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World Oil
Outlook
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The medium-term outlook for the downstream sector indicates sustained
pressure for capacity rationalization, especially in OECD regions.
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New refining capacity moves to developing countries
Recent assessments indicate that around 6.8 mb/d of new crude distillation
capacity will be added to the global refining system in the period to 2015.
The highest portion of this new capacity is expected to materialize in the
Asia-Pacific region, mainly in China and India, accounting for 50% of
additional capacity, or 3.4 mb/d. While investments in refining capacity in
the Asia-Pacific are predominantly driven by domestic demand, in the other
two regions with the highest capacity additions to 2015, the Middle East and
Latin America, the incentive is a combination of local demand and, given
their increasing supplies of domestic heavier crude streams, the 'value
added' benefits of refining 'at home'. Of the global 6.8 mb/d of new
refining capacity by 2015, the world's developing regions will account for
almost 5.5 mb/d. The scale of new refining capacity in developing countries
stands in stark contrast to that assessed to come on stream in developed
countries. North America and Europe combined, show an increase of 0.7 mb/d
for the period to 2015 and this does not take into account any planned or
potential capacity closures. In addition to crude distillation capacity, a
relatively high proportion of secondary process units will be added to the
global refining system in the medium-term. Additions to conversion units are
estimated at 4.4 mb/d, driven by strong demand for light products,
especially middle distillates. Desulphurization capacity additions exceed
those for new distillation capacity, reflecting the continued worldwide
trend to low and ultra-low sulphur fuels.
Crude distillation capacity additions are projected to exceed requirements
in the medium-term
The net effect of assessed 'firm' projects is that excess refinery capacity
is anticipated to grow by 2.5 mb/d by 2015 compared to current levels,
assuming no refinery closures. This reinforces the expectation of a
challenging period for the industry, with lower refinery utilizations and
weak margins. Moreover, strong regional differences will apply, notably
between the continuing growth requirements in non-OECD regions, especially
Asia, and surpluses in the US, Europe and Japan.
Effective refining 'spare capacity' approaching the level of 10 mb/d by 2015
In
2009, the oil demand collapse, combined with refinery capacity additions,
led to substantially lower through puts. This shifted effective 'spare
capacity' in the global refining system to a level of more than 7 mb/d.
Accounting for new projects coming on stream, the overall refining surplus
could approach 10 mb/d by 2015, unless some capacity is closed. Thus,
today's refinery projects - and those assessed to come on stream in the next
few years - potentially represent a substantial proportion of the total
additions needed over the next 10-to-15 years.
Capacity rationalization in the refining sector appears inevitable
The medium-term outlook for the downstream sector indicates sustained
pressure for capacity rationalization, especially in OECD regions. The US
and Europe are home to the largest capacity overhangs. In Europe, only a few
facilities have been formally shut, with a total capacity of around 500,000
b/d. The prevailing trend has been to sell refineries or undertake extended
maintenance and temporary shutdowns. In the US, a combination of expanding
local crude production, healthy margins due to wide West Texas Intermediate
differentials and rising export opportunities, could act to support
capacity, leading to only minor closures in the US over the next few years.
The one country where closures currently look set to occur at scale is
Japan, where up to 1 mb/d of distillation capacity could eventually be
closed by 2015. China is another case where legislation is likely to have an
impact. However, this is related to the goal of eliminating the country's
small refineries with capacities below 40,000 b/d. The elimination of very
small refineries could also take place in Russia.
Declining crude share leaves little room for further refining expansion in
the long-term
It
is significant that, beyond the 6.8 mb/d of known projects expected to be on
stream by 2015, the Reference Case outlook shows that only an additional
10.5 mb/d of cumulative additions will be needed by 2035. In the subsequent
five-year periods after 2015, the required level of capacity additions
averages only around 0.4-0.5 mb/d p.a. The underlying reason for this trend
is that non-crude supplies increase faster than demand, and thus, as a
proportion of total supply. It means that less incremental refining capacity
is needed per barrel of incremental liquids demand. Indeed, by 2035, it is
expected that the total supply of around 110 mb/d will be met by close to 82
mb/d of crude-based supplies and 27 mb/d of non-crudes (including processing
gains).
Asia-Pacific will dominate long-term future capacity additions
The vast majority of required refining capacity expansions to 2035 are
projected for the Asia-Pacific and Middle East regions, 9.8 and 3 mb/d
respectively, from a global total of 17.2 mb/d. Growth in the Asia-Pacific
is dominated by China and India. In Latin America, projected capacity
additions of 1.7 mb/d by 2035 exceed the estimated moderate demand growth of
1.3 mb/d for the same period. Capacity requirements in Africa and the FSU
region are in the range of 1 mb/d. The outlook in these regions differs
markedly to that for industrialized countries, which beyond projects already
under construction, see virtually no capacity expansion.
Growing importance of hydro-cracking units
Recent projections highlight a sustained need for incremental
hydro-cracking, some 10 mb/d out of the 14 mb/d of global conversion
capacity requirements by 2035. The need to keep investing in additional
hydro-cracking capacity, with its high process energy and hydrogen costs, is
expected to help support future wide distillate margins relative to crude
oil and other light products. In contrast, recent substantial coking
capacity additions, together with limited medium-term exports of heavy sour
crudes, has led to a coking surplus, which is expected to further expand as
new projects come on stream.
Therefore, between 2015 and 2035, less than 1 mb/d of further coking
additions are projected. The outlook for catalytic cracking is similar. It
is adversely impacted by relatively slow gasoline demand growth and rising
ethanol supply in the Atlantic Basin. Moreover, total conversion additions
of close to 10 mb/d, above projects currently being developed, are almost
100% of distillation capacity additions. This reflects the need to increase
the production of light products for every barrel of crude processed.
Substantial desulphurization capacity additions will also be necessary to
meet sulphur content specifications, as non-OECD regions, in particular,
move progressively towards low and ultra-low sulphur standards for domestic
fuels - often following the Euro III/IV/V standards. In addition, these
regions can be expected to use this new capacity for exports to countries
that already have advanced ultra-low sulphur standards. Over and above
existing projects of 5.8 mb/d, a further 4.2 mb/d is projected to be needed
by 2015, and some 13 mb/d from 2015-2035.
Oil trade continues to expand
Oil trade between the 18 model regions of the WOO's downstream outlook is
set to grow over the entire forecast period. It will increase by around 4 mb/d
in the period to 2015, compared to 2010 levels. Between 2015 and 2035, total
oil movements are projected to increase by more than 8 mb/d, reaching a
level close to 70 mb/d by 2035.
Moreover, product exports will grow faster than those for crude oil. Steady
increases in global crude oil exports are a result of varying trends at the
regional level. The most obvious is the expanding importance of the Middle
East as the key crude exporting region in the decades ahead. The largest
increase in inter-regional movements relates to crude oil exports from the
Middle East to the Asia-Pacific; an increase of 7 mb/d from 2010-2035. In
relative terms, however, Russia and the Caspian countries will more than
triple their crude exports to the Asia-Pacific, as new pipelines to China
and Russia's Far East become operational. And at the same time, exports to
Europe are significantly reduced. Similarly, Africa will almost double its
crude exports to the Asia-Pacific by 2035.
Uncertainties surround refining investments
Substantial capital investments are required to expand and provide
maintenance to the global refining system. In the period to 2035,
investments are estimated at around $1.2 trillion in the Reference Case, of
which $210 billion is for existing projects, $300 billion for required
additions and close to $700 billion for maintenance and replacement.
This excludes related infrastructure investments beyond the refinery gate,
such as port facilities, storage and pipelines. These investments are,
however, subject to a number of uncertainties. A refining sector that is
being squeezed by the rising supply of non-crudes, could become even more
pressured by further liquids supply growth, notably from NGLs, given the
emergence of shale gas. In addition, biofuels represent a further
'wildcard', especially if second and third generation biofuels evolve faster
than expected. On the demand side, while non-OECD demand looks robust,
transportation efficiency measures in industrialized regions could lead to
steeper declines there, and policy measures could reshape the demand slate.
And, if the crude price to natural gas price ratio remains wide enough,
liquefied natural gas could become an attractive option for marine fuels
replacement, especially longer term, and on new build ships. Moreover, there
are the uncertainties surrounding possible capacity shutdowns. This suggests
a cautious approach should be adopted with respect to future refining
investment decisions.
The importance of alleviating energy poverty
Figures from the United Nations show that 1.4 billion people have no access
to electricity and some 2.7 billion rely on biomass for their basic needs.
Moreover, according to the World Health Organization, relying on biomass
means 1.45 million premature deaths per year, most of them children, a death
toll greater than that caused by malaria or tuberculosis. It is essential
that the world effectively tackles the issue of energy poverty, as a means
of achieving the Millennium Development Goal (MDG) of halving the proportion
of people in poverty by 2015. Sustainable development is a high priority
agenda item for OPEC Member Countries. It is also the main objective of the
assistance they provide to other developing countries, directly through
their own aid institutions, as well as through the OPEC Fund for
International Development.
In
total, they have provided close to $350 billion (in 2007 prices) in
development assistance to other developing countries in the period
1973-2010. This amounts to nearly $10 billion a year. A significant portion
of this amount, $69 billion, has been devoted to energy related projects,
covering a diverse portfolio of energy sources that includes financial
support to renewable energy sources. Rio+20 next year is a great opportunity
to take stock, particularly in terms of the MDGs, and to define improved
processes, structures and means for achieving sustainable development.
The crucial importance of human resources
The future availability of qualified technical talent remains a major
challenge facing the oil industry. The Great Recession has had a significant
impact in terms of job losses and a lack of job creation. However, the
origins of this talent shortfall lie back in the 1980s and 1990s. It was
then that the oil and gas industry saw a wave of cost cutting and
redundancies, as a result of which many technical people who were then
entering their mid-career left the industry for good. The industry will need
more qualified people in the years ahead. It begs the question: how can the
industry find, hire, train and keep talented people? The industry needs to
be made more attractive; to make it accepted as an inclusive and forward
looking workplace. A related issue is that of local content. This is of
particular relevance to many oil and gas producing developing countries.
Local content is crucial role as it can, and should, provide a strong
platform for a country's economic and social development.
Dialogue and cooperation continue to support market stability
In a world of growing interdependence, the importance of dialogue is widely
acknowledged. This is underscored in OPEC's Long-Term Strategy and the
'Riyadh Declaration', which concluded the Third OPEC Summit in November
2007. OPEC has also been broadening and strengthening its dialogue with
consuming and producing countries, as well as other international
institutions. The issues at stake are complex, broad and inter-related. They
require concerted efforts and, where appropriate, joint collaboration, to
find adequate, cooperative and sustainable solutions. Close engagement with
major stakeholders at various levels is essential to advance mutual
understanding on common challenges, such as security of supply and demand,
investments, cleaner fossil fuel technologies, environmental protection, the
role of petroleum in promoting sustainable development and energy poverty.
Expanded, in-depth dialogue, builds confidence, aids long-term market
stability, and can attend to the concerns of both producers and consumers,
particularly at times of high volatility in markets.
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Source: OPEC Publications |
