Special Presentation The Case for Refinery Consolidation Benigni on Oil Markets
Issue 06/ 2019
17 July 2019 Disclaimer
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Wednesday, 17 July 2019 www.jbcenergy.com Slide 3 Agenda
• Part 1: The Current State of Global Refining Capacity – The Call on Crude Refining – Is There Any Spare Capacity? • Part 2: Expected Capacity Growth And Upside Risk – Base Case Capacity Growth – Upside Capacity Growth Scenario • Part 3: Consolidation Pressure – Refinery Capacity At Risk • Part 4: What Are The Best Strategies To Protect Individual Assets? – How Much Does Petchem Integration Help? – Alternative Strategies • Conclusions
Wednesday, 17 July 2019 www.jbcenergy.com Slide 4 Part 1: The Current State of Global Refining Capacity
Wednesday, 17 July 2019 www.jbcenergy.com The Call On Crude Refining
Cumulative Middle, Light Distillate & Fuel Oil Fundamentals vs 2013 Average [million b/d] 5.0 Middle distillates Light distillates Fuel oil
Demand Demand Demand 4.0 Supply Supply Supply
3.0
2.0 JBC Energy estimates from May 2019 onwards
1.0
0.0
-1.0
Source: JBC Derived Data -2.0 Jan-14 Jan-16 Jan-18 Jan-20 Jan-14 Jan-16 Jan-18 Jan-20 Jan-14 Jan-16 Jan-18 Jan-20 Global clean product fundamentals have weakened, especially for light distillates, as supply is increasingly outpacing demand growth. Increased refinery complexity and a lighter global crude slate are also contributing.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 6 The Call On Crude Refining
World: Y-o-y Change in Core Refined Products Demand ['000 b/d, 3MMAvg] 2500
2000 Forecast
1500
1000
500
0
Based on observed monthly statistics, as -500 East of Suez West of Suez Annual average available. Missing data estimated, extrapolated, or derived from annual assessments. All data Source: JBC Derived Data from May 2019 onwards is estimated. -1000 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
Demand growth for core refined products slowed considerably in 2018 and we see only a slight acceleration over 2019-2020, with the risk to this forecast skewed to the downside.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 7 The Call On Crude Refining
World: Call on Crude Refining Y-o-y Change [million b/d] 3.5 Demand Growth Biofuels LPG Ethane Call on crude refining 3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0 LPG (70%) and Ethane (100%) assumed to be met by NGLs processing. -1.5 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 SuDeP Slower demand growth and competition from biofuels, LPG, and ethane is set to erode incremental growth in the call on crude refining in the coming years.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 8 The Call On Crude Refining
World: Total Products Forward Demand Cover and NWE Complex Margin, Y-o-y [days, $/bbl] 5.0 10.00 Total products forward demand cover (inverted) 4.0 NWE complex margin -rs 8.00
3.0 6.00
2.0 4.00
1.0 2.00
0.0 0.00
-1.0 -2.00
-2.0 -4.00
-3.0 -6.00
-4.0 -8.00 Forward cover for a given month is calculated as the observed stock level divided by the 3-month forward demand average. Data from May 2019 onwards is based on JBC estimates. -5.0 -10.00 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
Source: JBC Derived Data The global refining system has been quite sensitive to changes in forward demand cover. The considerable risk of rising stocks and forward demand cover over 2019-2020 could lead to significant pressure on refining margins.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 9 Is There Any Spare Capacity?
• When comparing global crude intake vs existing refining capacity, the resulting utilisation rate would imply that despite extremely strong global refining margins in 2017, almost a fifth of global nameplate capacity did not run. However, the majority of this was in fact not available spare capacity, but rather capacity in decay. • Spare or swing capacity: – Refining capacity that is sensitive to global refining margins and capable of ramping up within several weeks. • Capacity in decay: – Refining capacity that for technical or local economic, legal, or political reasons has not been operating irrespective of refining margin signals. • Long-term non-operability: Any refining capacity that has been operating significantly below its nameplate value for at least three years is considered to be capacity in decay. This capacity is probably unable to return online without capital investment in addition to a significant change in its economic, legal or political environment. • Active Refining capacity: – When we subtract capacity in decay from nameplate refining capacity, we consider the result to be active refining capacity – a more accurate measure of refining capacity that is available to the market.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 10 Is There Any Spare Capacity?
World: Refining Sector [million b/d; %] 140 85% Refinery Capacity Crude Runs Refinery Utilisation - right scale
120 82%
100 79%
80 76%
60 73%
40 70%
20 67%
SuDeP 0 64% 2000 2005 2010 2015 2020 2025 2030 Historically, almost 20 million b/d of global refining capacity was not running over the past decade. Refinery maintenance can account for only about 5 million b/d of this. A large portion of the remaining non-active capacity is capacity in decay.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 11 Is There Any Spare Capacity?
Ukraine: Refining Sector [million b/d; %] 1.2 60% Refinery Capacity Crude Runs Refinery Utilisation - right scale
1.0 50%
0.8 40%
0.6 30%
0.4 20%
0.2 10%
SuDeP 0.0 0% 2000 2005 2010 2015 2020 2025 2030 Ukraine as a prime example of capacity in decay, with utilisation rates at only about 10%.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 12 Is There Any Spare Capacity?
China: Refining Sector [million b/d; %] 20.0 100% Refinery Capacity Crude Runs Refinery Utilisation - right scale 18.0 90%
16.0 80%
14.0 70%
12.0 60%
10.0 50%
8.0 40%
6.0 30%
4.0 20%
2.0 10% SuDeP 0.0 0% 2000 2005 2010 2015 2020 2025 2030 In China, despite the relatively normal utilisation rate of 80%, there is still the equivalent of South Korea’s entire CDU capacity that is consistently not running.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 13 Is There Any Spare Capacity?
World: Refining Capacity in Decay [million b/d] 16 China Venezuela Mexico Other - Americas Africa Rest of the World
14
Capacity in decay: Nameplate capacity on a country level that is utilised at 55% or lower 12 and not seen returning in the next 5 years at least. For larger refining systems (more than 1 million b/d), if nameplate capacity adjusted for maintenance exceeds crude intake by more than 500,000 b/d consistently, the non-utilised capacity is considered in decay. 10
8
6
4
2
0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Refining capacity in decay has increased significantly over the last three years, mainly due to issues in Central and South America and Mexico related to underinvestment, coupled with political and economic turmoil in the case of Venezuela.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 14 Is There Any Spare Capacity?
World: Refining Capacity Y-o-Y Change vs Utilisation Rate [million b/d; %] 3.0 90.0% Capacity in decay (inverted) Nameplate capacity 2.5 Call on refining 89.0% Active capacity Utilisation (active capacity) - rs 2.0 88.0%
1.5 87.0%
1.0 86.0%
0.5 85.0%
0.0 84.0%
-0.5 83.0%
SuDeP -1.0 82.0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Up until 2018, the weaker growth in nameplate refining capacity vs demand growth was exacerbated by decaying capacity, especially in Central and South America. The sharp rise in active capacity utilisation would indicate next to no spare capacity in 2018. We see this reverse from 2019 onwards.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 15 Is There Any Spare Capacity?
World: Estimated Spare Capacity (Cumulative vs 2013) and Utilisation Rate [million b/d, %] 1.5 90%
1.0 89% 0.5 88% 0.0 87% -0.5
-1.0 86%
-1.5 Spare capacity estimated by discounting 85% nameplate refining capacity for capacity in decay -2.0 and maintenance vs global crude intake. Active capacity defined as global nameplate 84% -2.5 capacity minus capacity in decay. 83% -3.0 Spare capacity 82% -3.5 Utilisation (active capacity) - rs Source: JBC Energy -4.0 81% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
We expect a fall in global refinery utilisation rates in 2019 amid the fall in the call on crude refining and higher active refining capacity, leading to a sharp rise in spare capacity (+2.4 million b/d y-o-y).
Wednesday, 17 July 2019 www.jbcenergy.com Slide 16 The State Of Global Refining Capacity
• In 2019, the global refining system is showing increasing signs of oversupply. This is due in part to the weakening call on crude refining, as well as the stronger growth in refining capacity. – However, due to decaying capacity in recent years, mostly in Mexico and Central and South America, and weaker nameplate capacity additions, there was very limited spare capacity at the start of 2019. In this context, the strong capacity growth this year serves in part to rebuild global spare capacity. – The 1pp y-o-y drop in the utilisation rate of active capacity in 2019 would imply an increase of global spare refining capacity, returning close to 2015 levels. • From 2020 onwards, we see pressure on refining markets intensifying as more and more capacity will have to be pushed back to become spare capacity.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 17 Part 2: Expected Capacity Growth And Upside Risk
Wednesday, 17 July 2019 www.jbcenergy.com Base Case Capacity Growth
World: Primary Refining Capacity Additions and Main Projects ['000 b/d] China India Other Asia Saudi Arabia 2017 Iran Kuwait Other Middle East Nigeria Turkey United States 2018 Rest of the World
Main Projects (2019-2025) 2019 Additional Target Country Company Location Capacity Time Dangote Oil Refining Lekki Export Nigeria 650 Jun-22 2020 Company Limited Processing Zone, Kuwait National Kuwait Al-Zour 615 Jul-20 Petroleum Co. Saudi Arabia Saudi Aramco Jizan 400 Sep-19 2021 United States ExxonMobil Beaumont 400 Aug-23 RAPID, Pengerang, Malaysia Petronas 300 Mar-19 Johor 2022 Turkey Turcas, Socar Aliaga 214 Jan-19 Changxing island, China Hengli Petrochemical 200 Jan-19 Dalian Changxing island, China Hengli Petrochemical 200 Jun-19 Dalian 2023 India Indian Oil Corp Panipat 200 Sep-22 Zhanjiang, China Sinopec 200 Apr-21 Guangdong Zhoushan, Zhejiang 2024 China Rongsheng 200 Jul-19 province Zhoushan, Zhejiang China Rongsheng 200 Mar-21 province USVI Limetree Bay Virgin Islands 200 Dec-19 2025 India IOC Paradip 200 Jul-25
SuDeP -500 0 500 1000 1500 2000 In our base case, we see global nameplate refining capacity increase by 1.8 million b/d y-o-y in 2019 and grow at average rate of 840,000 b/d y-o-y in the next five years, mainly on the back of new highly complex greenfield plants in the East of Suez.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 19 Base Case Capacity Growth
World: Primary Refining Capacity Additions By Region and Nameplate Utilisation [million b/d] 3.0 84% Overcapacity/ consolidation Overcapacity/ consolidation pressure exacerbated by the pressure
Thousands 2.5 83% economic crisis
2.0 82%
1.5 81%
1.0 80%
0.5 79%
0.0 78%
-0.5 77% Tightening Tightening spare -1.0 spare 76% capacity capacity -1.5 Central & South America North America Africa 75% Middle East Asia FSU East SuDeP Europe Utilisation - rs -2.0 74% 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 In our base case, we see the global refining system going though a cycle of higher consolidation pressure lasting though 2025. We currently see capacity growth decelerating gradually from 2021 onwards, assuming several big projects in early stages of development are not realised.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 20 Base Case Capacity Growth
World: Call on Crude Refining vs Capacity Additions [million b/d] 3.0 Crude Intake 2.5 Call on crude refining Intake vs Call on Crude Refining Primary capacity 2.0
1.5
1.0
0.5
0.0
-0.5 Three consecutive years of -1.0 Two consecutive stockbuilds Call on crude refining years of estimated based on demand -1.5 stockbuilds growth for core refined products and 25% of LPG -2.0 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 SuDeP A stronger call on crude refining helped the global system digest the wave of high capacity growth of the early 2000s’. However, this will be more difficult to do post-2019 as we see the call on crude refining remain relatively weak. Moreover, relatively strong crude intake growth in the short term is expected to lead to strong stockbuilds.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 21 Base Case Capacity Growth
Crude Run Change by Component (Y-o-y) [million b/d] 6.0
4.0
2.0
0.0
-2.0
-4.0 New capacity Maintenance & outages (inverted) Runs at existing plants Source: JBC Derived Data Total runs -6.0 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Considering our demand growth forecast and new capacity, we see a strong need for run cuts once the particularly heavy maintenance schedule observed over Q2-2019 passes.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 22 Upside Capacity Growth Scenario
World: Potential Refinery Projects Series1and Regional Destribution ['000 b/d, %]
Potential refining capacity projects ['000 b/d] Target Region Country Company Location Capacity time
Asia Philippines Petron Corp. Limay, Bataan 100 2020 Asia China PetroChina, PdV Jieyang, Guangdong 400 2021 Middle East Oman Oman Refining JV Al Duqm 230 2022 28% Asia Pakistan Byco Petroleum Pakistan Karachi (Balouchistan) 100 2022 Middle East UAE ADNOC Ruwais 600 2024 Asia India Nayara Vadinar 400 2024 Zhoushan, Zhejiang Asia China Rongsheng 400 2024 province PARCO, Mubadala Khalifa Point, Asia Pakistan 250 2024 (maybe) Balochistan Asia Middle East Saudi Arabia Saudi Aramco JV COTC, Yanbu 400 2025 IOC, HPCL, BPCL, Aramco, Asia India Ratnagiri 800 2025 Adnoc Shenghong Asia China Jiangsu 320 2025 Middle East Petrochemical Asia Pakistan Saudi Aramco Gwadar, Balochistan 300 2025 Asia China Norinco, Saudi Aramco Panjin, Liaoning 300 2025 Asia Pakistan PSO + Chinese company Lahore 300 2026 Africa Angola Sonangol, KBR Lobito 200 2026 Middle East Iraq tba Al-Fao 300 2028 72% Asia Sri Lanka Singapore-Oman JV Hambantota 200 2030 Total 5600
Source: JBC Energy
We see another 5.6 million b/d of refining capacity that could potentially come online over 2020-2030, in addition to those in our base case, consisting mostly of highly complex greenfield plants. There are also several projects in early development in the West of Suez (e.g. Mexico, South Africa), we consider them less likely to be realised than the listed projects above.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 23 Upside Capacity Growth Scenario
Global Primary Refining Capacity Additions And Utilisation ['000 b/d, %] 4.5 88.0% Asia Middle East
Africa Europe Thousands 3.5 North America FSU East 85.0% Central & South America Potential upside to capacity Implied utilisation (high capacity growth case) Implied utilisation base case 2.5 82.0%
1.5 79.0%
0.5 76.0%
-0.5 73.0%
SuDeP -1.5 70.0% 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
If the potential 5.6 million b/d of additional refinery projects are realised, the impact on global utilisation rates would be even worse than the impact of the economic crisis of 2008.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 24 Expected Capacity Growth And Upside Risk
• A period of tight spare capacity and high margins in the post economic crisis years has incentivised a new cycle of strong investment in new refining capacity. – We see global nameplate refining capacity increase by close to 7 million b/d over 2019-2025, compared to 5.3 million b/d over the previous 7 years (2011-2018). – If we consider several grassroots projects in early stages of development, 2019-2025 nameplate capacity growth could reach 11.5 million b/d, more than double the 2011-2018 growth.
• In our base case, we see the utilisation rate of the active global refinery system fall by 1pp y-o-y in 2019. • By 2025, we see utilisation rates of active capacity fall by another 1.4pp vs 2019.
• In the high capacity growth scenario, we see utilisation rates plunge by 5.5pp between 2019 and 2025, falling 1pp below their 2009 lows at just 75.8%.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 25 Part 3: Consolidation Pressure: Capacity at Risk
Wednesday, 17 July 2019 www.jbcenergy.com Capacity At Risk
• As consolidation pressure is expected to increase going forward, we see several key factors that could provide refiners with competitive advantages – Lower feedstock costs • Close to crude production, net crude exporting region – Priority access to demand growth hot spots • Captive domestic market • Proximity to high-growth markets without trade barriers – High-quality fuel supply, meeting required specs – Flexible supply adjustments according to market conditions • Conversely, we see several factors that could make refiners more vulnerable to consolidation pressure – Strong dependence on product exports • This is particularly true in the absence of lower feedstock costs, long distances to growing markets • Stagnating or falling demand in local markets, leading to growing dependence on product exports – Proximity to trade hubs and lack of trade barriers in the local market – Lack of flexibility in feedstock procurement and on the product supply side
Wednesday, 17 July 2019 www.jbcenergy.com Slide 27 Capacity At Risk
World: Utilisation of Active Capacity [%] 100%
95%
90%
85%
80%
75%
70% Europe FSU East World
65% 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 SuDeP Europe and the FSU East are the most vulnerable to consolidation pressure due the longer distance to regions of stronger demand growth, falling local demand and high feedstock costs in the case of Europe and relatively low complexity and flexibility in the case of the FSU.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 28 Capacity At Risk
Europe: Export Exposure in Selected Countries and Refining Capacity ['000 b/d] 600 1800 Product balance excl. diesel Diesel balance 500 1600 Export exposure Capacity - rs 1400 400
Exports exposure calculated based on non-diesel net exports in 1200 300 2018 and 50% of diesel net exports to account for the remanining net short of this fuel. For diesel net importers export exposure decreased by total diesel imports. 1000 200 800 100 600
0 400
-100 200
-200 SuDeP 0
Refinery systems geared towards exports are the most susceptible to pressure. Countries that are net importers of diesel and core products will be pressured by their proximity to trade hubs and lack of trade barriers.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 29 Capacity At Risk
Relative Competitivnes of Refinery Systems in Selected Regions [%]
United states 60% The size of the bubble reflects the Europe 50% relative share of the refinery Russia system to global refining capacity. 40% China
Thailand 30%
2030 - India 20% Middle East 10% Mexico
Germany 0% Central & South America
Share of demand demand of 2019Share growth -10% Brazil Mexico -20% Japan and South Korea -30%
Jordan Source: JBC Energy -40% Indonesia -250% -200% -150% -100% -50% 0% 50% 100% 150%
Malaysia Crude net Imports vs crude intake Refinery systems with very low crude intake to net imports ratio and growing local demand should have a competitive advantage. These are located mostly in Asia, the Middle East, and Central and South America. However, the availability of conducive investment frameworks is often missing.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 30 Part 4: What Are The Best Strategies To Protect Individual Assets?
Wednesday, 17 July 2019 www.jbcenergy.com Best Strategies
• How much does petchem integration help? – New refinery projects have a strong focus on petrochemicals, with about a third of the new capacity we see coming expected to be integrated with petrochemical units. – However, we see overinvestment in the global petrochemical sector weighing on the potential profitability of such projects, especially if they do not benefit from feedstock cost advantage. • Alternative strategies – Aggressive clean fuel strategies – Operational excellence – Securing the refinery hinterland – On-purpose Hydrogen supply investment rationales – Alternative technologies
Wednesday, 17 July 2019 www.jbcenergy.com Slide 32 How Much Does Petchem Integration Help?
World: Main Refining Expansion Projects by Rationale 2019-2030 ['000 b/d]
26%
41%
Includes projects expected to Includes all projects currently start up between January 2019 under development with total and December 2030 with total capacity of 11.9 million b/d. capacity of 6.3 million b/d. 59%
74%
Petchem-oriented Other
Source: JBC Energy
About a quarter of all projects expected to come online by 2030 have a strong focus on petrochemicals (1.6 million b/d). Considering all projects under development, the share of petchem-oriented projects is 41% (3.2 million b/d).
Wednesday, 17 July 2019 www.jbcenergy.com Slide 33 How Much Does Petchem Integration Help? Refining Capacity Projects With Petrochemical Rationale ['000 b/d] Additional Country Company Location Target Time Rationale Capacity Integrated with a petrochemical complex, reduce import Malaysia Petronas RAPID, Pengerang, Johor 300 Mar-19 requirements China Hengli Petrochemical Changxing island, Dalian 400 Jun-19 Integrated with a petrochemical complex
China PetroChina Huabei, Daqing 100 Jun-19 Meet growing domestic demand from the petrochemical sector
Brunei Zhejiang Hengyi (China) Brunei 175 Jul-19 Export-oriented
China Sinochem Quanzhou, Fujian 60 Oct-19 Integrated with a petrochemical complex
China Sinopec, KPC (Kuwait) Zhanjiang, Guangdong 200 Apr-21 Export-oriented Zhoushan, Zhejiang China Rongsheng 400 Jul-21 Integrated with a petrochemical complex province Total projects expected to come online 1,635
China PetroChina, PdV Jieyang, Guangdong 400 2021 Integrated with a petrochemical complex
UAE ADNOC Ruwais 600 2024 Integrated with a petrochemical complex Zhoushan, Zhejiang China Rongsheng 400 2024 Integrated with a petrochemical complex province Saudi Arabia Saudi Aramco JV Yanbu 400 2025 Crude-to-Chemicals project IOC, HPCL, BPCL, India Ratnagiri 800 2025 Integrated with a petrochemical complex Aramco, Adnoc Shenghong China Jiangsu 320 2025 Integrated with a petrochemical complex Petrochemical China Norinco, Saudi Aramco Panjin, Liaoning 300 2025 Integrated with a petrochemical complex
Total potential projects 3,220
So urce: JB C Energy SuD eP
We see about 1.6 million b/d of new refinery projects coming online between 2019 and 2030 that have a strong petrochemical focus. Considering projects in early stages of development, petchem-focused capacity additions could reach 4.9 million b/d.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 34 How Much Does Petchem Integration Help?
• A large proportion of new refinery projects have opted for integration with petrochemical production units in a move to take advantage of the expected strong demand growth in the sector going forward and to reduce their exposure to weaker demand growth for road fuels. • However, we see overinvestment in the petrochemical sector increasing competitive pressure and limiting the benefits from petchem integration (See Benigni on Oil Markets – Issue 5). – We see a significant amount of petrochemical capacity growth in the next few years alone. • United States: – We see 4.7 million tonnes/year of ethylene supply based on ethane cracking coming online in 2019 and another 3 million tonnes in 2020. – At the same time, we expect to see close to 8 million tonnes/year of ethylene supply from naphtha cracking being realised over the next 5 years, largely in Asia. • Projects in countries providing a feedstock advantage may still benefit from petchem integration, as well as projects in proximity to high demand growth centres.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 35 How Much Does Petchem Integration Help?
World: Petchem Feedstock Demand per Capita & Y-o-y Change [kg/y; million tonnes/y] 70 30.0 Ethane Y-o-y - rs LPG Y-o-y - rs Naphtha Y-o-y - rs Petchem Feedstock Demand per Capita 65 25.0
60 20.0
55 15.0
50 10.0
45 5.0
40 0.0
35 -5.0
30 -10.0 2005 2010 2015 2020 2025 2030 Naphtha demand growth in Asia is set to be driven largely by China’s drive to become self-sufficient in terms of meeting its domestic ethylene and aromatics requirements. Ethane demand in North America will be supported by forthcoming ethane-based steam cracker additions in the US.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 36 Alternative Strategies
Wednesday, 17 July 2019 www.jbcenergy.com Aggressive Clean Fuel Strategies
• In a more competitive environment, refinery complexity and the capacity to supply clean on-spec fuels will be key. – However, there are relatively few refinery systems currently that do not already produce high spec fuels. • Refiners producing low-spec fuels have to rely on niche markets or selling their production as feedstock to complex players at significant discounts. • In a high-complexity global refining system amidst tight residue markets, there may be a case for simple refinery setups with access to low-sulphur crude. Several such plants are currently under construction targeting supply of VLSFO in the post IMO 2020 market. – Malaysia: Vitol is reportedly building a 35,000 b/d plant (Q3- 2020 planned start-up). – US: PBF Energy is reportedly repurposing an asphalt facility it purchased last year to process 25,000 b/d for crude into marine fuel.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 38 Aggressive Clean Fuel Strategies
Relative Competitiveness of Refinery Systems in Selected Regions [%] 25% Europe
FSU East 20% 64.6% 79.3% The size of the bubbles reflects 2030 utilisation rate. Central & South America 63.6% 15% 79.9%
Asia
10% Africa (2019)oilyield Fuel 74.6%
North America 5% 79.4%
86.6% Middle East
0% 0% 20% 40% 60% 80% 100% Source: JBC Energy Desulphurisation to CDU capacity ratio Low refinery complexity, reflected in high fuel oil yields, is a main disadvantage for several refinery systems in Central and South America, Africa, FSU East, and the Middle East. Selected sub-regions in other regions are also vulnerable, especially in Southeast Asia and Mexico.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 39 Aggressive Clean Fuel Strategies
East of Suez: Relative Competitiveness of Refinery Systems in Selected Sub-Regions [%] 25% Thailand
Malaysia 20% 1.2% 0.2% Indonesia 0.3% 0.2% 15% Vietnam 5.9%
Philippines 10% 1.9% 0.7% Taiwan
Fuel oil yield (2019)oilyield Fuel 0.6% 5% Pakistan 5.9%
4.9% Bahrain 0%
Yemen The size of the bubbles reflects the share of global demand growth (2019-2030). Jordan -5% -20% 0% 20% 40% 60% 80% 100% 120% Source: JBC Energy Crude net Imports vs crude intake
Some smaller refinery systems in the East of Suez with high fuel oil yields and a high share of imports in their crude slate are at a relative disadvantage. Although demand growth in the respective local market is likely to offset some of the pressure, support from this side is may be limited by cheap product import availability.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 40 Operational Excellence
• In a more competitive environment, we see a strong advantage for refiners that are more flexible in optimising their operations to short-term price signals to maximise margins. – Procurement: crude slate and overall feedstock flexibility – Production: flexibility to adjust throughput and product yields to market needs • Closer inter-department cooperation – Making sure information is managed in an optimal way is key to improve operational flexibility. – Closer cooperation between different departments (operational management, trading, strategic planning, etc.), thanks to multi- directional flow of information and joint decision-making, should ensure market signals are available and treated at the right level.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 41 Securing The Refinery Hinterland
• The first-mover disadvantage – We see a disadvantage to a pro-active approach to consolidation. The improvement of refining economics once sufficient refining capacity is scaled back should benefit players who manage to wait out the most difficult period. • The net-importer benefits – Refiners located in net-short local products markets benefit from the fact that the marginal barrel needs to come from outside, leading to the net-short local markets pricing at a premium to trade hubs. – Unless refiners can benefit from lower feedstock costs, we see a clear advantage from constraining overcapacity on the local level to protect the refinery hinterland. – Optimising midstream presence could additionally help improve profitability.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 42 On-purpose Hydrogen Supply Rationales
Short-term considerations:
• Most hydrogen used in refinery processes is produced on-site, from naphtha reforming and steam methane reforming. – Refineries integrated with petrochemical units can derive additional hydrogen from steam cracking. • Refiners with insufficient hydrogen production capacity have to rely on external supplies, which increases their operational costs. – Hydrogen costs can represent 10-40% of the average refining margin according to the IEA, depending mostly on feedstock costs (natural gas). – Higher on-site hydrogen supply thanks to e.g. higher recovery of hydrogen from waste refinery gases could improve refinery profitability by reducing reliance on external sources/feedstock. – Selected recent projects to boost hydrogen supply: • Shell’s 200,000 b/d Rheinland refinery in Germany has announced a 10 MW electrolyser project for 2020 that will supply around 1,000 tonnes/yr, or 1% of the refinery’s hydrogen needs. • A small refinery near Hamburg, Germany, has announced a 30 MW electrolyser paired with offshore wind power to replace purchases of up to 3,000 tonnes/yr • Linde plans to invest US$1.4 billion to expand its existing gasification complex on Jurong Island to produce and supply additional hydrogen and synthesis gas to cater to ExxonMobil's expansion plans. • Hengyuan Refining approves $66.4-million investment to build a hydrogen manufacturing unit as part of a hydrogen generation (H2Gen) project for production of cleaner fuels at its 156,000-b/d refining complex in Port Dickson, Malaysia (Feb 2019). • ExxonMobil to build new hydrogen plant in UK as part of Fawley refinery expansion (April 2019).
Wednesday, 17 July 2019 www.jbcenergy.com Slide 43 On-purpose Hydrogen Supply Rationales
Long-term considerations • Meeting higher desulphurisation needs – Global demand for hydrogen from the refining sector is set to increase thanks to • IMO 2020 • Potential stricter sulphur requirements for jet fuel • Tighter sulphur limits for gasoline and diesel in current niche markets with lower specs in Africa, Southeast Asia, etc. • Potential losses of hydrogen supply from reformer shutdowns – We see increasing pressure in refinery reforming economics over the coming years from: • Lengthening gasoline balances on limited demand growth • Competition in the aromatics market from petchem players – The shutdown of reforming units in the increasingly oversupplied light-ends markets could lead to lower hydrogen supply, increasing external hydrogen sourcing for some refiners. • Hydrogen as viable alternative fuel – While hydrogen is still a nascent technology in the transportation sector, its potential uptake on a larger scale could boost global demand. While the refinery industry is currently producing hydrogen to meet its own desulphurisation needs, a stronger focus on hydrogen supply as a new transportation fuel could be a viable option for the refinery of the future.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 44 Alternative Technologies
• Gaining more experience in key alternative technologies could provide a double benefit: – Re-branding and improved public image – Greater preparedness for a potential uptake of these technologies on a larger scale. • Integrating biofuels into the supply portfolio • Production of synthetic crude oil and products from waste plastic • But we see all these options primarily as strategic investment with focus on branding and technology preparation, while the core business focus should remain on standard petroleum fuels which will continue to dominate the landscape at the very least for the next decade.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 45 Conclusions
• 2019 is a turning point between tight refining capacity and a shift to overcapacity. – Due to low capacity growth and decaying capacity over the last decade, in 2019 spare capacity is still relatively scarce, with the delayed start-up of new refineries and disruptions to operations of existing plants leading to high margin volatility. – However, strong capacity growth this year and in the following years is set to outpace the incremental call on crude refining by a sizeable margin, leading to intensifying consolidation pressure. – Compared to our base case, global capacity growth could easily double from projects in early stages of development, leading to a plunge in utilisation rates of established plants.
• Focus on petrochemicals is not a silver bullet, and feedstock costs will be key for the profitability of new refinery-petrochemical projects. – We expect that a lot of the refinery and integrated petchem projects in early stages of development will be dismissed or strongly delayed in the next few years.
• We see several alternative strategies to boost the competitiveness of established plants, such as improved operational flexibility, focusing on clean fuels, hydrogen supply, and new technologies.
• A pro-active approach to consolidation is not always a good strategy due to the first-mover disadvantage. However, overcapacity in a local market without a feedstock advantage is to be avoided.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 46 2019 JBC Energy Matters Seminar
JBC Energy will be holding its 3rd Annual JBC Energy Matters Seminar, in Vienna, Austria. This year you can enjoy two full days of JBC Energy’s fundamental analysis, with in-depth coverage of oil supply, demand, refining, crude and product balances, as well as the opportunity to benefit from two additional days of an intense JBC Asia training programme.
Take advantage of this four-day event! Spend two days immersed in stimulating presentations and discussions, covering the most relevant aspects of Upstream, Downstream, and Natural Gas markets, and two additional days of intensive training designed to help our clients to organically meet their HR objectives by providing them with the tools to develop their staff members’ skill levels. SAVE THE DATE JBC Energy Matters Seminar 5-6 September 2019
3 Sep 2019 4 Sep 2019 Day 1 — 5 Sep 2019 Day 2 — 6 Sep 2019
Pre-Seminar Training Pre-Seminar Training JBC Energy Matters Seminar JBC Energy Matters Seminar
Analysing Oil Markets—This Energy Trading, Risk Management & Crude & Product Market Outlook Oil Industry Investment training has been designed to Pricing—This training aims to enable — The first day of this year’s Perspectives —The second and provide participants with a participants to identify, measure, and seminar will focus on near-term last day of the JBC Energy thorough understanding of oil manage risk in its many forms by developments. Sessions will start Matters Seminar will be divided market fundamentals and with applying proper tools through with a market overview focused into three main modules focused the skills to identify key drivers in disciplined evaluation and decision- on supply, OPEC, and politics, by on long-term issues covering the making. Volatility, counterparty the upstream and downstream our founder and Chairman of the full barrel. exposures, credit requirements, industries. The focus of the JBC Group, Johannes Benigni. The government regulations, unexpected course is firmly on commercial rest of the day will be divided “black swan” events, and geopolitics The most relevant aspects of factors making it perfect for keep traders in a perpetual state of into two modules focused on Upstream and Downstream anyone in a market-facing role. high alert. crude and product markets, markets will be discussed including a special session on throughout the day, with the last IMO issues. session focusing on the Key Richard Gorry is Johannes Benigni is Takeaways from the Seminar and the Managing the chairman and To finish the day, participants will Discussions. Director of JBC founder of the JBC have the opportunity to meet Energy Asia Energy Group. industry peers and the JBC team A comprehensive slide package (Singapore). during a Flying Dinner. covering all sessions will be provided to participants.
Wednesday, 17 July 2019 www.jbcenergy.com Slide 47 Disclaimer
JBC Energy’s JBC Energy GmbH Benigni on Oil Markets Benigni on Oil Markets is Wollzeile 6-8 1010 report is published 11 times inspired by JBC’s founder Vienna, Austria per year by JBC Energy GmbH. Johannes Benigni's original www.jbcenergy.com and pioneering market views E-Mail: Copyright ©2019. [email protected] Tel: +43 1 513 49 22
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Wednesday, 17 July 2019 www.jbcenergy.com Slide 48 Thank you!