Refining capacity is becoming a scarce resource. Margins in key consuming areas are at or near record highs and access to capacity will become much more important for oil companies as product surpluses diminish. Global oil demand, although growing more slowly than last year, is still reaching new heights and is outstripping the ability of the refining system to supply the products demanded by consumers during peak winter periods. In addition to a shortage of distillation capacity, the industry lacks the necessary upgrading plants to make the right mix of products to match a changing demand barrel. Specifically, refiners are finding it hard to make enough gasoline, jet fuel and diesel to meet increasing demand. It is shortfalls in the supply of these products that have been pushing oil prices to ever-higher levels over the last 12 months.
The capacity shortage comes with a set of problems, none of which have a short-term solution. High utilisation over long stretches of time puts a strain on refining plant, as the US and Europe have found to their cost this summer. Since the beginning of 3Q05, the two regions have been hit by a series of technical problems and accidents, forcing temporary shutdowns at over 15 refineries. Brief refinery closures would have little effect on a market where there was spare capacity, but the refining industry now has very little flexibility to cope with unexpected shortages.
In addition to making enough products just to match growing demand, the industry also has to cope with increasingly stringent product specifications, such as lower limits on sulphur content and higher required gasoline octane numbers. This ‘quality deficit’ is putting even more of a strain on refining capacity and is causing the long-haul trade in products and blending components to grow world wide, adding to the oil industry’s costs.
Another challenge facing the industry is how to meet a lightening demand barrel with supplies from an increasingly heavy crude barrel. Since conversion capacity the world over is being run flat out, high refinery utilisation rates generate large volumes of residue that cannot be processed in cracking units, boosting the yield of heavy fuel oil. Thus, surpluses of fuel oil are building at the same time as gasoline and distillate supplies are tightening.
There is no quick solution to the refining industry’s problems. High margins should encourage the building of new plants, but the refining industry has a long history of overcapacity and poor returns, making refiners cautious about investment in new distillation plants. New refineries are planned in Asia, which is still short of products in net terms, and in the Middle East, where producers want to cash in on future export markets for high quality products in Europe and the Far East. However, few of these will come on stream within the next two years. Most downstream capital expenditure is currently being channelled into new upgrading and desulphurisation plants.