Refineries rethink plans for post-Covid market

29 December 2020
The protracted recovery outlook for refined products poses a steep challenge to regional players with major capacity additions planned

This package also includes:

> Narrative advances for Gulf unconventional energy
Weak economic growth looks set to persist
Mena lenders trudge into tougher year

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Demand for crude oil and refined fuels was upended in 2020, as the Covid-19 pandemic ravaged the global economy, causing some high-value refined products such as gasoline and jet fuel to trade below crude oil prices. 

Globally, refiners responded quickly to low refining margins and negative cracks, cutting refinery runs by roughly 12 million barrels a day (b/d) year-on-year during the second quarter of 2020, according to research from US-based Bank of America (BofA) Securities.

But even after refiners took such drastic measures, refined product inventories ballooned and now loom over the prospect of swift recovery in the sector. Refinery margins remain near zero across most regions, including in the Middle East and North Africa (Mena) region, even as refinery utilisation rates remain about 10 per cent below year-ago levels.

Varied recovery

Average oil demand erosion in 2020 is expected to be to the tune of about 10 million b/d, led by a decline in demand for transport fuels.

In 2021, BofA Securities forecasts a rather quick rebound in road fuel demand and sees a longer recovery for jet fuel. For gasoline, demand is expected to fall by 3 million b/d year-on-year in 2020 and rebound by nearly 5 million b/d in 2021.

Diesel demand has held up relatively well in 2020, but jet fuel will delay the full recovery for middle distillates until 2023. In aggregate, oil demand could take two to three years to reach pre-pandemic levels, but this will depend on when a vaccine is made available.

As the global refining sector ponders how to work through the existing capacity overhang, greenfield refineries around the world, and in the Mena region in particular, are entering the grid in 2021. During 2021-23, global refining capacity is set to rise by more than 6 million b/d, unless refinery closures are announced.

Karbala refinery

After significant delays during the execution phase, Iraq’s $6bn Karbala refinery project is expected to enter the grid in 2021, with a capacity of 140,000 b/d. In January 2014, State Company for Oil Projects awarded the engineering, procurement and construction deal for the project to a South Korean joint venture of Hyundai Engineering & Construction (E&C), GS E&C, SK E&C and Hyundai Engineering.

Saudi Aramco has said its $16bn Jizan refinery complex, which has a total capacity of 400,000 b/d, is scheduled to start operations in the first quarter of 2021. 

Meanwhile, state-owned Bahrain Petroleum Company expects the $4.2bn project to modernise its Sitra refinery, which would increase the complex’s output to 400,000 b/d, to be completed by mid-2022.

Petrochemicals outlook

The pandemic’s impact on petrochemicals demand has been sector-dependent thus far. The rapid shift to online shopping boosted demand for plastic packaging in 2020, which represents more than one-third of total plastic demand, according to BofA Securities.

Conversely, the slowdown in the manufacturing and construction sectors has softened demand for durable plastics used by those segments. 

On the other hand, the dramatic rise in demand for personal protective equipment (PPE) amid the pandemic has meant demand for polymer grades used to manufacture PPE kits for the healthcare, industrial and consumer segments surged in 2020.

The exponential domestic demand for PPE products has meant even Gulf states are having to import polymers to meet local requirements, despite the regional petrochemicals industry being a key exporter to the world.

Consultants, however, believe this to be a short-to-mid-term phenomenon, as regional players start to tweak product lines of their existing chemicals assets to meet local demand for PPE kits. State energy companies have also been considering altering the size and scope of their upcoming projects to cater to PPE-specific product lines in order to both serve the local market and become a key global exporter.

Projects pipeline

Aside from projects under execution, the Mena region currently has a significant pipeline of oil and gas processing as well as petrochemicals projects at various pre-execution stages.

Considering the demand scenario for refined products, coupled with a mixed outlook for petrochemicals derivatives, and with lower margins putting energy companies under duress, how quickly the project owners choose to proceed with these schemes remains to be seen.

With about $49.6bn-worth of downstream oil and gas and petrochemicals projects in the pipeline, according to regional projects tracker MEED Projects, Egypt is poised to make the largest refinery and derivatives capacity addition in the years to come.

Egypt projects

Egyptian Petrochemicals Holding Company (Echem) is planning to build the country’s largest chemicals complex in New Alamein City on the country’s Mediterranean coast. The estimated $8.5bn project, which is currently in the study phase, will have an annual production capacity of 1 million tonnes a year (t/y) of petrochemicals and 850,000 t/y of oil products.

Echem is also in the study phase with another integrated refinery and petrochemicals project that is being planned to be built in the Suez Canal Economic Zone. Echem signed an agreement with US consultancy Bechtel in February 2020 for the joint financing and development of the estimated $6.7bn project. The scheme is planned to have a capacity of 900,000 t/y of petroleum products and 1.2-1.9 million t/y of petrochemicals products.

The UAE also possesses a robust pipeline of downstream projects, which are set to start production later during the decade. An estimated $15bn New Refinery project planned by Abu Dhabi National Oil Company (Adnoc) forms the centerpiece of Abu Dhabi’s ambition to raise its refining capacity by 65 per cent, from 922,000 b/d to 1.5 million b/d.

The project’s development schedule has, however, been delayed, with Adnoc considering a reduction in the planned capacity of the greenfield refinery, as a way to rein in the project’s costs. The goal to increase Abu Dhabi’s overall refining capacity by 600,000 b/d remains in place, but Adnoc is reportedly studying an alternate approach to achieve that – by increasing capacity at its existing refinery complex in Ruwais by 200,000 b/d, with the rest to come from the New Refinery.

Tightened budgets

There are close to $300bn-worth of total downstream oil and gas and petrochemicals projects at various pre-execution stages in the Mena region. Of these, about $186.6bn, or more than half of the projects, are in the study phase, indicating that the development of a large volume of these projects remains contentious.

As state energy enterprises come under financial burden due to low refining margins and subdued petrochemicals demand from industrial segments, they will be cautiously evaluating downstream project spending. This implies a lot of planned projects could be delayed until a clear rebound in demand is in sight for the downstream sector.

The announcement by Omani-Kuwaiti joint venture Duqm Refinery & Petrochemical Industries Company (DRPIC) in early November 2020 that it was going to suspend front-end engineering and design (feed) work on its proposed $7bn Duqm petrochemicals project in the sultanate is a case in point.

DRPIC’s board of directors concluded that “the suspension of feed work on the project is in the interest of the company during a time of unprecedented global economic uncertainty due to the impact of the Covid-19 pandemic, depressed demand and highly volatile commodity prices”.  

“The shareholders intend to reassess the project, taking into account the current challenging global market environment and the importance of seeking opportunities to enhance the value of the project,” DRPIC said in a statement. 

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