refining industry as a whole.

“The main concern for refineries such as in South Korea is growing supply, notably from India and the Middle East, amid weak demand from China that will continue to weigh on margins,” Della Pelle said. “Moreover, the situation is not going to improve for the Korean oil refining industry.”

Crude supply headache

Diversifying crude supplies for South Korea has been difficult. In 2013, the country imported nearly 2.5 million barrels per day (bpd) of crude oil, making it the fifth-largest oil importer worldwide. Of that amount, nearly 90 percent was imported from the Middle East. Middle Eastern suppliers offer discounts to South Korea to maintain market share.

Diversifying crude oil sources for South Korea will also be difficult because the country’s refiners are mostly configured to process Middle Eastern crudes. The suppliers will also be watching policy trends in South Korea, particularly recent measures that provide subsidies to refiners importing crude oil from the Americas, Africa and Europe in an attempt to diversify the crude import slate.

Looming battle

Many analysts state that India will continue to offer stiff competition for South Korea because it already has several world-class refineries. The EIA, citing FACTS Global Energy data, said at the end of 2013 India had 4.35 million bpd of refining capacity, second only to China, Asia’s largest refiner. India enjoys several advantages over its South Korean counterparts, including being closer to Middle Eastern suppliers. Its proximity to the Mideast lowers transportation costs, thereby allowing it to pass these savings on to buyers of its refined products.

India is poised to expand market share in the Asia Pacific region, especially as expanding capacity in the Middle East displaces Indian distillate and gasoline barrels from the West. However, he added that he doesn’t believe they will pressure South Korean runs.

Saudi Arabia, however, is the new refining player. The Kingdom, known mostly as the world’s leading crude oil exporter and the de facto OPEC leader, increased its export of refined oil products from 55.9 mt in 2013 to 73 mt in 2014, an increase of 17.01 mt year-on- year. Meanwhile, China’s import of oil products dropped last year to 43.82 mt from 52.7 mt in 2013, while Indonesia’s imports rose last year to 43.97 mt from 32.64 in 2013.

Saudi Arabia is now a double key player both in the supply of crude oil and, most recently, in the supply of refined products. In fact, Saudi Arabia plans to become the world’s second-largest exporter of refined oil products by 2017 and this year is scheduled to bring on-stream two new refineries adding 800,000 bpd capacity for a total of more than 3 million bpd of capacity.

Saudi Arabia is much more a game changer than India, and overall both Indian and Saudi Arabian refineries will be direct competitors to South Korean refineries.

What Nigeria is missing

Nigeria is the world’s 13th largest oil producer but the country does not have significant refining capacity. Just like Saudi Arabia, Nigeria could have become a double key player which obviously should have been a game changer for its economy.   

A number of other oil producing countries are exporting finished derivatives of crude oil. With the dwindling demand of crude oil from other countries, the implication is that a significant proportion of the money earned from crude oil sale goes out again to import processed petroleum products.

Even amongst African countries, despite its status as the continent’s top crude oil producer and exporter, Nigeria continues to trail other African countries such as Algeria, Egypt, Libya and South Africa in terms of refining capacity. The World Oil and Gas Review 2014 shows Egypt as having the highest primary refining capacity in 2013 among the five countries, followed by Algeria and South Africa.

Nigeria is arguably the biggest importer of refined petroleum products on the continent, creating a lucrative market for refineries particularly in Europe and the United States. The country imports more than 80 per cent of its refined petroleum products for the servicing of its economy. Attention should therefore shift to in-country refining of the nation’s crude oil.

The Nigerian National Petroleum Corporation (NNPC) has four refineries; two in Port Harcourt (PHRC), and one each in Kaduna (KRPC) and Warri (WRPC). The refineries have a combined installed capacity of 445,000 bpd. A comprehensive network of pipelines and depots strategically located throughout Nigeria links these refineries.

NNPC has put the combined average capacity utilisation of the four refineries at 25.95 percent for the month of December 2013. This is a significant improvement from the 6.46 percent capacity utilisation of the refineries in November 2013, and a slight decline from the 30.87 percent utilisation year on year to December 2012.

FRANK UZUEGBUNAM