PARIS (ResourceInvestor.com) -- If Hurricane Katrina is to have a lasting global impact, it could be on the oil refinery industry. As the tempest rode in from the Gulf of Mexico it seriously damaged at least four major U.S. refineries, Pascagoula, Meraux, Belle Chasse and Chalmette. This in turn, has finally led to the media being able to question the bottleneck in global refinery capacity.
Demand for refined product has never been higher around the world. Since the United States stopped building refineries 29 years ago, its refinery capacity has fallen by around 10%. Yet its intake of gasoline has risen by 45%. Now into the mix come the emerging economies, especially the much-trumpeted Chinese and Indian expansion. They too are hungry for gasoline - increased refining is needed more than ever.
To put it into context the nature of the American and European refinery industry is almost completely moribund. There simply were not enough profits for major oil companies - they spent the ‘80s and ‘90s closing refineries, not building new ones. America is currently only online to create one more refinery the tiny 150,000 barrel per day (bpd) refinery in Arizona, from a company called Arizona Clean Fuels, near the small town of Welton. It still has many regulatory hurdles to overcome and its final capacity will only be a drop in the American fuel ocean.
"There is just no slack," says Paul Horsnall of Barclays Capital bank in London. "There really was very little leeway for any accident, any unexpected disruption, [because there is] no spare capacity. Therefore a very heightened transmission of shocks through to prices. And it had already been working like that throughout the summer. Prices had been very sensitive to refinery disruptions already in the U.S., and it was getting to the point where even relatively small refinery disruptions were feeding through into significant impacts on prices."
As a result the rest of the world, and especially the Middle East, have taken advantage of this lack of global refining capacity and are set to cash in. Right across the Middle East, Indonesia, India and China, new refinery projects are ready to exploit the gaps in the market left by the OECD nations, especially the U.S.
Saudi Arabia's Yanbu refinery on the Red Sea is going to be financed to the tune of around $8 billion. The existing refinery at Rabigh is to receive somewhere in the region of a $2 billion upgrade in conjunction with the Japanese company Sumitomo. Then the refinery at Ras Tanura is also to be upgraded, at a cost of $1.3 billion.
Saudi Aramco has also been aggressively persuing refining operations overseas, notably in China. Here Aramco will work on joint ventures with the Chinese state oil company SINOPEC to create a $1.2 billion operation in Qingdao province. Then perhaps most interestingly is the three-way venture between the Chinese state, Aramco and American company Exxon Mobil [NYSE:XOM] to build a $3.5 billion refinery in Fujian province. This refinery is especially important as it will be built specifically to handle brands of heavy Saudi crude.
So other opportunities are now presenting themselves to Middle Eastern and also Asian countries. Indonesia is building a new refinery in Tuban, Eastern Java. China of course is undertaking a huge expansion programme including a $3.3 billion build in Dushanzi to process oil from Khazakstan. Also India is perhaps the most aggressive nation with $8 billion worth of new refining operations, upgrades and joint ventures.
Kuwait too has multi-billion dollar plans. A new $6.5 billion plant near Kuwait city to come online by 2010 will produce a whopping 600,000bpd. Plus $3.3 billion in upgrades for the Al Ahmadi and Mina Abdullah refineries will mean Kuwait could be producing as much as 1.3 million barrels of refined product every day, within five years.
Qatar have undertaken the multi-billion dollar Dolphin Project to work on new fuels, especially Gas-To-Liquids (GTL) refining. This will enable Qatar to supplement its existing petro-industry to produce new liquid fuels - ones that could be vital in powering road transport, airlines and others in an increasingly fuel-competitive world.
There is the $1 billion Oryx refinery in conjunction with Sasol of South Africa [NYSE:SSL] and also the Pearl joint venture with Royal Dutch Shell [NYSE:RDS.A; RDS.B]. The latter is expected to produce 70,000bpd as early as 2009. Exxon Mobil has also penned a deal to undertake GTL in Qatar. Throw in the Ras Saffan operation co-financed with Korean company Daewoo which will produce LPG, kerosene and naphtha, and you can see a strong pattern evolving.
Yet underlining this sea-change is the absolute reluctance of richer nations to become involved in new refinery builds. It may mean Middle Eastern nations do eventually create an over-build in the sector reducing prices. But equally it may not. It also means that the next few years may continue to see great price volatility on the back of tight capacity. In the medium term the middle east could benefit, but it could be a bumpy ride.
Paul Horsnell from Barclays Capital again "If you had a magic wand solution, your magic wand would give you a few more refineries within the U.S. system. That is not going to happen. We're stuck in an imperfect world. I think...for the rest of this decade...at various points these refining dislocations, refining shortages are going to play a key role in price formation. But in terms of getting more capacity into the system, you have look at it and say, 'no'.
“I think the slight shock is when we did check through what are the firm expansions, not just new refineries but expansions in straightforward distillation capacity due in the world over the next five years, and the real shock was...there are no firm expansions in refining capacity, not just in the U.S. but in North America, South America and Europe. All of the expansions are in the Middle East and Asia."
